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Trevor Williams

Trevor Williams

Economist, Visiting Professor, Lecturer, Writer, Public Speaker.

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Posted on 17th July 201725th July 2024

Balancing the financial books – what price happiness?

Income: 19s,8d

Expenditure: 18s,8d

Result: Happiness said Micawber

If only life was that simple. But looking at the UK’s financial balances can yield useful information about the build-up of excesses in the real economy. Recent figures from the ONS show that the UK’s household saving ratio – defined as their total expenditure relative to disposable income – fell to its lowest levels since the records were compiled on a similar basis in the early 1960s. But another measure of the financial position of households which calculates its net balance – taking account of its assets and liabilities (see chart) – is often regarded as a better guide to its true financial health than the saving ratio.

Defining savings

Yet data shows that that net position is deteriorating – and is at a level not seen until just prior to the financial crisis in 2008.

Net sector financial balances (government, companies, households, overseas) must sum to zero for the economy as a whole.  This is because one sector’s surplus or deficit must be another sector’s surplus or deficit. If the domestic sectors (government, companies, households) are in a net surplus or deficit position as a whole, then the overseas sector balances the accounts.

A domestic financial deficit implies borrowing from overseas, while a surplus implies lending overseas. In terms of the balance of payments:  net domestic borrowing means a surplus on the capital account as money comes into the country and net lending means a negative as money flows out of the country.

In  balance of payments parlance and accounting rules: a positive sign on the capital account is a negative on the current account and vice versa. But as I have shown, the current account deficit is really a function of the domestic saving investment gap. Since the UK tends to run a domestic financial deficit (domestic savings are insufficient for all its borrowing needs), it borrows from overseas. This means it runs a persistent current account deficit.

Should a deteriorating financial balance concern us?

The savings ratio and the sector balance are not exactly the same thing but their trends tend to move in the same direction.  The figures below are from 2016, and if that trend continued into 2017, UK households may once again be net borrowers from other sectors in the UK.

If so, what does this mean for economic stability? Well, for one thing it suggests that the current account deficit will deteriorate. Right on cue, ONS figures show that the UK current account deficit grew in Q1 2017, to £16.9 billion, compared to £12.1 billion in Q4 2016. It also suggests that the economy may be unbalanced. If, for example, consumer confidence took a dive, households may pull back on spending or restore their financial balance to a healthier position. This would mean higher saving, less spending and so weaker economic activity.

An unbalanced domestic financial position – never a borrower be?

Between 2005 and 2008, households started to become net borrowers, acquiring an increasing number of loans relative to deposits and other assets. Following the downturn, households acquired far fewer loans and only acquired a slightly smaller amount of assets, to become net lenders to other sectors. This peaked in 2010 when UK households lent £84.5 billion. Households then started to move towards becoming net borrowers as the acquisition of liabilities increased. In 2015, households remained slight net lenders, by £7.5 billion, driven by an increase in acquisition of loans and equity and investment fund shares and only slight changes in the values of assets.

Over the same period, government debt ballooned, with the deficit since being cut (although by no means eliminated) by a decrease in government expenditure – so-called austerity measures. Businesses have been increasing their savings and cash surpluses have grown since the Global Financial Crisis. What this means though is that they have failed to invest in plant and machinery – the tools to drive sustainable economic growth.

The risk of a fall consumer confidence is rising

With the UK’s EU exit underway, global economic fragility and heightened uncertainty, high levels of inflation and signs of a slowing in the domestic economy, the household sector’s financial balance suggest that the economy is perhaps as risky today as in the run up to the 2008 downturn – even though the financial balances had been in negative territory for a few years before the crisis. But it may not take a return to that position to cause a retrenchment today. This may have implications for bank rate, and so these are figures that will need to be monitored carefully in the quarters ahead.

CategoriesBlog Tagsassets, balance, business, consumer, current account, debt liabilities, deficit, fiscal, government, household

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Summary takeaways from the Budget today so far

The £2,000 Pension Salary Sacrifice Cap: Fairness or a Blow to Savings?

When the Chancellor announced a £2,000 annual cap on salary sacrifice into pensions, it appeared as a minor adjustment. However, it could significantly influence the UK’s pension incentive structure, potentially altering saving behaviour, workplace culture, and long‑term capital markets, which warrants closer examination.

A fiscal grab framed as fairness?

Salary sacrifice has long been a tax‑efficient way for employees to boost pension contributions. By giving up part of their salary in exchange for employer pension payments, workers save not only on income tax but also on National Insurance. For higher earners, the savings could be substantial.

The new cap, effective from April 2029, restricts this advantage to the first £2,000 of sacrificed salary. For higher earners, this means they can no longer benefit from tax and NIC savings beyond that threshold, potentially reducing their overall incentives. Lower earners, who typically sacrifice less than £2,000, remain unaffected, which raises questions about the actual fairness and distribution of benefits across income groups.

Incentives Rebalanced — But at What Cost?

For lower earners, the incentive to save remains intact. They continue to enjoy tax relief and NIC savings on modest contributions, preserving pensions as the cornerstone of retirement planning.

For higher earners, however, the calculus changes. The cap removes the extra NIC advantage, reducing the appeal of salary sacrifice. Many may redirect savings into ISAs (lower now?), property, or other vehicles that offer greater flexibility. Employers, too, lose part of the incentive to promote salary sacrifice schemes, potentially weakening workplace pension culture.

The Treasury’s logic is to preserve incentives for mass participation while curbing disproportionate benefits at the top. However, a potential consequence is a decline in pension inflows, which could reduce long-term capital available for investments in equities and infrastructure, possibly affecting market stability and economic growth.

A deeper point is that the UK does not save enough and spends too much relative to its wealth, leading to a chronic current account deficit and reliance on foreign borrowing. This move to cap pension salary sacrifice further reduces savings, which could worsen the country’s fiscal challenges and impact long-term economic resilience. 

A Two‑Decade Tightening Cycle

This reform is not an isolated measure but part of a broader trajectory. Since the lifetime allowance was introduced in 2006, successive governments have narrowed pension reliefs for higher earners:

• 2006: Lifetime allowance set at £1.5m, later cut repeatedly.

• 2016: Annual allowance tapering introduced, reducing relief for incomes above £260,000.

• 2024: Lifetime allowance abolished, replaced by new lump sum limits.

• 2029: Salary sacrifice cap imposed.

The policy seeks to preserve incentives for lower earners while restricting them for higher earners to raise revenue. Each reform has been framed as fairer, but collectively they risk undermining pensions as a long‑term savings vehicle for those with the capacity to save more. The result has been the same: to raise more money.

Equity vs. Efficiency

The cap highlights a tension at the heart of pension policy. On the one hand, equity demands that tax reliefs do not disproportionately benefit the wealthy. On the other hand, efficiency requires strong incentives for all earners to save for retirement. By narrowing reliefs, the government may achieve Fairness, but at the cost of efficiency, discouraging higher earners from using pensions and reducing the capital available for long‑term investment.

The Bigger Picture

There was a fiscal hole to fill, and this is seen as one way to help fill it. Moreover, with the ‘triple lock’, pensioners have seen their income rise relative to other income groups over time. 

But this cap may also lead to a shift in savings behaviour. Pension funds could see reduced inflows, potentially changing asset allocation patterns. Future pensioners might save less, increasing the risk of poverty among retirees and raising social security costs, which highlights the importance of considering long-term social impacts in the debate.

Ultimately, the £2,000 cap is not just a technical adjustment but the latest chapter in a 20‑year tightening cycle. As much as any other item of fiscal policy, pensioners are not immune to the pressure put on the public purse.

Whether it proves to be a fair rebalance or a blow to savings will depend on how individuals, employers, and financial markets respond. I don’t think it will be positively.