Tax-free savings
"Annual income pounds 20; annual expenditure pounds 19, 19 shillings and sixpence: result happiness. Annual income pounds 20; annual expenditure pounds 20 and sixpence: result misery."

Our present period, with its vigour and its uncertainties, in so many ways is coming to resemble the Victorian age. So Mr Micawber's golden rule above becomes more and more relevant. We have to get people - all people, not just the rich - to save more.

Like then we are in a period of very rapid economic change, with a host of new inventions and services hitting the market, and new businesses springing up to meet new perceived needs. People with professional, business or craft skills are doing very well. On the other hand, job security has largely disappeared, and family structure is under strain - through the reason that marriages don't last now is divorce, rather than the death of a spouse.

This combination of uncertainty and vigour makes it more necessary for people to build up a cushion of savings, and also more possible to do so. If the welfare state cannot be relied up to support people comfortably 20 or 30 years from now - and adverse demography alone would put great pressure on any pay-as-you-go welfare system, however well-designed - at least people's savings are not whittled away by savage inflation.

The trouble is that though one half of the country is building up a sizeable cushion of savings through pension plans and home ownership as well as all the other incentives introduced in the last 15 years such as Peps and Tessas, the other half is not.

That is the claimed logic behind the new tax-free Individual Savings Accounts, details of which were outlined yesterday by Geoffrey Robinson, the paymaster-general: extend the savings habit to all - to the people who do not even have bank accounts - rather than confine it to the relatively sophisticated people who are currently building up their nest-eggs.

The principle certainly deserves a welcome. The idea of an ISA is modelled on the US Individual Retirement Account - they had to change the initials for obvious reasons - so there is quite a lot of experience around of this sort of plan. This is not really pioneering stuff: it is simply applying good international practice to the UK. The idea of trying to redistribute savings incentives away from the present, relatively sophisticated group of savers, towards the non-savers, also makes sense. If everyone had an ISA as a matter of normal practice, we would be well on the way to one- nation Victorianism, not the two-nation version to which we are in danger of returning.

The problem, as so often seems to happen with this Government, is that when you look at the detail, the product does not match the packaging. The reason is that the new plan, instead of being in addition to existing savings incentives, replaces them. Peps and Tessas have been very successful in extending the savings habit. The Treasury is always twitchy about supposed loss of revenue, and the tax-free status of the soaring balances in Peps has caused it particular concern.

If the Government really wanted to prioritise savings it would do something different. It might, for example, keep Peps and Tessas, pegging the amount to be paid in at present levels. Or it would allow a larger amount to be transferred into the ISA. Or it would increase the size of the total funds in an ISA pot to pounds 100,000. Or whatever. Ask the tough question: will this plan increase the total amount of savings in the country? Probably not. In fact it might in the short-run have the opposite effect: the present band of savers (who lose incentives) may save less, while the new band (who gain incentives) may take a while to save more.

So what is to be done? I suggest two responses. One is for the Government to listen to the representations of the savings industry. Of course, like any lobby, it will make a cause to suit itself. Nevertheless, it does know a lot about savings and the way in which tax incentives are likely to be effective in boosting them. By contrast the Treasury team, with the exception of Mr Robinson, who does know a thing or two about tax-efficient savings schemes (of which more in a moment), are babes in the wood. There is a long and dishonourable history of tax incentives not having the desired effect - look at the way money for Business Expansion Schemes did not go into business but into buying new halls of residence for universities.

The second thing is that they should seek to create a culture of saving. People do want to try and manage their money better. You may recall a couple of weeks ago we ran a series of articles about the attitudes of young people in this country. The most important practical skill listed by young people was "being able to manage money properly". This is not a response of the elite. People with no qualifications and the unemployed were the most likely of all to pick this.

So there is a great base of common sense here on which to build. Saving is the key to money management, for the harsh reality is those least able to afford to borrow are those who are charged the most. I suspect that if some small portion of the money that goes in savings incentives were deployed into education in basic financial management, the effect on the country would be enormous. There would be far fewer Mr Micawbers in the future.

As for the people who resent losing their Peps and Tessas, I have a further suggestion. To replace their PEPs, people should start PGPs. This stands for Paymaster-General Plans, which involve setting up off-shore trusts in Guernsey. These have the full approval of the Cabinet ... and I'm sure Mr Robinson would be only too delighted to tell you how it was done for him.