’ ll be more inclined to wait until that happens. sensing his options will improve in future, and rather than switching spending to some other, imperfect substitute today, he ’ ll instead want to shift it to tomorrow. spending on these other things would probably still go up, but by less than the decline in the taxed activity. aggregate consumption would therefore decline. the way to understand this is to recognise that the amount you save involves a decision about how to allocate your spending over time. and for that decision to change, the future has to look different in some way from the present. unless it affects your income, a permanent change in relative prices won ’ t do much to overall spending. temporary changes, which shift the relative attractiveness of spending at different points in time, can have much more powerful effects. all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice the cut in vat in late 2008, for example, enacted at the height of the financial crisis, was by design in place for only a year. it improved households ’ real incomes and therefore their capacity to spend. but the more important thing was that it was an explicitly temporary policy. if you know something ’ s going to cost more in future there ’ s an added incentive to buy it now. the same is true of the various policies designed to boost spending in 2020 : the vat cut for the hospitality sector, the “ eat out to help out ” scheme and the reduction in stamp duty. it ’ s doubtful any of these would have had the same impact had they been seen as permanent changes. i ’ ve gone through this because i think there ’ s a clear parallel with the pandemic and its effects on consumer demand. a jump in the prevalence of the illness acts like a big rise in the cost of particular things, activities that expose you to the risk of infection. the cost isn ’ t a monetary one ( which is why a better analogy is a compensated tax hike ). but it very clearly deters spending on riskier activities. by the same token, it also increases the incentives either to switch spending immediately to other, less risky things, or to defer it to the future ( i. e. to cut aggregate consumption and save more ). and the factors that determine the balance of these responses are the same as for the hypothetical tax hike. if either there are close substitutes for the riskier activities

the rt hon sir edward george : macro - economic developments in the uk and its effects on the west midlands speech by the rt hon sir edward george, governor of the bank of england, at the west midlands conference “ 20 - 20 vision ”, birmingham, 20 september 2002. * * * your conference title is “ 20 - 20 vision ” - which i thought initially - and not unreasonably - meant it was to be all about hindsight. and i happily accepted the invitation to speak on that basis, because, as we all know, 20 - 20 hindsight is very easy - as a lot of commentators have demonstrated just recently in their criticisms of us policy - makers in the light of the economic and financial market bubble which built up in the late 1990's! it was only later that i realised you intended that we should look forward to the year 2020 - that the conference was to be a foresight saga - and at that point i began to get cold feet! central bankers are jolly lucky if they feel at all confident looking ahead 18 months, let alone 18 years - and sometimes recently - given the volatility in financial markets - its been difficult to predict what was likely to happen over the next 18 minutes! but here i am, and what i thought i would do this morning is to try to provide some sort of uk macro - economic context for your discussion of the challenges facing the west midlands by first looking backwards at some of the trends that we have seen over recent years and then trying to anticipate how those trends might evolve. people often tell me that retrospection is a sign of old age. but as i reflect on my 40 years at the bank of england i am increasingly conscious of the remarkable change that has occurred over that time - in fits and starts certainly, but in the same general direction - from a heavily administered economic and financial system to one which is much more market based. post - war controls on resource allocation had been largely dismantled before i started at the bank. but the financial system was still governed by all kinds of direct controls - exchange controls, credit ceilings on bank lending - coupled with directional guidance, the queuing of equity issuance and business restrictions - on the activities of building societies, for example ; and there was direct intervention in the wider economy through prices and incomes policies and public ownership of large parts of industry, and so on. but all of that has now gone. it's true that plenty of regulation remains reflecting public policy