Copyright dailymail
Increasing financial literacy rates among Britons is the key to boosting the UK economy, research claims. An improvement in financial education rates of 10 percentage points could generate a 0.3 percentage point increase in the rate of GDP growth, after a four-year period, according to research from the Centre for Economics and Business Research and Principal Financial Group. This means if the UK were to reach a financial literacy rate of 50 per cent by the end of the year, the CEBR says projected cumulative GDP growth for the next four years could be raised to 4.8 per cent, from the current 4.5 per cent forecast. The CEBR and Principal add that improving financial literacy will also mean Britons are less likely to default on loans, more likely to borrow responsibly and will do more to help grow the economy. An improvement of just one percentage point in financial literacy rates would see a 2.78 per centage point reduction in defaults on household loans, the research claims. The same improvement in financial literacy would also lead to increased loan affordability and a 6.7 percentage point reduction in debt-to-income ratios. A 10-percentage point increase would lead to debt-to-income ratios falling by a third, CEBR and Principal said. Currently, the UK ranks 24th in financial literacy, according to the CEBR's Global Financial Inclusion Index, with just 39 per cent of the population deemed to be 'fully financially literate'. Kamal Bhatia, chief executive officer at Principal Asset Management, told This is Money: 'The data shows a strong link between higher financial literacy and lower rates of household debt default. 'This means that as the UK becomes more financially inclusive, fewer UK households will struggle with debt default. 'When people understand how to manage their money effectively, borrowing becomes more affordable and sustainable, leading to greater financial stability and improved living standards. He added: 'This translates into less financial stress, more disposable income, and the ability to plan for the future with confidence. 'It also opens up opportunities for entrepreneurship, as stronger household balance sheets enable people to borrow responsibly to start businesses or invest in their goals.' Principal says financial literacy in the UK is lagging relative to the size and strength of the financial market, owing largely to the UK's 'analogue' approach through the school curriculum. Bhatia told This is Money: 'Markets that are making the fastest improvements in financial inclusion, such as in Asia, are doing so by embracing fintech and digital banking. 'In other words, as technology enables simpler and easier access to financial information and resources, financial education is being embedded into citizens' lived experiences. 'The end result is a broader and deeper financial understanding across the population.' More widely, the CEBR ranks the UK as the 10th most financially inclusive country, with some 68 per cent of people saying they feel financially included, up from 59 per cent a year ago. This increase, the CEBR says, is down to improvements in support from both the Government and financial system, though the firms add that new Government leadership generally corresponds with a more positive consumer perception of their financial inclusion. Still, the UK falls behind a number of other countries whose population feel more financially included, including Thailand and the US. The index is based on scores for three main indicators; Government support, financial system support and employer support. The UK, Principal said, lacks in employer support, with companies not going far enough to provide benefits, resources and financial guidance to employees. Last year, employer support fell markedly on the back of macroeconomic pressures. Bhatia said: 'We believe this is due to trade-related uncertainty and reduced business confidence having limited employers' ability to offer initiatives like pay flexibility and financial well-being programs. 'This pullback has weakened one of the pillars of financial inclusion in the UK. 'The UK's tenth-place ranking continues to highlight a need for stronger employer engagement to ensure more holistic and sustainable progress.' Bhatia added: 'Financial inclusion supports long-term economic growth in the UK When more people are financially empowered, they contribute more actively to the economy - spending sustainably, investing wisely, and driving innovation. 'In essence, financial literacy and inclusion are foundational to both long-term individual prosperity and UK economic development.
