Reeves should take a leaf out of America’s book when it comes to encouraging investment in stock and shares, says Charles Hall
Although the focus in the Budget will be on the size and scope of tax increases, Rachel Reeves is also considering measures to increase economic activity, which includes encouraging savers to invest in equities. The comparisons with the US are very clear. Savers in the US invest considerably more in equities, which over time gives superior returns to most other asset classes and drives economic growth. Savings are a vital part of a healthy economy as they reduce dependence on the state and increase economic activity as people with savings have a greater propensity to spend given increased funds and a larger safety net.
In contrast, people in the UK have relied far more on property as a long-term investment. That worked well when interest rates were low, house prices were rising and cost of ownership was modest. The other key element of savings is cash and boy do we like cash. There is £1.9 trillion held in cash in the UK of which £430bn is in cash ISAs. Holding cash makes sense to provide a safety net for emergency purchases and a rainy-day fund. However cash should not be seen as an investment, given that the value is eroded every single day by inflation. There really should be a risk warning on cash to say that “holding cash will lose you money over the long-term”.
Resilient economies
A naysayer might say “investing in equities may make you money but what about when the market falls”. That’s a perfectly reasonable caveat. However, the clear evidence is that if you save regularly over time then the returns are attractive over any period. How many times have headlines shouted ‘shares crash’ over the last few decades. We had Black Monday in 1987, the dotcom bubble bursting in 2000, the Global Financial Crisis in 2007-8 and the Covid collapse in 2020 and yet here we are at touching distance to all time highs yet again. This should not be a surprise – markets tend to over-react to black swan events and economies are far more resilient than the scare-mongerers suggest. Furthermore, we should regularly see all-time highs in stock markets as businesses grow their profits over-time and there is an added survivor bias.
So encouraging people to invest in equities clearly makes sense to enhance their long-term savings. It also makes sense to encourage investment in UK equities. This is not out of patriotic duty, but because it is in all of our interests. Investing in UK equities provides companies with capital to enhance growth, it encourages domestic economic activity and increases tax revenues. There is a global battle for companies, talent and capital, but for far too long we have neglected a key strategic asset – our UK equity market. If we do not have a thriving equity market we will not keep our best companies and will lose the long-list of potential superstar companies that we have in the UK.
Rachel Reeves has an opportunity in the budget to transform equity participation and investment in the UK. Changing the annual cap for cash ISAs from £20,000 to say £10,000 would encourage more investment in Stocks & Shares ISAs. Establishing a UK minimum weighting of 50 per cent would transform the level of investment in the UK and removing stamp duty on UK shares in ISAs would enhance the attraction of domestic investment. These measures would not prevent anyone from holding cash or overseas equities outside an ISA, but would ensure that the UK actually benefits from the c£9bn of the annual tax benefit from ISAs.
There is one other measure that would transform investing in the UK. Many people are cautious about investing in equities due to an understandable concern over losing money. To address this risk aversion we could adopt a tax measure from the US. Over there, if you have a capital loss you can offset it against your income tax (up to $3,000 which rolls forward annually). This effectively provides a safety net and encourages greater investment risk appetite. Enabling a similar measure for investing in UK equities would provide a clear reason for people to invest domestically. This could be the silver bullet to change perception and increase investment in the UK. Furthermore, the cost to the Treasury would be minimal given that it could be limited to UK shares held in ISAs. It would also encourage investment at times of greater uncertainty when markets dip – after all these often turn out to be the best opportunities. These changes would revitalise investment in the UK and enhance growth and tax revenues – that’s a combination that Rachel Reeves, the Treasury and the OBR should delight in.