MONEY MATTERS: Economy And Investment

As investment is highly important for an individual or household, investments are also important for the broader economy.

There is interdependence between the household sector and other sectors of the economy, such as the corporate sector. For example, in the act of saving, households are not buying the goods and services that firms sell. However, by saving, households are placing money in financial institutions and this provides a potential source of funds for firms to expand and to invest themselves.

Governments also have an interest in household savings. One reason for this is that governments often spend more than the receipts they have from taxation. This was certainly the case in the aftermath of the 2007/2008 financial crisis which saw the UK government’s budget deficit (the difference between its tax receipts and government spending) rise to what was then a record level.

The COVID-19 pandemic also led to the UK government – and many other governments – increasing their borrowing sharply to cover the cost of the measures introduced to support households and businesses. To cover such a shortfall, governments have to borrow, including directly from the public. Governments have encouraged people to put money into government savings schemes (and, effectively, loan the government money), such as National Savings and Investments Certificates and Premium Bonds.