The 2021 Budget: Investment without savings

The shape of the budget is right, and inescapably so. There was no option but to double down on immediate post-Covid recovery programs in all areas, whilst at the same time setting out a plausible medium and longer-term plan for guiding UK’s public finances back towards sustainability. At the same time, Rishi Sunak tiptoed towards re-balancing the UK’s distorted profit model back towards investment and productivity led growth, with a smorgasbord of tax incentives and direct government investment funding.

For now, this was about as sensible and ambitious as a budget could be. But this year more than any other, it is impossible to know exactly how the massive distortions in private spending, saving and investment generated by the lockdowns will turn out. Sunak hinted that he hoped that we will see a rapid return to normality, and the budget would provide ‘consumers with more opportunities to spend some of the additional £125bn of savings accumulated so far during the pandemic.’

This snippet reveals a glaring problem baked right into the heart of this Budget. Rishi Sunak was not celebrating the fact that household savings have risen by £125bn, nor was he happy that business deposits had grown by £100bn. Instead, the entire budget has the tacit assumption that the only value to be found in those deposits is to get them spent as soon as is possible.

But can anyone say for sure that the country will go on a consumption binge? Or, more profoundly, if families across the country should want to burn through their newfound savings? Perhaps many of us will find that we rather enjoy our share of that £125bn improvement in our bank balances, and don’t want to see it frittered away.

Here, then, we see the problem: the budget had absolutely no concern with encouraging saving. Whilst trumpeting time and time again the hope for investment-led growth, Sunak never once acknowledged the link between investment and saving. If the government is serious about changing Britain’s economic model to one that’s based off investment and productivity growth – rather than a model fuelled by debt and rentierism – then you cannot ignore the role of the saver.

This is because, in the long run, how much you invest is determined by how much you save. In a time of near-zero interest rates, this may not seem an economic truism, but it inevitably will reassert itself with frightful force. It is simply impossible to perpetually finance the economy through pumping it full of cheap money and avoid inflation or the crowding out of productive investment spending. The concern of financing debt is especially true with the UK’s government debt, which has risen by £400 billion amid the crisis.

There was just a dim recognition of this awkward truth, with Sunak saying that ‘while interest rates are currently forecast to remain low, there is a risk that they could rise sharply, which would have significant consequences for the affordability of debt.’ But if this is the case, then wouldn’t it surely be a good idea to encourage a stable investor base for UK government debt? The alternative is the incredibly precarious situation we have right now, where the national finances are dependent on perpetual money-printing from the Bank of England and the confidence of the banking system.

In earlier times of massive crisis such as war, governments encouraged people to buy government bonds, such as war bonds and savings bonds. The reasons for this were a) to grow a stable investor base to moderate the volatility of interest rates, and b) to moderate the possibly volatile swings in consumption which can be expected in an immediate post-crisis environment – both these would be incredibly useful in 2021 and 2022.

Yet there is not even a nod in this direction. The government has plans for a UK Infrastructure Bank, to be based in Leeds apparently able to deploy £12 billion of equity and debt capital. But is it a bank? Will I, as a saver, be able to deposit my savings in it? If not, in what sense is it a bank, rather than simply another government fund? Why even call it a bank if it has no ability to collect and allocate savings profitably? The Budget tells us of plans for a Levelling Up Fund, a Futures Fund, a Community Renewal Fund, a Community Ownership Fund, and Towns Fund – will it be possible for ordinary people to directly invest in these, so they can both build their own wealth while helping the country to recover?

The only nod towards the saver is the possibility of a ‘green gilt’ National Savings Bond sometime in 2021, after £15bn of green gilts have been sold to banks and institutional investors. But the bottom line is this: this budget envisages net borrowing of £297.7bn, of which national savings bonds are targeted to bring in a mere £6bn – ie, 2% of the total, which is effectively a rounding error. That paltry £6bn is just 5% of the £125bn increase in household net deposits seen during the pandemic.

When the government is serious about encouraging and rewarding saving, we’ll know it’s serious about pushing the UK’s growth model away from debt and towards investment and productivity. But right now, it isn’t.

Picture by Harriet Pavey/ No 10 Downing Street