Savings are the third foundation of the mass middle class. Even more than full employment or home ownership, the accumulation of liquid assets by ordinary working people is the surest proof of a property-owning democracy.
Savings provide individuals and families with the dignity of choice. Having enough money to put aside not only demonstrates a capacity to afford more than the essentials, it allows people to take charge of their lives – by providing for the future, hedging against threats and preparing for opportunities.
Despite the full employment and welfare provision of the era, post-war Britain was characterised by an ever-strengthening savings culture. In the immediate aftermath of war, the household savings ratio stood at around zero – meaning the average family saved nothing from their disposable income. But with each subsequent decade the ratio edged upwards – peaking at twelve per cent by the early 1980s. [62] There was a dip at the end of that decade, but the ratio quickly recovered, standing at around ten per cent for most of the 1990s. [63]
This was also the era of privatisation, in which the great public share offers gave millions of Britons a chance to own a direct stake in blue chip companies. The percentage of households owning shares directly more than doubled.[64] The Conservative vision of a genuinely popular capitalism never seemed so close to being achieved.
The decade of debt
But, again, it was with the new Millennium that things went wrong. In the first decade of the 21st century our savings culture turned into a debt culture.
The household savings ratio collapsed, hitting a meagre two per cent by the eve of the financial crisis.65 Gross household savings (the absolute amount saved) halved between 2000 and 2007. [66]
At the same time, there was a huge increase in the level of household borrowing – from around 110 per cent of average disposable income to almost 170 per cent – exceeding anything seen in the other G7 economies. [67]
Most household borrowing is mortgage debt, which not only expanded as a consequence (and cause) of house price inflation, but also because of mortgage equity withdrawal. This period was further marked by the rapid expansion of unsecured consumer credit. [68]
In response to the ensuing financial crisis, households borrowed less, increased the rate at which they paid off their debts and, if they were able, put more money aside. As a result there was a sharp recovery in the savings ratio – though to a level well below that of the early and mid 1990s. [69]
Long-term consequences
The scramble to shore-up our personal finances has so far only repaid a small proportion of Britain’s accumulated household liabilities. With indications that the savings ratio is now heading downwards again [70] – the massive overhang of personal debt is likely to remain in place for years to come, with enduring negative consequences for the economy.
The destruction of our savings culture has had other consequences too. Share ownership by individuals fell away over the previous decade – as has indirect ownership through pension funds and insurance companies. [71] Furthermore, there’s strong evidence that ownership of non-housing assets has become increasingly concentrated in the hands of the richest individuals. In 1976, the poorest fifty per cent of the population owned twelve per cent of the country’s non-housing wealth. Ten years later this was virtually unchanged. However, by 2002, this proportion had diminished to just two per cent of the total. Over the same period, the proportion owned by the richest one per cent rose from 29 to 35 per cent. [72]
OUR RESPONSE
If wealth inequality is the problem, then some people think that a wealth tax is the answer. There is support for this approach on the right as well as the left, because taxing wealth is supposedly a lesser discouragement to entrepreneurship than taxing income.
However, the real problem is not that the wealthy have too much capital, but that the rest of us don’t have enough. [73] Pulling down the rich won’t recapitalise the poor. In fact, wealth taxes won’t pull down the rich anyway, because they have the means to keep their assets safe from the tax man.
In practice, the most likely targets of a wealth tax are the homes and savings of ordinary working people who don’t have the option of shuffling their wealth between different countries and asset classes. The confiscatory approach to wealth inequality not only wouldn’t work, it would create a further disincentive for saving, when the urgent need is for new incentives.
Of course, half the battle is to build the homes (chapter 1) and create the jobs (chapter 2) that would leave ordinary working people with enough money at the end of the month to be able to save. However, they also have to be willing to save – and that will require a complete turnaround in the direction of government policy, which currently favours debt.
An end to financial repression
The first and most fundamental step is to end financial repression. This is the name given to policies that are designed to suppress interest rates and encourage inflation. [74]
The excuse for such policies is that they are needed to give governments, businesses and households time to recover from the banking crisis and to repay their debts. However, the banking crisis was itself caused by the ‘cheap money’/‘easy credit’ policies of previous governments, both in Britain and elsewhere, that encouraged excessive borrowing and discouraged saving. [75]
Government now needs to send a strong signal that the age of cheap money, financial repression and quantitative easing is over. If it doesn’t, the risk is that individuals and businesses will get complacent again, stop repaying their old debts and start running up new ones – thereby creating the conditions for a new financial crisis.
Therefore, we propose:
A fair deal for ordinary savers
According to some economists – such as Thomas Piketty – the rich will eventually end up owning everything because the long-term rate of return on capital (which benefits people who already have wealth) is greater than the long-term rate of economic growth (which gives people who don’t have wealth the chance to earn some). [77]
This may come as news to most ordinary savers, who can only dream of getting that sort of return on their money. Evening-up rates of return on capital would go a long way to reducing wealth inequalities – most people would have the incentive to save more and their nest eggs would grow faster.
Therefore, we propose:
A new settlement on tax relief
Though government taxes many forms of saving, other forms – especially pensions – attract tax relief. In total this is more than £25 billion per year in upfront reliefs alone. [78]
The problem is that it disproportionately benefits the wealthiest savers (both because they have more money to save and because higher rate income tax payers get a correspondingly higher rate of tax relief). It is estimated that just 25 per cent of all pension tax relief goes to basic rate taxpayers. [79]
A fairer allocation of this vast amount of money could provide ordinary working people with a powerful new incentive to save.
Therefore, we propose:
Action to rebuild a savings culture among young people
By the time a student leaves school they will have seen hundreds, if not thousands, of adverts encouraging people to borrow.80 They will have walked along high streets full of shops pushing pay day loans and other sub-prime forms of credit. And, thanks to the student loans system, they are told that getting heavily into debt is the key to all future advancement. To cap it all, millions of young people emerge from twelve or fourteen years of state-funded education with an inadequate understanding of personal finance. [81], [82]
This is no way to build a savings culture.
Starting this year, financial education will be part of the National Curriculum for the first time. This is a welcome and long overdue step forward – but it is vital that it leads to verifiable improvements in financial literacy and changing attitudes to debt and savings.
Furthermore, financial education in schools should only be the start. Ongoing interaction between the individual and the state must reinforce the savings culture.
Therefore, we propose:
Create a UK Sovereign Wealth Fund with shares for all
In countries like Norway people don’t just save as individuals and families, but also as a nation. The Norwegian Government Pension Fund Global [83] is effectively a savings account for the whole population. While, in most other countries, ‘windfall’ revenues – such as those from Norway’s North Sea oil fields – would be spent by the government of the day, the Norwegians put the money into long-term investments.
Not only does this contribute to Norway’s future prosperity, it also strengthens confidence in the country’s finances and provides a powerful example for individuals to follow. Britain may not enjoy the same endowment of natural resources per head of population, but there is scope to use windfall revenues in the same way.
Therefore, we propose:
The creation of a UK Sovereign Wealth Fund into which all new public windfall revenues [84] – for instance, the tax revenues from offshore gas and oil extraction – would be paid.
Footnotes
62 ONS data / Chris Dillow, Stumbling and Mumbling, ‘What savings culture?’, 25 June 2010
63 ONS data / Thomas Crossley and Cormac O’Dea, Institute for Fiscal Studies, ‘The wealth and saving of UK families
on the eve of the crisis’, July 2010, page 5, table 1.1
64 James Banks and Sarah Tanner, Institute for Fiscal Studies, ‘Household saving in the UK’, October 1999, page 42
65 Thomas Crossley and Cormac O’Dea, Institute for Fiscal Studies, ‘The wealth and saving of UK families on the eve of the crisis’, July 2010 page 5, figure 1.1
66 ONS data / Economics Help, ‘Savings ratio UK’, 1 January 2014
67 Credit Suisse, ‘Global wealth report 2012’, October 2012, page 23, figure 1
68 Centre for Social Justice, ‘Maxed out: Serious personal debt in Britain’, November 2013, page 34
69 ONS data / Trading Economics, United Kingdom Households Saving Ratio 1955-2014
70 Ibid.
71 Office for National Statistics, ‘Ownership of UK quoted shares’, 2012, 25 September 2013, page 3, table 1
72 Office for National Statistics, ‘Social Trends 32’, 2002, page 102, table 5.24 and ‘Social Trends 35’, 2005, page 80, table 5.25
73 For instance, see Max Wind-Cowie, Demos, ‘Recapitalising the poor: Why property is not theft’, July 2009 2!3
74 For instance, see Carmen Reinhart, ‘The return of financial repression’, Banque de France, Financial Stability Re- view, April 2012
75 For instance, see Raghuram Rajan, ‘The true lessons of the recession’, Foreign Affairs, May/June 2012
76 See Thomas Pascoe, The Telegraph, blog, ’The gap between rich and poor will continue to grow until we give up on QE’, 5 March 2013
77 Thomas Piketty, ‘Capital in the 21st century’ (Harvard University Press, 2014)
78 Michael Johnson, Centre for Policy Studies, ‘Retirement saving incentives: The end of tax relief and a new begin- ning’, April 2014, page 4, table 1
79 Michael Johnson, Centre for Policy Studies, ‘Retirement saving incentives: The end of tax relief and a new begin- ning’, April 2014, page 6, table 5
80 StepChange Debt Charity / The Children’s Society, ‘The debt trap: Exposing the impact of problem debt on children’, May 2014, page 16
81 YouGov, ‘Britain’s financial literacy’, 7 June 2012
82 Personal Finance Education Group, press release, ‘Young people entering adult life with “dangerous gaps” in finan- cial knowledge’, 3 June 2013