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Downing Street has left it very late in the day to be doing something about Britain’s shamefully low levels of saving and investment, but finally the penny seems to have dropped.
Unless these deficiencies are urgently and forcibly addressed in public policy, Britain is finished as a major advanced economy. You cannot keep living on the never-never indefinitely, but as things stand, that’s the destructive, debt-funded trajectory.
After 13 years of fiddling while Rome burns, the Government is planning to do something about it by putting a raft of measures and initiatives for reversing the rot centre stage in this week’s Autumn Statement and next year’s Spring Budget.
This is the sort of thing that should have happened at the beginning of the Conservatives’ time in office, not at the end. The all-consuming nature of Brexit and then the pandemic provide some sort of an excuse, I suppose; those two distractions used up all the available oxygen, leaving nothing for anything else. I wish I could say it was worth it.
It is the curse of democratically elected governments that there are few, if any, votes in the sort of measures needed to put the economy on a more dynamic footing. The demands of the ballot box instead encourage the politicians to prioritise short-term consumption, welfare and populist name-calling over all else.
The interests of long-term growth and prosperity come a distant second, for the payback is too far in the future to be of any immediate concern. Yet rarely before has long-term thinking been so much needed.
As things stand, Britain has one of the lowest savings rates in the OECD – or to be more precise, the sixth lowest among richer nations at just 1.7pc of GDP last year. This contrasts with 6.1pc for the European Union as a whole, 9.1pc in Germany and 13.9pc in the Netherlands.
Since savings and investment are essentially just two sides of the same coin, it should come as no surprise that Britain also has some of the lowest levels of business and government investment in the OECD. Abundant investment doesn’t automatically lead to greater prosperity, but it surely helps.
It is also true that too much saving can be economically destructive – or what the British economist John Maynard Keynes called the “paradox of thrift”: if you don’t spend, but save all your money instead, it damages demand and can cost someone else his job.
Given Britain’s current position, however, too much saving would be a nice problem to have. In any case, we’ve got the balance hopelessly wrong as things stand.
Nowhere is this more apparent than in the slow death of the British stock market. You’d need several rainforests of newsprint to detail all the policy missteps and delusional mindsets that led up to this tragic state of affairs.
Suffice it to say that the stock market’s decline is powerful evidence of an economy that is dying on its feet, unable to replace the old and mature with the new and growing companies of the future.
I’ve been talking to Charles Hall, head of research at the City stock brokers Peel Hunt. “The pace of decline in Britain’s small and mid-cap market is relentless” he says, “and will continue unless effective action is taken quickly.
“We are currently in a doom-loop where valuations are low, liquidity is reducing, investors are seeing withdrawals and there is little desire to IPO”.
The rot is most obvious in the FTSE SmallCap Index, where the number of constituents has shrunk by 10pc in the last year alone, and an astonishing 30pc over the last five years.
The Government wants to encourage investment in tech and healthcare, but a striking proportion of the companies exiting public markets, either by going private or via overseas acquisition, is in precisely these sectors. The very lifeblood of the UK economy is being progressively sucked out of it.
A little history. The biggest source of evergreen capital for UK stock markets used to be Britain’s extensive array of final salary pension schemes. But as these matured and went into run-off – deemed by sponsors too expensive to keep going because of the growing panoply of regulation that surrounded them – they pulled their UK equity investments and for liability matching purposes stuck the money into supposedly super safe gilts instead.
What little equity investment they retained, moreover, they began to invest globally, reducing their UK equity weighting to a tiny fraction of its former self.
Over time, equities always outperform government bonds, perversely making the switch out of equities hugely costly to sponsoring companies. Protecting pensioner entitlements, which was the intention, is all very well, but it has come at a heavy price. Collectively, sponsoring companies have had to spend hundreds of billions plugging deficits, money that might otherwise have been invested in new products, services and jobs.
Premier Foods, for instance, is still forced to devote approximately 40pc of its free cash flow to plugging the deficit in its various pension schemes. It is as if the company is being run solely for the benefit of legacy pensioners, rather than as it ought to be for shareholders, customers, employees and the wider health of the UK economy.
Nor is it just pension funds. Retail investors are likewise shunning UK markets for higher-performing overseas alternatives.
Tax-free Isas were meant to provide an incentive to invest, but much of this source of savings goes straight into cash or foreign equities. Is there anything more ridiculous than a UK tax break for the purpose of driving savings overseas?
At least the Japanese, when they copied the Isa idea from Britain, had the wherewithal to limit qualifying investment to Japanese companies only.
In any case, the effect has been catastrophically bad for the UK stock market. Small wonder that it looks undervalued compared to peers.
Normally, investors would see this as an opportunity for arbitrage, and chase the cheaper prices. But in fact it has had the opposite effect. A growing lack of liquidity has further alienated investors for fear of prices getting cheaper still. It’s a vicious circle of decline.
Some argue that it doesn’t matter. Much of the action in equity funding now takes place outside public markets, in private equity and other sources of venture capital, they point out. Perhaps, but the growth in private equity was very much a zero interest rate phenomenon. Now that debt is more expensive, many of the sums no longer add up. Much private equity is already in a lot of trouble.
Besides, even private equity eventually needs an exit. Without the liquidity of public markets, moreover, founders and key employees can likewise find it impossible to cash out. Stock markets are still a vital part of the feeding chain.
All these deficiencies are well understood by the current occupants of Downing Street, and finally they have determined to do something about them. But time is running out.
Britain has given up saving – and it’s a crisis we can no longer afford to ignore
The occupants of Downing Street have waited far too long to confront this vicious circle of decline