Like it or not, we'll all be savers soon

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The Independent Online
We are entering the age of the saver - a period of a generation or more when there will be mounting pressure on individuals to increase their savings. This is a 180 degree change from the prevailing ideology of less than 20 years ago when, here in Britain, personal savings were strongly discouraged by the tax system: tax of up to 98 per cent was levied on income from savings. Now, prompted by the ageing of the population and the shrinking proportion of people of working age able to support these older people, governments everywhere are nudging tax systems in the opposite direction. The aim is to encourage people to make their own provision for their old age; so instead of using the tax mechanism to discourage savings they are now discriminating in favour of them.

A pensions conference organised by City Forum in London last week highlighted some ways in which this may be taken further. One idea, suggested by Keith Bedell-Pearce of the Prudential, was to simplify the whole tax system in relation to pensions. The Pru felt that people were discouraged from saving for their retirement by the complexity of the tax rules and thought that tax limits on contributions into pension schemes should either be removed or a simpler set of limits put in place.

Another call for a simplified tax package for savings came from the Unit Trust Association whose director-general, Philip Warland, thought that there should be a fixed annual investment limit that could be saved free of tax, with anyone able to put the money in. The proceeds from this would then be invested into a retirement account. The annual limit could be pounds 6,000, the same as the PEP allowance, and the system could exist alongside the present more complicated pensions on offer.

The ideas here are very similar: create a new form of investment account that is simple to start. But if it is not surprising that the Pru and the UTA should be thinking along the same lines, remember that so too is the Labour Party. One of the few firm proposals Labour has made is for people to have individual savings accounts, which presumably would be encouraged by some form of tax concession.

All these ideas build on the PEPs and Tessas invented by the Tories, so you can see here something of a consensus: everyone is in favour of finding ways to encourage more savings. Whoever wins the next election, expect some kind of new "user friendly" savings account to be introduced in the life of the next parliament.

From the point of view of both the financial services industry and the government this makes sense: one gets a new product to sell, the other tends to reduce the burden of pension provision on future generations of taxpayers. But what might the encouragement of savings do for the economy as a whole? It so happened last week that we had two further chunks of information relevant to this. The first was the new economic forecast from the Treasury; the second the figures on foreign earnings from the financial services industry.

The Treasury forecast downgraded its expectation of growth for this year from 3 per cent to 2.5 per cent, which everyone had expected, but it also revealed that projected public borrowing was much higher than had been expected at the time of the Budget last November. The projected public- sector borrowing requirement for this fiscal year is now pounds 32bn. As the graph on the left shows, this means that the PSBR will have averaged about 3 per cent of GDP over the life of the four Tory governments. The whole period, with all the rhetoric about cutting public spending and prudent fiscal policies, has still resulted in borrowing running at a greater rate than the growth of GDP. Of course we are not alone in this, for much the same level of borrowing is common in all western democracies. On average, we performed quite well despite the binge of 1992 to 1995. The moral is surely very simple: it is very difficult for an elected government to hold down its borrowing.

Any rise in savings that takes place both tends to cut the pressure on public spending and make the borrowing requirement easier to finance. The immediate impact on public spending may be minimal, for any build- up of funds for personal pensions is not going to enable the government to hold down state pensions in the short run. It may make tying state pensions to prices rather than earnings more acceptable in the distant future, but that does not help now. But there is an immediate boost to the flow of funds available for investment. If all the new pension savings schemes were unit-linked, then all the money would go into equities, but a prudent long-term investment would almost certainly put some funds into the gilt market, too. As people approach retirement there is a strong case for switching funds into gilts to help insulate them from swings in share prices.

So encouraging savings helps eventually to hold down the long-term growth of public spending, but meanwhile makes borrowing easier and cheaper to finance.

It would have a further effect in that greater saving boosts the country's investment income. The graph on the right comes from the City table, the figures on the foreign earnings of the City of London published each year, which also came out last week. There is one obvious message, which is that the City - or rather the UK-based financial services industry - had a very good year, with foreign earnings topping pounds 20bn for the first time. For those of us who follow the financial services industry, it is encouraging that for all the talk of the City losing ground, it seems, if anything, to be improving its share of the world market in financial services.

There is another and less obvious message, which is the extent to which investment income is now underpinning the balance of payments. Net investment income is now running at over pounds 8bn, of which more than pounds 7bn is portfolio investment. Much of that is generated by the insurance industry, where income from investments is a large part of the business. (They get the premiums in, invest the money, then pay out the claims months or even years later.) But a growing amount - more than pounds 2bn last year - comes from pension funds. That, of course, is generated by the savings of the ordinary people who have company or personal pensions.

The more we save, the greater the pool of savings available for investment in this country: the bulk of the pension industry's funds are invested here. But some are invested internationally and the rise in these earnings are now material to the balance of payments. The UK happens to be very good at international investment.

So quite aside from the positive impact on public finance, there is a straightforward balance of payments case for seeking to encourage more savings, too. To some people this may seem a little odd: should we really encourage the growth of a rentier economy, relying more and more on foreign investments rather than exports of goods and services? Actually we have no choice. An ageing nation, with a higher proportion of people living off pensions, inevitably becomes more of a rentier nation. Indeed it is much better to have substantial income from investments abroad to help pay those pensions than to have to increase taxes on the declining proportion of working age people.

The logical case for seeking to boost savings is so powerful that you can expect to be encouraged, cajoled and even bullied to save more - by whatever government happens to be in power.