Spending v Saving

This is one of the key questions the UK (& others) face over the next few years. At last, the tories have stuck their head above the parapet and suggested that we need to save as a nation rather than spend our way to oblivion (http://news.bbc.co.uk/1/hi/uk_politics/7810932.stm). So now there is clear air between the government and the opposition on this. About time too. Problem is that Joe Public is not yet mature enough to accept that saving may actually be a good idea.

A. The Case for Spending
The economy is stuffed if we collectively stop borrowing to spend. Since 2001, borrowing has been growing above trend and at accelerated rates. Approximate 'normal' levels have been:

1. Consumer borrowing has been increasing by £100+bn per year
2. Corporate borrowing by £50+bn
3. HMG borrowing by £30-50bn

If GDP is around £1400bn then the economy has been boosted by 10-20% due to borrowing. This explains the miracle economy in a nutshell.

The so-called 'credit crunch' in late-2007 choked off 1 and 2 many years after time should have been called on the debt party. However, I wouldn't call it a proper credit crunch until the net increases of these fall to close to zero. This only really started to happen in 2008 Q4.
The UK government are now trying to restore borrowing by using 3 to replace/finance 1 and 2. Hence the forecast budget deficits of £100-150bn over the next few years as we ride the brave new world of NuLabour Keynsian economics.
The theory goes that once that happens we can restore normality and we all live happily ever after. There will also be some lovely views of pigs flying along the skyline...

B. The Case for Saving
In sensible economies, it is normal to have a saving rate of 5-10%. This can take the form of pensions, cash, investment, etc. Putting aside money to boost the long-term economy (be it company investment, R&D, saving for a rainy day or pensions) is a good indicator for a nation.

Of late though, the usual suspects (UK, US, etc) have seen saving drop to 0% or even spend periods with negative savings rate. The maxim being "Live for today." This boosts economic growth in the short term but is madness long-term. History books show it to be lunacy and in this instance it will prove no different. So somehow we need to boost saving to build a stable economy in the future.

'Spending' is associated with the problem, 'Saving' with the solution. If we accept that long-term we need to move from 'Spending' back to 'Saving' how do we do it without the economy suffering a major contraction (aka depression)?

This is one of the major questions we have to find a solution to in order to heal the economy...