The national savings rate has dropped from over 9 per cent of income to 6.5 per cent in two years. With pre-approved loans coming through the letter box, Irish people have embraced the buy now, pay later culture without any discernible struggle.
So what is the Minister for Finance going to do in the December budget about the fact that there is so much money sloshing around in the economy? Everybody has an opinion on this one, and the pile of pre-budget submissions is growing by the day. One common theme emerging is using savings as a reward to workers and as an anti-inflationary tool.
There are different approaches to this idea. Some favour the creation of a savings bond that would act as a deferred payment scheme, while encouraging people to save. This is essentially an IOU to workers. ICTU, the ESRI, the Small Firms Association and Fine Gael all support the introduction of some form of savings bond, which would be paid to workers, cashable at a later date.
The workings of suggested schemes vary, as do the time limits, from around three years to 40 or more for new entrants to the workforce. Financial experts warn that any plan to establish special savings schemes would need to be structured carefully to avoid deflecting personal savings from pension plans or causing a bubble flowback of cash into the market in a few years.
The Tanaiste, Ms Harney, favours a voluntary scheme of contractual saving, where significant tax relief on savings would be available. She has proposed the introduction of medium to long-term savings accounts with tax-based incentives. Ms Harney wants to stimulate an increase in savings, not simply a transfer of money already being saved into a tax-efficient scheme.
The Tanaiste recognises that tackling the falling savings rate is a national priority that needs to be addressed in itself and not just in the context of inflation.
The State's largest insurance group Hibernian has called on the Government to introduce tax incentives on long-term savings.
In its pre-budget proposal, the Hibernian Group urged the Government to encourage individuals to make greater provision for long-term savings by reducing the exit tax from 25 per cent to 12.5 per cent. Exit tax is the tax payable on the return from an investment when a savings or insurance plan matures. This rate is currently higher than capital gains tax.
While the ESRI does not make pre-budget submissions as an institution, its members do have opinions on this matter. Prof John Fitzgerald of the ESRI is in favour of giving some kind of bond to individuals on an even basis.
He argues that this would be better than tax relief on savings from an income distribution point of view. According to Prof Fitzgerald, tax relief on savings would reward those on higher incomes who are already in a position to save substantially.
He points out that if the Government gave more tax relief to high-earning savers, the net result would be that they would save less and spend more. Unlike deferred compensation, this would not have an anti-inflationary effect. The Small Firms Association will be making its pre-budget submission shortly but has already flagged some savings ideas. It has looked at ways of encouraging savings and helping first-time buyers.
According to Mr Pat Delaney, director of the association, the Minister could incentivise saving by setting up a savings bond that people could pay into from their salaries.
The association proposes allowing people to save up to £5,000 (€6,348) per year for a minimum of three years to use as a tax-free sum towards buying a house.
Under such a scheme, no tax would be levied when the bond was redeemed if the funds were used solely for the purchase of property. The National Treasury Management Agency would administer this type of scheme.
One of the merits of this idea, according to Mr Delaney, is that it would encourage people not to spend but to put their money into the traditional Irish investment, property.
The second part of the association's savings proposal is to extend save-as-you-earn schemes to non-quoted companies. These contractual savings schemes allow employees to save towards the cost of share options in certified financial institutions. The trade unions have been examining the savings bond proposal and SIPTU has suggested a pensions bond of £500. The payment would take the form of a bond that could only be cashed under certain conditions and must be used for pensions or savings purposes.
Anyone who is not already a member of a pension scheme could use the bond to start up a new pension arrangement such as a Personal Retirement Savings Account (PRSA). The forthcoming Pensions Bill will provide a legal framework for PRSAs.
Because of the strain that social partnership is under and the fact that the better-off benefited more from last year's budget, it is thought that the unions' agenda will be most closely adhered to this year, particularly if the employers get their way on pay.
Whether the Minister opts for one of the savings-related proposals or some combination of them remains to be seen. In the six weeks leading to Budget day, calls from different groups will become louder and perhaps the Minister will know a good idea when he hears one.
