Tax concessions fail to boost savings

The government’s strategy to promote personal savings has failed. A report by Scottish Widows gives the statistics.* The household savings ratio, currently between 5% and 6%, is significantly lower than it was 10 years ago (just over 9%). From 2002-2006 average savings levels were at their lowest since the 1950s.

Given that governments have made increasing savings a priority for more than 20 years the figures are particularly telling. First Peps and then Isas were high profile initiatives with this goal.

Scottish Widows tries to fudge this failure by pointing out that investment in Isas was at an all-time high last year. But, as the report concedes, most Isas are in cash. It is likely that even if Isas did not exist such assets would be in savings accounts. Existing investors have simply shifted to a product where they can get greater tax advantages.

Indeed, it is possible that tax incentives have discouraged investment. Investors need to save less to get a given level of return.

Sadly, the default option in explaining the low level of saving is the fecklessness of individuals. Endless government initiatives have tried to encourage the teaching of finance in schools as a way of getting people to save more. But a large part of the population has resisted such exhortations.

Thankfully the move to make personal finance teaching a compulsory part of the national curriculum was rejected last week. However, “economic well-being” – a combination of third rate economics and therapy – looks set to be taught more often in schools.

With the benefit of hindsight the reasons for the low savings rate are largely economic. A stable economy and easier access to credit have reduced the need for saving while making it easier to borrow. There is less need to save, for example, because the chances of suffering unemployment have fallen. And those who need to make substantial purchases can generally use credit rather than needing to save.

The recent surge in house prices has also played a part. Individuals feel less need to save if the value of the equity in their houses has surged. Many have also bought second homes as investments rather than putting their saving elsewhere.

The government’s initiatives have proved, at best, irrelevant to Britain’s level of saving.

* “Preparing for the Future: Britain’s Savings and Investments Landscape”.