The use of central bank asset purchases, otherwise called quantitative easing, was brought in by Gordon Brown to lever the banks out of their crises, and has been applied since 2007. The politically attractive side effect of low interest rates from QE has since saved the UK government about £120bn of net interest payments. However, the low interest rates also mean low returns on private savings deposit accounts. The other side effect of QE, higher inflation, has also eroded the capital value of such savings. The combined impact has been estimated at £110billion of household spending or saving that could have taken place.
This loss of value from savings has been felt particularly by those expecting to use their savings as supplements to pensions or as as source of retirement contingency funding. The private beneficiaries of QE number those who incurred large debts, and like the government will now have to pay only minimal interest on this capital. Their capital debt is also effectively reducing through inflation. Thus, the prudent have been penalised by QE, and the profligate or debt fuelled, have been rewarded.
The long term fallout from this is to place a huge disincentive on traditional saving for the future and to make debt accumulation superficially attractive. Low savings means low investment, and high debts are a way of placing current problems onto the next generations, in the hope that they will have sufficiently strong future economies to contain the past debt. When debts cannot be paid, the consequences can be dire, however successive government policies have done anything but reduce the burdens.
A study, ‘Maxed Out‘ said that despite the return to economic growth, personal debt in the UK totals £1.43 trillion, close to its all-time high. Average household debt stands at £54,000 – almost twice the level a decade ago. Although much of it stems from mortgages, the report warned that poor people were hit hardest as unsecured consumer debt almost tripled in the last 20 years to nearly £160bn.
This has not gone unnoticed by the government and there are proposals to restore some of the social and financial values of savings. A strong incentive for the government is also that personal savings can be used in retirement to offset some of the costs of supporting the elderly, especially as many of the UK pensions schemes are failing to provide the previously expected returns. The recent auto-enrolment scheme for private sector pensions at a minimum of 8 per cent contribution per annum, is both tax efficient and relatively painless with joint contributions from the individual and the employer.
The role of the government should be to bring back savings as a natural option for the individual, instead of savings now being seen as a low-return poor choice. Yet, one of the stalwarts and most successful savings vehicles, the ISA, is under some threat. Treasury officials are considering a cap on the ISA, limiting the maximum to £100,000. Instead, it would be better for the ISA to be seen as an opportunity for the long term, with savers able to hold all of the £11,520 annual allowance in cash, as against £5,760 now. There would then be an equal opportunity for any mix of cash, shares, bonds and funds. It would also be an enhancement if there could be some degree of permitted movement between cash, and stocks and shares, for flexibility as the investor requirements change.
ISA annual allowances are uprated in line with inflation figures, but the ISA has only ever been updated spasmodically as a socially beneficial right to tax free savings, from its original inception as the PEP. There are many possibilities for the ISA which could be attractive to the saver, where any loss of short term tax revenue is offset by a stable savings platform, adding to the funds available nationally for investment.
This whole field is a fount of imaginative and appealing policy opportunities for UKIP, as well as addressing a genuine remedy for the current lack of savings incentives. As an example, in another context it has been suggested by UKIP that there should be a Sovereign Wealth Fund (SWF) for the UK funded through potential shale gas revenues. This might be worth pursuing in association with a savings vehicle on the lines of the ISA, where this type of ISA would provide investment in shale gas production, whose returns are related to the shale gas SWF. There would then be priority direct returns for those who had invested in the ISA, but still with returns for the nation in general from the SWF. The SWF gets funding impetus from the start, and a high personal support from investors and other parties throughout its development.
The other parties whilst recognising the need to stimulate a savings culture are hamstrung by their own past policies; the Conservatives are particularly aware of the difficulties that they face. UKIP, without the historical baggage, face no such inhibitions, and have a clear opportunity for solutions not open to the others.