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How does government budget austerity affect savers?

With no end in sight to an era of economic uncertainty that is the toughest since the 1930s, savers find it difficult to know where to put their money. The government budget priority of keeping interest rates at rock bottom, alongside ailing stock markets, make finding attractive returns on investments a tricky task.

Safe havens in the economic storm

Ad Bill Clinton once said: "it's the economy, stupid". The government budget plans for the foreseeable future will emphasise austerity, cutting back on public spending, hoping that inflation will recede and maintaining a tight grip on interest rates.

The whole country will struggle with the tough economic conditions, but prudent savers face a long wait before their investments start to pay acceptable returns.

A keystone of government budget policy is keeping interest rates low. Savers, who have become accustomed to meagre returns, can expect little to change in the short term.

The Bank of England committee that sets the base rate, which banks use as the guideline for their savings interest and lending charges, has shown few inclinations to raise rates, and with the economy teetering on the brink of a double-dip recession, has little room for manoeuvre.

Savers are facing a choice between speculative investments in a stock market that is lurching between bouts of bad news, and keeping their cash in savings accounts that struggle to keep pace with inflation.

There are advocates for investing in property, although the market is moribund, and the pessimists suggest a major downward lurch is inevitable.

The traditional safe haven in a recession is precious metal, but gold prices are already at an all-time high, and some analysts suggest they have peaked.

Debt management

Anyone lucky enough to have some spare cash should take their lead from the government budget policy and look to pay off any outstanding debts, or make a lump sum mortgage payment. This might seem unexciting, but it will prove an astute move once interest rates start to shift upwards.

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