Brits aren’t spending enough – time for Splash Out to Help Out
Household debt has declined and people have stopped spending on productive things like home improvements but also in leisure. That’s bad news for the public finances, so the government should look at ways to incentivise spending, says Tim Sarson
Brits have stopped spending. After the great financial crisis in 2008 we collectively decided to zip up our pockets and became almost overnight a nation of misers.
We stopped spending on productive stuff like home improvements, and we also stopped spending on fun stuff like meals out or a new outfit. Last year annual real household spending growth was only 0.8 per cent.
Instead, we’re saving. Our household savings ratio as measured by the Office for National Statistics (ONS) used to be worryingly low, averaging close to six per cent in the 90s and noughties. After 2008 it jumped, absolutely rocketed during Covid, didn’t unwind anywhere near fully afterwards, and now it’s 10 per cent.
Household debt has declined from a peak of 155.8 per cent of income in 2008 to 117.5 per cent at the end of last year. If you strip out secured (mortgage) debt, the UK population is in a whopping net cash position.
Have businesses been taking up the slack? Nope. Business investment has undershot forecasts for years, having shrunk after the financial crisis, not grown at all during the “Brexit plateau” from 2016-2019 at the same time as the US equivalent grew by 12 per cent, and oscillated around the stagnation level since. As of Q1 2026 it is 1.8 per cent lower than the level of a year ago. Our Gross Capital Formation Rate is the lowest in the G7 and has been since 1997.
Are you surprised? This isn’t what you were brought up to believe. For decades we were berated for our over-extended mortgages and maxed out credit cards and appalling savings ratio. And the government was trying every trick in the book to get us to save more, and spend carefully.
Reversal
Well things have changed. The reversal is real.
This is bad news for government finances. I hate that political aphorism that government should think more like a household and not live beyond its means. Annoying because that’s not how investment spending works, but also annoying because the government is having to spend more than it earns precisely because so many of us, more precisely those with wealth and savings to spare, are living well within our means
The numbers on public sector and private borrowing for most advanced economies show a neat negative correlation. When one side borrows, the other can save. For a glimpse of the future, take a peek at Japan. Their household net debt is only 61 per cent of GDP, with a savings pile of over two trillion Yen, more than half of which is in cash and bank deposits. Yet their government has run up a debt burden of close to 250 per cent.
What happens when a trend, a pattern, a rule of thumb that has been the received wisdom forever suddenly does a screeching handbrake turn and heads in the opposite direction? It’s one of those things I find fascinating. Old assumptions linger on in a sort of shadow of the status quo ante. We really struggle with the cognitive dissonance. That has implications for policy, including tax policy. Our fiscal framework is still geared up to reward thrift, particularly at household level. Not just saving, but saving in low risk, low yielding assets.
Cash ISA saving has rocketed since 2022. That’s tax policy directly steering people’s surplus funds into basic, interest earning deposits. Even with the cash allowance dropping to £12,000 from next year, that’s more than enough for most taxpayers to place all their savings there. We are given tax relief at our marginal rate for saving into pensions. Until recently we even exempted pension funds from Inheritance Tax.
Things have changed at the corporate end: we do now handsomely reward capital expenditure and R&D spending. But not entirely. It’s much harder than it used to be to get a full tax deduction for borrowing, in fact the tax code seems almost designed to convince corporate taxpayers not to borrow.
So, imagine you were chancellor for the day with one job and one job only, and that was to get Britain spending again. What might you do?
You’d disincentivise low risk savings, fix pensions tax relief to somewhere between the basic and higher rate, or only give higher rate pension relief to contributions into riskier assets.
If you were thinking really radically, then instead of taxing interest income, tax the value of investments at say two per cent. That way any extra yield the investor gets over say five per cent is free money.
And, of course, you would get rid of those high marginal tax rate cliff edges that we all know and hate. People won’t pile all their pay-rise or bonus into extra pensions savings if they’re not otherwise paying over 60 per cent tax on it.
Why not incentivise splurging and party time? General exuberance, irrational or otherwise, is good for the economy and good for the government coffers.
You’d incentivise proper investment spending. Maybe consider a 10 per cent VAT rate on all construction and home improvement activities. Those who hate different VAT treatment for different things would hate it, but hey: remember we’re imagining a chancellor for the day with one mission and one mission only. Stamp Duty Land Tax, council tax and business rates would go, replaced with a land value tax that doesn’t increase when the landowner invests in improvements. For corporates you’d extend the R&D expenditure credit to capital expenditure, and consider a superdeduction for capital spending on a few choice areas that are known to increase productivity.
Finally, Splash Out to Help Out! Why not incentivise splurging and party time? General exuberance, irrational or otherwise, is good for the economy and good for the government coffers. Your chancellor for the day might roll out special party zones with low employment tax costs, property taxes and VAT for hospitality businesses. You might even make weddings tax-deductible, including stag and hen expenditure.
Of course, very few of these policies are likely to see the light of day anytime soon. That’s because we’re stuck in the mindset that says thrift is good, spending is reckless. But from a macro-economic point of view, saving too much and not spending enough is every bit as reckless, and it just moves debt off the private and on to the public balance sheet. Sooner or later policy will need to catch up with the data.
Tim Sarson is head of tax policy at KPMG