With sinking savings and investment, Britain risks becoming like Argentina

As the G20 summit reaches its conclusion in New Delhi this weekend, it is worth noting that in terms of its savings rate, Britain is worse than any other member of the group. As Lord King, former governor of the Bank of England, points out in an interview with The Telegraph, we are lower even than Argentina, where to save in pesos is to watch your money burn.

But for a brief blip during the pandemic, when inability to spend caused the household savings rate to soar to 27pc of income, Britain’s savings deficit has been a major concern for a very long time now.

According to OECD data, we saved just 0.8pc of GDP last year, lower than almost anywhere else in Europe other than Greece. The OECD measures and reports the savings rate in a somewhat different way to that of our own Office for National Statistics, which records a higher ratio, but the point still stands. Like for like, we fall woefully short against peers.

Small wonder, then, that with an ageing demographic, the economic establishment has depressingly resigned itself to the inevitability of an ever higher tax burden; as a nation, we have singularly failed to save enough to pay for our old age.

Only by taxing younger cohorts more, which virtually guarantees economic stagnation, can we provide the pensions, health and social care older generations have come to expect.

A higher savings rate won’t automatically drive higher levels of investment, but it would certainly help. As things stand, so-called “gross capital formation” in Britain, which includes both public and private investment, is the lowest as a proportion of national income in the OECD bar Greece.

We need to be a bit careful here, because Britain is overwhelmingly a service, and increasingly, digitally based economy where capital investment is almost bound to be lower than in countries with big manufacturing sectors.

Even so, our low savings rate is making it a struggle even to finance those investment opportunities that do exist – and looking around the broad sweep of potential openings for business and utility investment, there are potentially a lot of them.

As a result, we are more and more dependent on foreign investors to bankroll our investment spending. At the same time, some of Britain’s most up and coming companies are choosing to list overseas rather than here in the UK in their search for capital, creating a “doom loop” where lack of domestic savings forces business to fund itself abroad, thereby further weakening the attractions of London’s already dying stock market.

How did it come to this? Britain used to boast an exemplary funded pensions system which both as a matter of duty and choice supported the UK stock market by overwhelmingly investing in British companies.

Then Robert Maxwell fell off his yacht, leaving his pension funds – which he had raided to support his teetering business empire – bereft of the assets needed to meet their liabilities. In marched a veritable army of regulators, lawyers, actuaries and accountants determined to make amends by imposing belt-and-braces guardrails on the entire industry. Enforced liability matching was born.

This naturally drove trustees to abandon volatile, higher risk equities for government bonds, where the long run returns are much lower but the capital value on redemption is guaranteed.

Rapidly falling interest rates were the final straw. For many companies, sustaining a defined benefit pension scheme became prohibitively costly. Up and down the land, this once thriving privately provided social safety net was closed to new accruals and put into runoff. Many workers stopped saving for a pension entirely, and spent the money instead.

Automatic workplace enrollment into the Government-sponsored National Employment Savings Trust (Nest), which now has more than £30bn under management, is meant to provide some kind of substitute, but it’s not nearly enough. And when you look at where Nest invests its funds, it’s hard to find a British company anywhere.

Instead, this new pool of UK savings is spread globally, which naturally makes the world’s biggest company, Apple, its largest single investment.

Jeremy Hunt, the Chancellor, has made it his mission to address these deficiencies, but so far all he’s done is fiddle at the edges. It’s unlikely to make much difference. Anything bolder just gets buried in endless government reviews, where it is easy to come up with a hundred and one reasons why something potentially transformational shouldn’t be done.

There is in any case a sense in which the train has already left the station. It’s too late for many of those who are approaching retirement to make adequate provision now.

Lord King asks how we can raise our savings rate. How indeed, when increased taxation increasingly forces those still in a position to save to instead bankroll the needs of those who aren’t?

With its stunning mix of neo-classical and art-deco architecture, and its vibrant social scene, Buenos Aires, Argentina’s capital, is surely one of the most attractive cities in the world. But it is also one that looks backwards at glories past rather than forwards to the future. All of them dead: Diego Maradona, Eva Peron and Carlos Gardel (an old crooner who wrote a number of classic tangos) are still its heroes.

Britain is not Argentina, or not yet in any case, but likewise it threatens to become a prisoner of its past. Eventually there will be a reckoning, and it won’t be happy.