Solving the Productivity Puzzle
The UK’s productivity performance since the financial crisis has been woeful and has fallen significantly behind comparable economies, with labour force productivity growing just 0.4% annually since the crisis. Resolution Foundation analysis suggests that if UK productivity had increased in line with the average of France, Germany, and the US since 2008, Britons would be on average £3,400 better off overall.
There are a variety of reasons for the UK’s productivity puzzle, including political uncertainty, regulatory barriers, and a rigid planning system. However, part of the story is the UK’s lower level of gross fixed asset investment as a share of total economic activity. In the 40 years to 2022, fixed investment in the UK averaged 19 per cent of GDP, the lowest in the G7.
Yet, in an economic sense, higher fixed asset investment, such as that into infrastructure or buildings, has to be funded, either through greater borrowing from abroad or lower consumption and more saving at home. The UK’s current account deficit, the mirror of overseas investment in the UK, is already large, and government policy shouldn’t be directed at becoming even more reliant on the kindness of strangers.
In order to generate the savings and productivity boosts that the UK needs, we require a renewed culture of savings. Crucial to building this culture is a combination of improved financial literacy, direct government support and a restructuring of our pensions industry.
Further investment will need to be paid for by higher domestic savings and investment. In the short term, this may mean lower consumption, but in the longer-term the boost to potential growth would make the economic pie bigger for everyone.
paul diggle, chief economist, abrdn
In order to encourage the economic growth and personal freedom that a culture of saving and investing could deliver, abrdn has suggested 5 policy proposals as part of its Savings Ladder manifesto to get Britain investing:
1: Start a conversation
The Government needs to start a national savings conversation on the same eye-catching scale as the 1980s ‘Tell Sid’ British Gas campaign, but for the digital age. Any Government campaign should not be solely focussed on the disposal of NatWest shares. It should be a broad campaign relating to investing. ISAs should be promoted as part of share ownership, particularly as this tax wrapper celebrates its 25th anniversary in April 2024.
2: Make saving easier
The Government should take forward ISA simplification proposals - abrdn and many others have argued that the ISA brand has been stretched too far, with several different types of ISA. This is a barrier to engagement and getting started.
abrdn would also like to see better engagement through better retirement planning tools for consumers. Financial services and Government websites need to develop more flexible, engaging retirement tools to suit a broader range of people, allowing savers to plug in other assets such as ISAs.
3: Remove stamp duty on UK shares and UK domiciled investment trusts
From stamp duty holidays under labour in 2008 on homes worth up to £175,000 and again in 2020 under the Conservatives on homes worth up to £500,000, UK investors have not had the same number of signals that Government sees share ownership as a habit worth supporting.
Over successive parliaments, there have been disincentives for money to be invested in pension and savings pots, depriving UK markets of an obvious source of capital and inhibiting consumers from building financial resilience. Just as stamp duty holidays on property have been shown to have wider economic benefits, a savings nudge via the total removal of stamp duty could also be more broadly beneficial to the economy by boosting liquidity and incentivising flow to UK markets.
4: Boost financial literacy
Financial literacy is not structured to succeed in the UK, because it isn’t measured. The OECD collate and publish data on financial literacy levels across 39 countries, and it is striking that the UK does not take part. This data would be a valuable way to identify policy measures to more effectively target and fund financial literacy at scale in the UK.
We have no shortage of data in the UK on consumer trends, spending, employment, consumer debt and savings. And yet we have no measure of financial literacy levels, which can underpin much wider consumer behaviour. If we want to build a national strategy for financial engagement, and increase public awareness, we need to start measuring it and assessing it with internationally comparable data.
Financial literacy could also be improved by supporting the next generation of savers by extending mandatory financial education in UK schools and better embedding finance into subjects such as maths, economics, and citizenship.
5: Double the minimum payment thresholds into defined contribution pensions and make default funds easier to track
Auto-enrolment has significantly helped increase financial resilience, particularly for younger workers, but to avoid a future retirement crisis, we all need to be saving more.
This is a policy that could make a difference, on a phased basis. There’s no doubt that the politics of this is difficult, but there aren’t many people in the industry who don’t believe that higher contribution levels is a nettle that will need to be grasped at some point. Higher contributions could be particularly helpful for those closer to retirement who have not benefited from auto enrolment from the get-go, and who have more catching up to do.
By enacting these proposals, abrdn believes that the UK economy and capital markets would receive a significant boost, and individual savers would be better positioned to enjoy the retirements they want and deserve.
You can read our recommendations and manifesto in full here.