There's more to savings than rainy days

How do you get people to save more? A lot of the problems of developed countries such as our own would become much more manageable were we to increase our savings. In economic terms, there is the benefit of a greater supply of funds available for investment. In social terms, a larger proportion of the country would have a cushion of savings to cope with increasingly uncertain times. But if getting more savings means more tax breaks, there is an obvious revenue cost.

Thus the taxation of savings is going to be one of the great issues during the next decade or so, not just in the UK but throughout the developed world.

Here, however, it is going to become a much more important issue in the next year. Were a new Labour government to be elected, it would be under enormous pressure to boost savings. One of the very few commitments Labour has already made is to introduce some kind of individual savings account, along with a more general commitment to encourage investment.

But a new government here, just like governments in all the developed economies, will be under great pressure on the revenue side. Any tax incentive to boost savings will lead to further loss of revenue; and so it will scrutinise the existing leakage of revenue from the growing proportion of savings income that is presently tax-free.

The propensity to save seems to a large extent to be determined by culture, or at least that is what has traditionally been argued. East Asians, it was said, tended to save because of their tradition of family members supporting each other. Anglo-Saxons, it was argued, were cultural borrowers rather than savers. And while some continental Europeans - such as the Swiss and the Germans - were traditional savers, the growth of the welfare state there had reduced the need for individual saving.

There is obviously something in this cultural explanation - East Asian societies in general save a higher proportion of GDP than Western societies. But if you look at household savings, as opposed to those of the economy as a whole (remember that companies and governments can be savers or dis- savers), it becomes clear both that savings rates can vary greatly over time, and that some countries most people would not think of as great savers actually do save a lot.

The left-hand graph shows household savings ratios for a number of countries in 1990 and this year, with some surprising results. For example, the Belgians and French come out top, ahead of the Japanese. The Dutch, just over the border from Belgium, are bottom. The Italians save more than the Germans. The Swedes, notorious for assuming that they did not need to save as the state would provide for all their needs (and for high tax rates that made it impossible to save) have become substantial savers over the last six years. And Britons, hardly renowned for their financial prudence, seem now to be saving more than the Swiss.

Remember, these are household savings. If companies rely on borrowing for their capital needs and if governments run large fiscal deficits, countries as a whole may save less than individuals - and vice-versa. There is probably a link between the high savings of Italians and Belgians and the high deficits of their governments. But at least it is clear that habits can change: look at Sweden, where the rise in savings is probably associated both with cuts in taxation and a sharp rise in insecurity.

If that is so, what lessons are there for the UK? It would be ridiculous to advocate a further rise in insecurity as a means of encouraging more savings. Most people in the UK would say they feel sufficiently insecure at the moment, thank you very much. There is a limit to the effectiveness of exhortation, which incidentally does not come very well from any government running a deficit of pounds 30bn a year. So if we want more savings, we probably have to resort to tax incentives. The trick will be to use these to encourage new savings, rather than hand out money to people who would have saved already.

The practical difficulty here is set out in the centre graph, which shows the value of funds going into the two main new tax-free personal savings vehicles introduced in the Eighties - personal equity plans (PEPs) and Tessas. These (and some of the arguments about taxation of savings) have been taken from a study this month by Coopers & Lybrand, Savings: The Inequality of Taxation, prepared for the Building Societies' Association.

Remember the background to PEPs and Tessas. PEPs were brought in to try to boost personal investment in equities; then it seemed unfair that people who saved with building societies did not receive a similar benefit, so Tessas came in too. Both have been very successful in gathering money, although we really do not know if overall savings have increased.

We can, however, be reasonably sure that while in the case of PEPs some new money has gone into shares, in the case of Tessas money was simply transferred across from existing bank or building society accounts. To a large extent, one form of tax incentive did genuinely encourage investment in British industry and will, at the margin, have cut the cost of its capital. The other, by contrast, simply handed savers a tax benefit that they would not otherwise have received. The tax saved by holders of PEPs has become larger (right-hand graph), partly because interest rates have fallen and partly because Tessas are maturing or being rolled over. But arguably PEP tax relief gives better value.

Where, with this experience, do we go now? One option is to do nothing with existing schemes and bring in some new ones alongside. Gradually, the real value of the Tessa tax break would diminish and would become less of a problem. The value of the PEP tax break will, unless there is some catastrophic collapse of the stock market, rise and rise. On the one hand, this means that more money goes into investment in British industry, but I suspect that at some stage the Inland Revenue is going to become concerned at the leakage. If, in addition, a new Labour government were to introduce tax incentives for individual savings accounts, the leakage would be all the greater.

A second and more attractive option would be to keep PEPs (though not increase the value of the cash that can be put into them), and convert Tessas into the new individual retirement accounts, perhaps broadening the range of investments so that Tessas (or rather the individual savings accounts) were no longer entirely deposit-based.

A third option would be to consolidate both PEPs and Tessas into the individual savings account. A new government would have to be careful not to be seen to be taking away the existing incentives for saving, assuming it was indeed serious about trying to boost saving. But it could try and skew the present system to give a greater bias towards supplying risk capital and less incentive to sticking cash on deposit.

There is, I suppose, a further broad option, which is to accept that it is becoming very hard to do much about taxing savings altogether. Tax, it could be argued, should be levied on current economic activity, so that once people have paid tax on their earned income any subsequent return should be tax-free until they choose to spend the cash.

That is how pension taxation works. If you really want to encourage savings, that is the way to do it. The gap could be plugged with additional taxation on environmental damage - higher fuel tax and the like.

Too radical? Of course. But trying to fine-tune a tax system to increase one sort of saving and not another carries its own problems. The more complicated the tax system, the more benefit to the financially sophisticated and their advisers and the less advantage to decent people who simply want to set a bit more aside for their future.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree Group have been well esta...

Recruitment Genius: Call Centre Debt Collector - Multiple Roles

£21000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

Guru Careers: Financial Director / FD / Senior Finance Manager

Up to 70k DOE: Guru Careers: We are seeking an experienced Financial Director ...

Recruitment Genius: Junior / Apprentice Sales Executives - OTE £50,000

£11000 - £50000 per annum: Recruitment Genius: This financial company offer ma...

Day In a Page

Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks
The haunting of Shirley Jackson: Was the gothic author's life really as bleak as her fiction?

The haunting of Shirley Jackson

Was the gothic author's life really as bleak as her fiction?
Bill Granger recipes: Heading off on holiday? Try out our chef's seaside-inspired dishes...

Bill Granger's seaside-inspired recipes

These dishes are so easy to make, our chef is almost embarrassed to call them recipes
Ashes 2015: Tourists are limp, leaderless and distinctly UnAustralian

Tourists are limp, leaderless and distinctly UnAustralian

A woefully out-of-form Michael Clarke embodies his team's fragile Ashes campaign, says Michael Calvin
Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice: Inside Westminster

Blairites be warned, this could be the moment Labour turns into Syriza
HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

The mystery of Britain's worst naval disaster is finally solved - 271 years later

Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

'I saw people so injured you couldn't tell if they were dead or alive'

Nagasaki survivors on why Japan must not abandon its post-war pacifism
Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

The voter Obama tried hardest to keep onside

Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen