The UK invests too little. This is now widely agreed. Naturally, this has led to a discussion of how to induce more investment. Yet how would the extra investment be funded by a country that is even more strikingly short of savings than it is of investment?
According to IMF data, gross investment averaged a mere 17.1 per cent of UK gross domestic product from 2010 to 2022. This was lower than Italy’s 18.6 per cent, and the US’s 20.6 per cent. It was even further behind Germany’s 21.1 per cent and France’s 23.3 per cent. Korea’s 31.4 per cent seems from a different planet. The UK unquestionably lags behind on investment.
Jonathan Haskel, a member of the Bank of England’s Monetary Policy Committee, also noted in a recent interview that the growth in real investment has lagged well behind that in France, Germany and the US since the Brexit referendum. Haskel estimates the productivity penalty from this post-Brexit investment slump at about 1.3 per cent of GDP, some £1,000 per household. Yet the UK’s share of investment in GDP was consistently lower than in peer countries well before the referendum. This is a chronic weakness. The fake pre-2008 productivity boom in financial services masked this longstanding problem.
It is essential, then, to raise public and private investment if the country is to attain faster growth. This will require a higher share of investment in GDP than its historically low levels. But investment is financed by savings. The striking fact about UK investment is that it is also heavily dependent on foreign savings. That is because its savings are even weaker than investment. This, too, is a chronic condition, not a recent one.
Between 2010 and 2022, UK gross national savings averaged a mere 13.3 per cent of GDP. The US average was 19.0 per cent and Italy’s was 19.8 per cent. Still further ahead were France, with 22.6 per cent and Germany, with 28.2 per cent. Korea’s averaged 35.7 per cent.
The UK’s low rate of national savings makes it significantly dependent on foreign savings to finance its investment. This is revealed in the current account deficit. On average, that deficit was 3.8 per cent of GDP from 2010 to 2022. That financed roughly a fifth of UK gross investment over that period. If investment rose without an equivalent rise in domestic saving, the external deficit would become still bigger.
This makes sustaining foreign confidence in the UK vital, something Liz Truss failed to understand. It means that a big part of the returns on investment go to foreigners. It means, too, that the investment rate is a worse indicator of the future standards of living of British people than their even lower savings rate. Some of the benefits of investment do indeed accrue to the British even if it is owned by foreigners. But not all do. Otherwise there would not be the inward investment. If the country saved more it could not only afford a higher rate of investment, but its people could accumulate a nest egg of foreign assets as well. In brief, savings matter.
We heard a ridiculous discussion of “Singapore on Thames” during the referendum campaign. As a low-tax base for multinationals inside the EU, Ireland seems a better analogy: “Singapore on the Liffey.” Yet the UK can learn things from Singapore. Even if one removes the huge profits of foreign multinationals from savings, one is left with a savings rate of 30 per cent of GDP there. This is the result of forced savings through the “central provident fund”, which compels workers and employers to contribute 37 per cent of their wages and salaries up to the age of 55. As a result, Singapore finances a huge domestic investment rate as well as accumulations of foreign assets: between 2010 and 2022, the current account surplus averaged an astounding 17.5 per cent of GDP.
Needless to say, Singapore’s forced savings have not been discussed as a model by Brexiters. Yet it would greatly help the prosperity of the UK if savings were raised, alongside policies to promote higher investment. Greater public savings would help. But household savings could also be raised by increasing the minimum rate of contribution to defined contribution pension schemes under the “auto-enrolment, with an opt out” now in place. The current rate of 8 per cent is far too low to achieve an adequate pension in retirement. This could be steadily raised in the years ahead, perhaps to 20 per cent. That would also surely increase the country’s ultra-low savings rate.
If the aim of policy is to raise the incomes of British people in the decades ahead, the focus cannot only be on investment. The British need to accumulate more real wealth. That depends on productive investment of higher savings. The debate on improving the economic prospects has to focus on both.