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  1. Business
8 March 2024

Jeremy Hunt is right about the economy – but he can’t fix it

The Conservatives have realised too late that changing how Britain raises private investment is a good idea.

By Will Dunn

Like Schrodinger’s cat, the “British ISA” announced by Jeremy Hunt in his Budget speech this week can be described as existing in two states: it is simultaneously a good idea, and as useful as a chocolate teapot.

An individual savings account (ISA) is a tax break the government will give you for saving money. You can put in up to £20,000 per financial year and you don’t pay tax on the interest. If you use it to invest in stocks and shares, you can also avoid paying tax on the returns, such as capital gains and dividends. That’s what the proposed British ISA (Brisa? UKisa? Britisha?) is designed to encourage – it gives savers an extra £5,000 of yearly allowance, if they invest it in British companies.

With this idea, the Chancellor is highlighting an important problem. Shares on UK stock exchanges are significantly undervalued; in 2022, JP Morgan estimated the “discount” on British-listed companies at 40 per cent compared with the rest of the world. This makes it more difficult for domestic companies to raise capital, create new jobs and grow the economy. It is not the reason that Britain’s per-capita economic growth – and therefore our standard of living – has barely moved since 2010, but it is probably a reason.

What happens instead is that British companies are bought by foreign companies, such as the telecoms company Spirent and the logistics-first Wincanton, which have both received takeover bids from US companies in the past week, both at significantly over their market price. Foreign direct investment is great, but we don’t want it to be the only option.  

Will the BritIShA (rhymes with Patricia) give our capital markets the boost they need? No, because it doesn’t exist yet, nor will it until at least the next tax year (by which time we’ll have a new government, which might decide to bin the idea). And no, because people in the UK already invest a lot in Britain; Hargreaves Lansdown, the UK’s biggest private investment platform, told me more than 80 per cent of its customers’ equity investments are in domestic companies.

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In fact, encouraging Brits to further concentrate their investments within our borders is bad advice. “Not putting all your eggs in one basket is one of the golden rules of investing,” says Susannah Streeter, head of money and markets at Hargreaves Lansdown.

Even the more optimistic estimates of the money a British ISA could add to our capital markets – such as the £10bn a year suggested by the think tank New Financial – are relatively small change; the FTSE 100 has a market value of £1.9trn. 

The investors who are really needed to help UK equities are institutions, such as pension funds and insurance companies. Most of the world’s pension funds have a strong “home bias”: Australian and South Korean pensions are almost 30 times as likely to buy equities in their home companies relative to global markets. The UK is the exception – the only major economy in which retirement savings are biased towards investing in other countries.

Both parties acknowledge this: Jeremy Hunt announced plans just before the Budget to compel pension funds to declare how much they invest in UK companies relative to those overseas (from 2027), and Rachel Reeves wants to build a £50bn “future growth fund” from defined contribution schemes.

Such plans could be transformative but they remain, like the cat, in a probabilistic state. BritIShA is a harmless idea from a Chancellor rolling dice before an election after 14 years in which his party has delayed and prevented investment in and by British companies by endlessly rewriting the policy that affects them. Business runs on Newtonian mechanics; only real action will change the problem that Hunt has acknowledged.

This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here.

[See also: What would Labour do differently?]

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This article appears in the 13 Mar 2024 issue of the New Statesman, The battle for Keir Starmer’s soul