After the excesses of Christmas, many of us will be worrying about the credit card bills we will soon receive. Yet, whatever our New Year’s resolutions, Britain, more than most economies, remains addicted to debt and terrible at saving. Part of the cause of the financial crisis was too much borrowing – but it was private-sector borrowing that was the real issue. The good times were funded by cheap money and when the banks couldn’t access capital markets any more, that cheap money dried up and, along with it, went consumer spending.
So, what’s the problem? First, low levels of savings and high personal debt leave individuals exposed to falls in income or unexpected bills. Second, they leave the whole economy exposed. This is increasingly problematic because over the past 10 years there has been a substantial transfer of risk to the individual – from the cutting back of the welfare state, to the rise of zero-hour contracts and the hike in tuition fees, people are having to take on more risk. The response however has not been an increase in savings, far from it – savings have fallen as a share of our income from nearly 12 per cent at the beginning of 2010 to less than 5 per cent now.
So, what can be done? Perhaps most of all, low savings reflect low wages. Workers need a pay rise without cuts to in-work benefits, and as a country we need to be creating more high-paid, high-skill jobs which offer more security and the capacity to save.
But public policy could make saving more rewarding. Savings are subsidised in a number of ways – including through pensions tax relief, ISAs and National Savings. Yet it’s not clear we get value for money from this support. The highest earning 1 per cent with salaries of more than £150,000 receive 14 per cent of total pension tax relief, while only 10 per cent goes to the whole bottom half of the income distribution.
So first, let’s replace the £34bn pensions tax relief system with a simple savings bonus. For every £1 that you put in – however much you earn – you would get 25p or 30p from the public purse. So, if you save £1,000 a year you get £250 or £300 to top up your savings, with annual and lifetime limits on what you can put in.
Second, auto-enrolment into workplace pensions has been a big success, with six million more people now saving for their retirement. But those doing several jobs are unlikely to be enrolled, because you need to earn £10,000 in any one job to qualify. That needs changing. And, with 15 per cent of people self-employed, we should help these workers enrol into a pension by ticking a simple box on the annual tax return, so that they can benefit from saving and tax relief too.
Third, support for ISAs needs overhauling. Currently 60 per cent of the tax-free return on ISAs goes to the highest 15 per cent of earners, and the increase in the ISA limit from £7,000 to £15,000 over the past decade has only helped those who can save big sums of money every year. Let’s introduce a lifetime allowance of £500,000 for ISA investments and freeze the annual limit at £15,000 for the remainder of this parliament with a shift in resources – for example, by matching, pound for pound, the first £100 that each saver puts in an ISA for basic rate taxpayers.
Fourth, we need to make it easier to save. Many ISA providers only allow you to save for an ISA with a minimum contribution of £50 a month – let’s lower this and get more firms to offer payroll deductions into a savings account. With all the innovations making it easier to spend with the flick of a bank card, surely we can make it easier to save too? Why not have an app where you can decide to save £2.50 rather than buy a coffee, or round up every transaction to the nearest pound with the difference going into savings.
The fact is, savings matter. We worry about income inequality, but wealth inequality is greater and rising – with the wealthiest 20 per cent of households having a staggering 117 times more assets than the poorest 20 per cent. Part of the way to narrow this gap is through encouraging savings and changing the tax relief system – subsidising the rich less and helping those on modest incomes more.
The government needs a long-term plan for savings to secure our economic and financial resilience and must reallocate tax relief to those who we want and need to encourage to save. With a few simple steps in the Chancellor’s 2016 budget and a bit of innovation, imagination, and social purpose from the financial services sector, we could help make families and our economy more resilient and more secure.
Rachel Reeves is Labour MP for Leeds West and a member of the Treasury Select CommitteeReuse content