Government’s £40bn savings subsidies must encourage responsible investment

This post is by Green Alliance associate Chris Hewett, based on a new report Saving for a sustainable future, published today.

The post-Budget row over tax relief for charitable giving has obscured the fact that there are many other tax reliefs given for savings and investment activity. Indeed, the government currently subsidises savings and investments by nearly £40 billion each year in Pension Tax Relief, Individual Savings Accounts (ISA) allowances and Capital Gains Tax relief for residential property sales.  Rather than arguing over whether these should be capped, Green Alliance has been looking at how government might use these subsidies to encourage more responsible investment and transparent banking.

An economy fit for the future
Britain’s economy before the credit crunch was based on high borrowing to fuel increasing consumption to drive economic growth.  As individuals we didn’t save enough for our own financial security and as a country we haven’t invested enough in our economic future. Now we are seeing more private saving, but no consequential upturn in investment.  To face the long term challenges to our economic prosperity like an ageing population, climate change and scarcity of global natural resources, accelerated by the rise of emerging economies, we will need a more resilient economy that has far stronger foundations of savings and investment.

A barrier to low carbon growth
The financial services profession, which is supposed to facilitate savings and investment, has so far been part of the problem. Whether it’s the excessive fees in the pensions industry, the growing short termist approach of equity investors, or the lack of transparency in the banking sector, public trust in the people who manage our money has never been lower.  In particular, the short term mind set of the investment community has a material impact on Britain’s ability to grow a low carbon economy. This transition will require high levels of capital investment in new technology, infrastructure and improving the built environment.  The current UK financial sector, driven by quick profits from trading and short term market fluctuations, is not well suited to this type of patient finance.

Use subsidies to encourage responsible investment
Yet, in this climate of opinion, the government has to find a way to convince the public not just to save more, but to channel those savings into productive investment. One way to do this is for the government to be more explicit about encouraging savings and investments that enhance social and environmental well-being, as well as financial returns. It should use the existing subsidies to enforce this principle.

There are currently no strings attached to the £40 billion per year taxpayer subsidies for savings and investments. In an era where all subsidy has to work harder for the public interest, we believe there should be a principle that in return for tax relief, savers and investors should be able to demonstrate a contribution to the public good. There is a growing set of voluntary standards and codes of practice which investment organisations can apply to demonstrate they are taking a responsible approach, looking a long term interests, not just short term profits.

Our new report, Saving for a sustainable future, makes the case for these principles to be used in public policy and sets out the ways in which it could be applied:

  • Pension Tax Relief could be made conditional on responsible standards.
  • Banks could only be able to offer tax-free Cash ISA accounts if they can demonstrate responsible and transparent lending practices.
  • Capital Gains Tax relief for the sale of a residential property could be made conditional on certain energy efficiency improvements being made to a building.

There is strong political consensus on the need to rebalance our economy and reshape British capitalism in way that better incorporates the values of society. A good start would be to apply these ideas to existing taxpayer subsidies.

2 comments

  • Interesting – but some unsupported assertions here. ‘Excessive pension fees’ for example – actually pension fees have been heading south for many years and are probably lower than they have ever been. There are plenty of things the financial services industry could improve – but it weakens the case to repeat myths.

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