Economic Policy Memo

Executive Summary

The Chancellor should introduce auto-enrolment into Stocks and Shares ISAs (S&S), paired with a UK Productive Finance Fund, to address both the household wealth gap and chronic underinvestment in productive capital. Britain's productivity has averaged just 0.5% annual growth since 2008², near the bottom of OECD rankings. A crucial overlooked dimension is where ordinary people's savings sit: 84% of UK adults hold no S&S ISA³, leaving household wealth in low-return cash vehicles that fund little productive activity. Auto-enrolment would channel household savings toward the firms and regions that need capital most, while building wealth for those currently excluded.

Background

Productivity, output per hour worked, is the primary driver of wages and living standards. An S&S ISA allows UK residents to invest up to £20,000 annually in stocks, bonds, and funds tax-free. Unlike a Cash ISA, which functions like a savings account, an S&S ISA exposes savings to capital markets, offering higher long-term returns in exchange for some investment risk.

Chronic Underinvestment Has Stalled UK Productivity

UK productivity has barely grown since the financial crisis. Output per hour worked has risen only around 6% since 2008, against a pre-crisis trend that would have delivered nearly 40% growth. Annual productivity growth averaged just 0.5% from 2010 to 2022, placing the UK well behind France, Germany, and the United States⁴. If this continues, the UK cannot sustain current living standards.

The root cause is broad-based underinvestment. Total investment as a share of GDP has declined since the 1980s across both public and private capital. Decades of neglect in skills and training have trapped many firms in a low-skill, low-wage, low-productivity cycle, while austerity from the 2010s further weakened public investment. The consequences are uneven: most regions show productivity levels well below London⁵. What this diagnosis overlooks is household savings – the vast majority of which sit in low-return cash vehicles. The transmission mechanism runs through valuations and cost of capital: sustained retail demand for UK equities supports higher market prices, which lowers the cost for mid-tier firms to raise new capital through primary issuance. When borrowing and equity issuance become cheaper, investment in equipment, skills and technology follows.

S&S ISAs Work But Participation Is Narrow

S&S ISAs are effective wealth-building tools, but their reach is far too narrow. Long-run UK equity returns have historically averaged 5–7% annually in real terms – well above cash savings⁶. S&S ISA holders accumulate approximately 27% more wealth over 14 years than similar non-holders, even after controlling for income, age, and initial wealth⁷.

Yet only 16% of UK adults held an S&S ISA by 2025, against 31% for Cash ISAs. Participation is deeply skewed: 60% of those earning over £150,000 maximise their annual allowance, while lower earners participate far less. The Resolution Foundation estimates the £6.7 billion annual foregone tax revenue flows disproportionately to higher earners⁸. A policy designed to democratise wealth is functioning as a subsidy for the already wealthy.

The Barrier Is Entry, Not The Product

S&S ISAs are not inherently elitist. The barrier is getting people through the door. Behavioural economics shows that asset ownership generates not just financial returns but lasting changes in financial habits that compound over time^9,10. UK evidence shows that less-educated individuals see larger wealth gains from adoption than graduates, likely because their portfolios are least diversified and benefit most from equity exposure¹¹.

This connects directly to productivity. The households most excluded from capital markets – lower-income, less-educated, in post-industrial regions – are those where the productivity gap is deepest. Low wages make saving harder, limiting investment participation, concentrating wealth, deepening regional inequality, and sustaining low productivity. Breaking this cycle requires targeting the entry barrier.

Low take-up represents a market failure. First, a behavioural failure: status quo bias and loss aversion mean households systematically choose the perceived safety of cash over higher long-term equity returns. Second, a positive externality: when savings shift into productive equity, the resulting firm investment generates wages and productivity gains beyond the individual saver – benefits they do not capture and so do not factor into their decision. Both failures justify intervention.

Recommendations

Two linked recommendations address both the wealth gap and the productive investment shortfall.

1. Auto-enrol workers into S&S ISAs. Modelled on the 2012 pension auto-enrolment reforms, workers aged 22–50 should be automatically enrolled at 1.5% of gross salary, rising by 0.5 percentage points annually to a cap of 3%, with a simple opt-out. Pension auto-enrolment confirms the power of defaults: private sector participation rose from 42% to 86% within six years¹². HMRC and employers already have the infrastructure. The default fund should be a diversified, low-cost index tracker. Target: raising participation from 16% to at least 50% within a decade.

2. Create a UK Productive Finance ISA (PF-ISA). A ring-fenced fund investing in mid-tier UK firms – those most in need of capital to close the productivity gap. The government should co-invest 25p per £1 for first-time investors earning below median income, funded by redirecting a portion of the existing £6.7bn tax expenditure from high-earner Cash ISA relief. Liquidity risk for low-income holders can be managed through a five-year minimum holding period with hardship exemptions. Australia's superannuation system and France's Plan d'Épargne en Actions demonstrate domestic allocation mandates are manageable at scale.

Conclusion

Britain's productivity crisis is typically framed as a failure of government and corporate investment. That framing is incomplete. Ordinary people's savings are part of the story, and right now they are in the wrong place. Auto-enrolment works. ISAs work. What is missing is the will to combine them. The Autumn Budget 2025 signalled intent by cutting Cash ISA limits while preserving the S&S allowance, but that change takes effect only in 2027. Pairing the restriction with auto-enrolment means both policies reinforce each other. The architecture exists. Acting now would give ordinary people a stake in the economy and give the economy the capital it needs to grow.