In Money Week this week, I've been discussing why the government should be trying to get people owning shares again. Here's a taster....
Who owns the UK?
According to the latest figures, it isn’t you and me. It isn’t even the big insurance and pension funds, although they have a far larger slice of it than ordinary individuals. Increasingly, it is foreign institutions.
That matters far more than most people realise.
In the 1980s, the Conservative government of Mrs Thatcher campaigned for wider share ownership. It is time some of those ideas were revived, because who owns the UK is likely to be even more relevant for the 2010s than it was for the 1980s. One opportunity for a new Tory government, if it wins the election this year, will be to get ordinary people buying shares again, both through restoring the tax breaks on equities, and by using the privatisation of the banking system to distribute shares more widely.
The Office for National Statistics last week published data that showed the ownership of British quoted companies has changed significantly in the last few years. Individuals now own just 10% of the shares quoted on the London market, down from 13% in 2006, and from 54% in 1963. That is an all-time low.
Meanwhile, the proportion held by foreigners has risen dramatically. Foreign investors now account for 42% of London-listed shares, compared with 28% back in 1997. Insurance companies account for 13%, whilst ‘other financial institutions’ (mainly hedge funds) account for 10%. The balance is made up of unit trusts, charities, and, rather ominously, the government, which now owns 1% (mainly Royal Bank of Scotland – hardly the basket you’d want all your eggs in).
It’s true that individual share ownership has been on a steady downward trend ever since the figures first started to be published in the 1960s. In part, that reflected the rise of the big unit trust and pension companies, which owned shares collectively. In the 1980s and early 1990s, however, the percentage at least held steady at around 20%. But under this government, it has halved again. On current trends, it will expire completely in another decade, perhaps when some elderly pensioner in Eastbourne finally decides to sell those British Telecom shares they bought in the 1980s.
Of course, its understandable that most investors are fed up with buying shares. It has been a miserable decade for equity investors. Unless your timing is exceptionally good, you’d have lost money. And the tax breaks on Individual Savings Accounts have been steadily whittled away, making share ownership gradually less attractive. Instead people piled into property, or just spent all their money.
But just as we did in the 1980s, we should be trying to get more people to own shares. Here’s why.
First, it gives people a stake in the system. As Mrs Thatcher saw clearly, people will only support a free market, capitalist economy if they feel they are a part of it. Over the last decade, the government has steadily loaded more and more taxes onto business, either directly through higher payroll charges, or else indirectly, through regulations that grant more and more rights to workers. If people don’t have any stake in business as shareholders, then they will probably support that – after all, it’s better if someone else pays the taxes rather than you. But if they can see every new corporate tax lowering the price of the shares in their portfolio, and reducing their dividend income, they are a lot less likely to sympathise.
Next, all the evidence suggests that individual shareholders are far more willing to support companies in the long term. Foreign investors will move into and out of the UK depending on the shape of a big chart in a Power Point presentation in Boston or Beijing. The hedge funds don’t hold onto a share for more than a few weeks. Private investors tend to buy and hold, not because they are intrinsically patient, but because they don’t have the time or the interest to constantly shuffle their portfolio around. Whilst nobody wants to see restriction on takeover deals, there can be no question that companies do best when they have long-term, supportive, patient shareholders, who will allow managers to focus on the long-term, without having to worry to much about next-quarter’s results, or designing some fancy piece of financial engineering that allows it to boost its share price for a few weeks.
Finally, British industry is going to desperately need more capital over the coming decade. After a decade in which it was puffed up with debt, and a tidal wave of public spending, the UK is going to have to develop new industries to get itself growing again. Capital will be in short supply. Savings are low, and the government will be borrowing most of the money that is available. Private shareholders will be one of the few sources of fresh capital for the new, entrepreneurial companies the UK needs to encourage.
The government can, in reality, do plenty to encourage people to own shares again.
It can restore the tax advantages. In the last decades, the tax breaks on an ISA have been sliced away so that they are virtually meaningless for standard rate tax-payers. Why not offer tax relief on contributions, just like a pension, and raise the annual contribution limit to £15,000. That would give people a powerful incentive to build up a portfolio of shares, rather than just putting all their money into property. You could go further. Why not make all dividends on shares in UK companies free of income tax – after all, corporation tax has already been paid on the profits that are being distributed.
Next, when the banks are privatised, use it as opportunity to spread share ownership. Selling off the utilities in the 1980s wasn’t just about raising money. It was about changing attitudes towards business. Why not give everyone free shares in RBS? After all, we already paid for them. And then make them free of all taxes if held for five years?
In a globalised economy, dominated by big investment funds, you’ll never get back to the high levels of individual share ownership of the 1960s. But 10% is a shockingly low figure – and if it could be nudged up a few points, it would help fix some of the problems with the UK economy.