UK’s new savings plan: Your money becomes everyone’s money – Merryn Somerset Webb

In a world where debt looms large and tax revenue hits its limits, countries face tough choices. Merryn Somerset Webb explores how nations, like the UK, grapple with excessive debt through various means, from classic financial repression to redirecting private savings towards domestic goals. With looming infrastructure needs and sluggish growth, the UK's Chancellor of the Exchequer, Jeremy Hunt, proposes novel strategies like incentivizing investments in British-listed firms through Individual Savings Accounts. This signals a shift towards mobilizing private savings for political objectives reminiscent of past capital controls. As nations increasingly tap into private wealth to tackle public challenges, the line blurs between personal savings and state resources..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..By Merryn Somerset Webb.How does a country deal with having too much debt? The most desperate call the International Monetary Fund and speak very, very nicely to whomever answers the phone. Obvious. Straightforward. Quite embarrassing. But you don't have to be at the stage of having the IMF on speed dial to be in trouble — or for that matter to default on your debt. There are other ways. .___STEADY_PAYWALL___.As market historian Russell Napier pointed out at the Library of Mistakes financial festival in Hay-on-Wye, Wales, last weekend, there are more stealthy ways to deal with the problem. You can indulge in classic financial repression – letting inflation run ahead of interest rates for long enough to cut the real value of the debt to reasonable levels; that's not a technical default but not much fun for anyone holding your sovereign bonds either. You can default on your citizens — by not providing them the services or benefits you have implicitly or explicitly promised them. Finally, you can reduce any new borrowing by directing other people's capital to your needs — something you get to do because you're in charge regardless of the impact on returns. Keep all these things in mind and look again at the UK budget unveiled this week by Chancellor of the Exchequer Jeremy Hunt. .Read more: SA Navy risks becoming 'sitting duck', leaving 3000 km coastline exposed – Kobus Marais.The UK has too much debt. There is little agreement among academics as to what constitutes "too much," but there is mostly a feeling that 100% of gross domestic product is pushing it. The UK is currently at about 96%. (Japan tops 200%). "Pushing it" may be what anyone thinks when looking at their tax statement and seeing that 12% of what they pay goes to debt interest. It's also a stunningly high tax burden relative to history amid an unpleasantly low level of growth. In the next five years, the UK economy is forecast to stand still. GDP per head (the only thing that really matters) is not forecast to grow. Finally, it has a very high number of financial imperatives. The UK state is not only bedeviled by underfunded and horribly unproductive public services, but its infrastructure is in dire need of an upgrade across the board – particularly given the forecast rise in the UK population. You can argue forever about the extent to which immigration is a net long-term economic positive or not for the UK. But either way, a million here, a million there, and you are going to need more transport, houses, hospitals and schools — all things the UK state simply can't afford, particularly given the huge capital expenditures that are now required for the energy transition and our new defense priorities. In World War II, the military took up around 40% of UK GDP. In 1980, it was still near 5%. Today, it's just over 2%. Five might feel more comfortable..Lots of debt; tax revenue at its limit; and new spending demands appearing every day? That brings us neatly back to default. You could say that the first two types are well underway. We see clearly that inflation has no interest abiding by the Bank of England's inflation target. And most citizens of the UK will say that they are pretty sure they aren't getting the services they thought they had been promised (try getting your bins emptied in Birmingham or a lawsuit to court anywhere in the UK)..But it was the nod toward the third and least obvious type of repression that made Hunt's budget particularly interesting. There was an announcement of a consultation to extend the UK's Individual Saving Account regime, which allows savers to invest up to £20,000 ($25,600) a year in a wrapper that protects their gains and income from tax. The idea is to allow an extra £5,000 a year but to require it be invested only in British-listed firms. There is also to be a series of requirements for pension funds to publish details of their allocations to UK investments with the clear intention that the transparency should automatically lead to an increase. And if it does not? "The government will review what further action should be taken if this data does not demonstrate that UK equity allocations are increasing." This all makes complete sense to Napier: Governments can't afford to pay for all the things we need, he says, so "mobilizing private savings to meet political goals will become the new normal." .Read more: ANC's controversial bid to revive Apartheid-era investment rule sparks pension industry concerns.Much of the commentary around the proposed new investment product has had to do with mechanics. But this is to miss the point. The Brit ISA should be seen more a case going where the money is – using UK saver assets and in particular pension assets (where the real money is) for domestic political purposes. We have been through this cycle before. Until 1979, the UK had exchange controls in place, which forced capital to stay at home. On the day those controls were abolished the FTSE 100 Index fell 3%. At the time UK pension funds had around 3% of their equity allocations in foreign stocks. There was concern that might go up to 10%. It actually went rather higher: UK pension funds now have only a 2.7% allocation to UK equities. The rest is busy cutting the cost of capital for companies listed elsewhere..It makes sense that our cash-strapped state might fancy bringing some of it home again – first to improve liquidity and valuations in our own financial markets and later perhaps to be firmly encouraged to finance the infrastructure we need. Think of this, says Napier, as an opening shot in what may well turn out to be a forced "retreat of global portfolio capital towards home base." In a world of debt and the limits of the Laffer Curve (the tax take can't rise much more), the state is increasingly short of other options. And what you think of as your money is increasingly going to be used by the state as though it was everyone's money..Read also:.How a Cape Town resident got his DIY solar setup to pay for itself in five monthsForced labour in Big Tech: Is exploitation an ingredient in your iPhone? – Stephen L. CarterRegulatory bullying threatens Safair's success in South African aviation: Ivo Vegter.© 2024 Bloomberg L.P.

UK’s new savings plan: Your money becomes everyone’s money – Merryn Somerset Webb

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