The budget provided thin gruel for savers. The starting rates for tax on savings and the ISA allowance were frozen, at £5,000 and £20,000, respectively. The personal savings allowance was held at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. At a time when inflation is increasing at 3 per cent, this amounted to a real-terms cut in savings allowances.
Savers lost out in the battle for the chancellor’s largesse, but this should come as little surprise. With the Bank of England having recently raised its interest rate for the first time in a decade — a move that few banks have passed on in full — the pressure to appease savers was, at least temporarily, lessened. Furthermore, savers have been big winners in recent budgets and autumn statements. Sustained efforts to create a savings culture had to pause for breath at some point. The budget was that point.
Since 2010 an increase in the ISA allowance by an eye-watering 178 per cent, the introduction of lifetime and help-to-buy ISAs, as well as being able to access pension savings at age 55, were all designed to encourage Britons to spend less and save more. Yet question marks remain within the Treasury over the efficacy of these efforts.
The UK’s savings ratio — the proportion of the nation’s income that it saves — has declined by more than half since 2010 and now stands at only 5.9 per cent. The Office for Budget Responsibility expects this to fall further to 5.4 per cent by the end of this parliament. This decrease, the largest among G7 countries, leaves households with a thin safety net in case of economic turbulence.
This deficiency in savings can be explained, in part, by the low interest rates on offer in UK deposit accounts. At a mere 0.81 per cent, the average interest rate payable on deposit accounts represents a large disincentive to save. Yet this low-interest environment has been a global phenomenon, so the UK-specific decline in saving cannot be attributable solely to low returns. There is also the idiosyncratically British attachment to saving via property, one that will be accentuated with the budget’s stamp duty cut. A more malevolent explanation is that average wages are almost 10 per cent lower today than they were a decade ago.
However, it is not all bad news for savers. One of the less celebrated policies to get us all saving more — and it didn’t get a mention in the chancellor’s speech — is about to receive a big shot in the arm. The auto-enrolment of low and middle-income workers into workplace pensions is about to trigger the biggest saving revolution attempted thus far. Having completed the enrolment of approximately seven million new savers, the plan is to increase the minimum contributions fourfold over the next 18 months, with overall contributions rising from 2 per cent to 8 per cent of earnings.
The scale of this change and its impact on household finances cannot be understated. This is a truly transformative change in the way in which Britons save for retirement. Starting with Adair Turner’s Pension Commission way back in 2002, this has been a long journey. It has been supported by no less than four chancellors, while the intellectual inspiration for the policy recently helped Richard Thaler to earn the Nobel Prize in economics.
By the time that Mr Hammond, or his successor, stands up next November, we will have a feel for the impact of this policy. A slowing economy may encourage the government to delay the build-up of rainy-day funds. That would be a mistake. Embedding a savings culture remains as important as ever.