News & Views

Repaying loans whilst generating growth, helping individuals to have autonomy over their own financial success, creating transparency in the UK’s shareholding framework - could a different cultural attitude to debt create a healthier economy?

Economically the UK has a lot to consider at the moment. Obviously, there's the question of inflation, down to around 7% in July from 11% the previous year. Interest rates are up in terms of long-term cycles, and the general rate of economic growth is on a discount from other markets. The important question as far as I can see it, is how are we going to generate growth?

Caught in our own modus operandi

A longstanding belief in my mind is that there's too much debt in the world and that needs to be repaid. How you repay debt while trying to deliver growth at the same time, however, is tricky because it’s largely the expansion of debt over the last generation that has facilitated economic growth, albeit somewhat artificially.

There’s a tension between taking the moral high ground and seeking to pay debt while other states expand by using it. Part of the problem is also that debt is treated more tax efficiently than equity ownership within corporate structures under the capital gains tax (CGT) rules, which doesn’t help put things back on a better footing.

However, to continue playing a proverbial game of pass the parcel is to risk holding it when it inevitably explodes. Therefore, whether it's individual, national and supranational, long-term debt has to be repaid if you're going to create real health and stability.

Pay now or pay later

Favourable treatment of debt was likely introduced for good reasons - much like the mortgage interest relief at source (MIRAS) scheme, which began in 1983 in a bid to encourage home ownership and was abolished in April 2000 by Gordon Brown. Unlike MIRAS, the corporate debt benefits were not removed - perhaps it was considered too big a pill to swallow for industry and for the economy.

It's not that these things don't have a place, and people and businesses need to be able to borrow from time to time, but if we don't adopt a change in culture, knowledge, education and attitude, I wonder whether by pushing the issue further down the road we're merely making the issue bigger? After all the world nearly blew up in the credit crunch because there was too much debt and yet the response has been to continue expanding the debt bubble. There is an imperative around reducing excess debt that's only going to become more insistent with time.

A purposeful culture shift

Debt has become a fundamental part of our culture - on a personal level, corporate level and governmental level. Many of the frameworks that have been put in place have exacerbated that trend.

For example, the precursors to ISAs for example, were personal equity plans (PEPs), where you invested in the equity of companies and had a capital stake. Now, you can buy debt in the form of corporate and government bonds put into ISAs. So, not only does the tax regime give relief to companies in having a leveraged balance sheet but also individuals are encouraged to buy debt in a way they never used to be.

In the City we work with debt a lot of the time, but it's siloed away from the greater impact, and that can mean that individuals don't always understand the nuanced implications that it has. I have written before about how the City can serve individuals across the UK, and fundamentally that is about safeguarding and nurturing the economy - understanding the impact of our actions on each person across the UK.

In addition, I don't believe that individuals are taught enough about financial structures to have total awareness and autonomy to make personal choices. It's not part of our national curriculum, and perhaps it should be, because if we don't understand personally what we're getting into, then we're vulnerable. Indeed, my daughter, who graduated in Economics, has just completed the CISI’s Fundamentals of Financial Services course and said “I learned so much on that, I don’t know why everyone doesn’t do it at school”.

Updating the system

Last year Sir Douglas Flint’s Digitisation Taskforce was launched to drive forward the modernisation of the UK’s shareholding framework. Part of that involves the dematerialisation of share certificates, for the ultimate beneficial owners to be identified and for intermediaries (stockbrokers, nominee companies, fund managers) to offer access to shareholder rights for voting and so forth.

I think that has the potential to open some of these conversations around how money and debt work - the fact that as a shareholder you’re a part owner of a business, but as a bond holder you just hold a contract to pay interest and repay the capital. Having published an interim report in July, the deadline for feedback is 25th September 2023 and I would encourage those interested to get involved.

I think that ultimately if we truly want long term growth that can be sustained, we need to focus on helping people to grow their own money, recognising peoples' values and rights in a constructive way that’s economically beneficial and that makes a tangible difference in individuals' lives. That approach is rooted in strong economic foundations, and to make them truly strong they have to be ethical as well.