I have this morning published the latest note in my series that will make up the Taxing Wealth Report 2024. This latest note deals with problems that ISAs create within the UK economy.
At present, we spend £3.7 billion over annum (or most likely, more by now) subsidising ISAs when the resulting savings are either left as moribund, economically dead money, in cash savings accounts or are used for financial speculation in the City of London. Neither creates any new investment in the UK. Neither provides a return to the Exchequer for the subsidy given, which goes mainly to the wealthy and elderly population of this country.
As a result, this note proposes a radical transformation of the use of ISAs so that they become a major source of the new financial capital required to create the transformed society that the people of this country deserve to live in.
The summary of this note says:
Brief Summary
This note proposes that existing ISA savings arrangements should be scrapped because they provide almost no overall economic return to the country as a whole, very largely subsidise the savings of the already wealthy, and divert funds away from much more constructive use.
Green ISAs are proposed in place of existing ISA savings arrangements. These Green ISAs would have to be invested in either government-backed savings accounts or bonds or private sector equivalent accounts, all of which funds would be required to invest the proceeds of sums raised in:
- The transition to net zero that this country requires.
- Social infrastructure, such as new housing.
- Related activities such as education, training and appropriate support services.
The option of simply leaving cash in moribund bank accounts or of speculating funds on stock markets, which is how the £700 billion or more now saved in ISA accounts is currently used, would disappear over time as existing ISA account arrangements expired and new ones took their place. £70 billion a year goes into ISA accounts at present, the main appeal being their tax-free status.
The creation of a new source of capital for public investment from this source would, as a result, turn the current £3.7 billion (and rising) annual cost of subsidising such accounts from being lost money into a valuable source of funding for new investments that would in themselves generate new taxation revenues. At the very least, the entire cost of the tax subsidy for these accounts would be saved by the tax paid on that new investment (with the actual sum generated likely to be very much higher). As such, it is suggested that at least £3.7 billion of tax cost will be saved a year as a result of these changes.
Discussion
There are good reasons for questioning the economic value of ISA savings arrangements to the UK government, and quite possibly to the UK population as a whole.
Approximately half the sums saved in ISAs are held in cash based accounts, with the proportion changing slightly over time. Cash based saving was rarely rational during much of the period covered by the HMRC data noted above because of the low rates of interest paid on sums deposited, and yet very large sums were saved in that way, largely because of the inherently cautious nature of most savers. There is no criticism implied here with regard to that behaviour: each saver should be able to determine their own risk profile.
There was, overall, likely to have been a higher rate of return to those who saved in equity shareholdings over this period, but that said the return in question might have been very volatile, and unstable. Not everyone will necessarily benefit by saving in this way.
More importantly, from a macroeconomic perspective, neither of these savings mechanisms adds any significant value to the UK economy. Cash held on deposit does at a macroeconomic level represent money withdrawn from circulation within the economy as a whole, and as such has a deflationary effect on overall economic activity. Few would suggest that this was of economic benefit during the course of the period since 2010 when austerity was already prevalent and growth was low.
In addition, and as is little appreciated, cash deposits do not in any way fund the lending made by the banks with which the sums are deposited. This fact was acknowledged by the Bank of England[1] in 2014. As they noted, at that time, loans made by commercial banks are the result of new money creation. Cash deposits made by one person are never loaned to another customer of a bank. As a consequence, cash deposits are, in effect, dead money within the economy, which is one reason why banks are so reluctant to pass on interest payments to depositors. Cash deposits do not add value to banks and so they are unsurprisingly reluctant to pay for them. What this does, however, mean is that these deposit add almost no value to the UK economy, and to subsidise them does, in that case, makes little sense.
There is little reason to suggest that equity share investments made through ISA accounts provide any more economic benefit for the UK as a whole. The vast majority of shares held in ISAs will be held through managed investment funds, most of which will track the performance of large share indices. These funds rarely purchase new shares issued by the companies in which they invest, largely because quoted companies very rarely rely upon this source of finance now. In fact, those companies are usually more intent on repaying their share capital than they ever are on increasing it.
In that case, what this means is that the funds that are held within ISA saving arrangements very rarely, if ever, result in the investment of new funds in new economic activity within the UK economy. They are instead used for speculative, but not investment, purposes. The result is that these savings, just like cash deposits, add almost no value to the UK economy as a whole either by promoting employment or by creating new investment in the productive economy.
Taking these combined observations into account it is apparent that a review of the savings arrangements represented by ISA accounts would now be appropriate. This is most especially the case when it is known that significant new capital is required within the UK economy to fund the climate transition, new social housing and other infrastructure investment.
The changes to ISAs proposed in this note address these issues with existing ISAs and turn ISAs from being a drain on the UK economy into a source of new capital for its transformation.
Cumulative value of recommendations made
The recommendations now made as part of the Taxing Wealth Report 2024 would, taking this latest proposal into account, raise total additional tax revenues of approximately £115.1 billion per annum.
Footnotes
[1] https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
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May I distract from the main thrust of this blog by asking a technical question? You say that “cash deposits are, in effect, dead money within the economy”. It seems to me that by putting cash in a building society you are removing it from the economy – it is no longer being used for purchases, services, etc. In that case, why is it not carrying out the same useful function as taxation, limiting inflation by balancing the amount of money in the economy?
Obviously from the point of view of governments it is less useful than taxation in limiting inflation because they have less control – with tax they can choose whether and when to re-inject money into the economy by government spending whereas with savings that is an aggregate of millions of individual decisions by savers. However that in itself arguably gives a rationale for governments acting to incentivise saving through schemes like ISAs in an attempt to bias those individual decisions in the way the government wants.
My apologies to those with a background in economics to whom this is probably basic stuff. However for me one of the pleasures of this blog has been its educational value.
But that is such feeble goal when something else so much more significant is possible
So, why just aim for ‘dead money’?
It is entirely reasonable for most people to hold some cash. Indeed, everyone should if they can.
And you are right, holding cash – or more importantly – changes in the desire to hold cash has a significant impact on the real economy. Indeed, the boom/bust cycle depends critically on this unstable factor and policy makers (monetary and fiscal) are acting to offset these changes…. if they know what they are.
Now, in an MMT world, this “dead money” would be deflationary and it would allow government top spend more on what we need but there are two problems. First, the “dead” money might come to life in an instant and derail tax/spending plans that need consistency over decades. Second, in practice we do not live in a world where MMT is understood so this “dead money” is constraining our ability to make the investments that we need to.
Thanks Clive, that helps. And the suggestion that savings could be more of an economic tool if only Chancellors understood money better.
I suspect that ISAs were originally designed to minimise the possibility of savings coming back to life in an instant, in that once cashed in you lost the tax benefit and you only had a small annual allowance to rebuild your tax-protected nest egg. However with annual allowances having been increased to far more than most people’s likely annual savings, that restraint has disappeared.
And Richard, I agree that your proposals for ISAs are far more creative and likely to benefit the economy more. But when was creativity and a desire for economic benefit beyond the chosen few ever in the job description for a Conservative Chancellor?
There was a phrase used in a comment here a few weeks ago which resonated with me, and I keep in mind whenever I read economic news. It pointed out that the Treasury sees its function as balancing the budget, when actually it should be balancing the economy.
Is money in bank accounts actually sitting idle? I would suggest not.
In the fractional reserve system, I would have thought it is either lent out by the banks or forms part of the reserve which enables the bank to lend money it creates, so it forms part of a system which funds at least some productive effort in the economy.
Moreover, if savers are faced with the prospect of restrictions on what they can do with their cash or investments, they may choose to do something other than put it in an ISA, so not all of the current money would in fact be available for the desired green investment.
There is no such thing as fractiomnal reserve banking
And I am not saying peiople need to invest in green ISAs – they would have freedom, but no tax relief, eksewhere
What I know is most people want safety and tax relief – and what i suggest combines both with social benefit
What is wrong with that?
Interesting comment on fractional reserve banking. I see some comments on the Web to the effect that the BOE no less has “admitted it no longer exists in the UK” but I note that the BOE is in fact offering a course which will “study the fragilities in fractional reserve banking”. I also note that the absence of FRB is not a universally held position (e.g. financial sense.com).
Both are true.
The BoE knows it is teaching nonsense, but maintaining that nonsense suits its narrative.
The Bundesbank has stated the same :
https://www.businessinsider.com/german-central-bank-says-credit-is-created-out-of-thin-air-2010-3?r=US&IR=T
Thank you
Is money in bank accounts actually sitting idle?
Er – yes. The bulk of it sits in the CBRAs and does nothing to promote real investment.
The mechanism I am assuming requires that some money is held in reserve, but that this enables lending on a much greater scale. Thus, the reserves would not be useless. I realise that the existence of such a mechanism is disputed.
Banks never ever lend reserves
They are substitute capital to defend against losses, guaranteed by the state
If you tax savers they will move their money to pensions or mortgage payments instead. Also the stock market is not speculation it is an investment. Keep gov’ hands off our money. Gov’s are bad at money look at the debt they are in! I wouldn’t trust them with anything, especially the Tories.
I am at least mildly bemused and amused by your comment.
Firstly, paying off a mortgage is no alternative to short term savings. Nor, come to that, is a pension. The chance that the average saver will see them as such is mildly absurd. You clearly do not understand differentiation in the savings market.
Second, as I explained in the blog post, almost no one invests in the stock market because almost none of the money paid into it ever results in expenditure on new assets or new employment creation. Instead it involves the purchase of secondhand pieces of paper (shares) With the hope of speculative gain. If you do not understand that, I doubt if saving in that way is for you.
Third, I find it very amusing that you think that the government is really bad at money when not only does it create all the money that you spend, but about 80% of all savings is in government incentivised or guaranteed accounts precisely because people trust the government with their money above everyone else.
If you were a student, I can assure you that you would’ve failed.
Teachers also get assessed. Take a negative mark for being patronising:)
I wasn’t
That was drivel
Mr Slinn,
“[O]ur money” (your words, I am using quotation marks to identify my source – which is your comment); isn’t actually your money. The money is, quite literally just a formal acknowledgement of a Government debt to you. Of course, if you really want the Government to eliminate that debt altogether, then the only way they can do this, but avoid a self-defeating circularity (think about what they are promising to do if you present your debt for ‘payment’ of the debt outstanding to you; i.e., replace one acknowledgement of a debt with another debt that is precisely the same acknowledgement of the same debt, in an endless loop); to which the final resolution to eliminate the debt altogether would be to tax the debt issued, back to zero. That’ll fix it. After all, they issued it on the basis that a) they promise to pay the bearer; but b) that they have the open-ended sovereign right to tax what they issue.
The rest is politics.