Tuesday, 6 January 2009

Savings and tax, a good start

Only Twelfth Night and already the battle lines are being drawn for a general election. And, for the first time, there is a sign that the Conservative opposition might understand the need for a fundamental change in the economy. Today David Cameron announced his plan for abolishing tax on the profits from savings for basic rate tax payers. It cannot be a stand-alone policy and we can expect a (coherent?) package to be outlined in the next few weeks and months. What I find encouraging about it is that it marks a shift from dependency on the State to dependency on one's own resources, just a little first step in a shift, but a shift nonetheless.

My view, for what it's worth, is that the vast majority of people are far more resourceful than they are given credit for and far keener to be self-sufficient than the welfare state acknowledges. Of course there are some idlers but not as many as we might like to think. One major problem we have is that the tax and benefits systems discourage individuals from providing for themselves, and one aspect of this is that it is hardly worth saving modest sums of money when inflation and tax reduce the value of what you have saved. If you receive 5% interest when your cost of living increases at 5% through inflation, your savings maintain their value; but the interest you receive is taxed at 20% so you actually receive 4% interest at a time of 5% inflation - you lose money. At the moment the rates of return on any normal savings account are well below inflation so the cost of saving is even greater.

The structure of economic policy should not be dictated by temporary circumstances. Just because interest paid to savers is currently low and inflation (not the bogus rates used by government but the real increase in the cost of living for real people) is high, removing tax on interest earned by standard rate tax payers seems fair. Were rates of return high and the rate of inflation low, there would be less immediate political pressure to remove the burden of tax on interest received. The real question is what is the right atmosphere for government to create. Should its policies encourage people to look after themselves or should it encourage them to rely on the State? The answer, of course, depends on where you stand in the political spectrum. I have no doubt that people are at their best and do more good for others when they are able to stand on their own two feet. Part of standing on your own two feet is being able to make the best provision you can for the future and there is no escaping the fact that saving money is the only means we have to provide for the future.

There are, in my view, two aspects to saving - the short term and the long term. The short term provides for the things we want and/or need over the next year or two or five, the long term is all about pensions. In all the fuss and feathers surrounding the recession the pensions crisis has rather fallen into the background. That is understandable while people are losing their jobs and homes, but the problem is not going away. In fact is has become even more serious with the stock market losing almost a third of its value in 2008. I will return to pensions in a moment because saving is about far more than pensions. It is about realising that the old sayings are correct - a penny saved is a penny earned, many a mickle makes a muckle, look after the pennies and the pounds look after themselves, never a borrower or a lender be. Living within your means and saving what you can to make things easier in the future are, I have no doubt, things that improve the quality of life. It is for each individual to decide whether they get greater satisfaction from having something they cannot afford now and paying for it twice-over by putting it on a piece of plastic, or waiting a while to have a fridge with two doors and buying one only when they have enough in the bank. Encouraging saving by removing tax on the interest earned might help more people realise that their lives will not end if the big flat screen telly arrives next year rather than this. It won't have a dramatic effect, but it sets the scene for greater self-sufficiency without the dead weight of credit interest.

The long term is perhaps even more important. My opinion of private pensions was cemented a long time ago. I know of people who worked in a small factory in the 1960s and 1970s who were encouraged by their employer to start individual pensions funds. The employer agreed to match the contributions the employees made. A number of people started saving for the first time in their lives. Most retired many years ago and received a small but welcome boost to their state pension, for some it was just £15 or £25 a month but that made a big difference when their only source of income was a state pension of £250 a month. I spoke to some of them about it and what I heard time and again was regret that they had not been encouraged to save years before. It was not so much about the extra money, it was about the extra money having come from their own efforts. The state pension was taken for granted, the little extra was something they looked on with real pride. You see, they did it themselves. They had help from their employer but that was part of their remuneration it was not a gift, they actually saved the money and were able to provide something extra for themselves.

We hear a lot from the current government about how well pensioners are provided for. They have the basic state pension, a minimum income guarantee, a free television licence, a winter fuel allowance, free bus travel and discounts on this and that. Talk to the pensioners themselves and they will tell you they paid National Insurance all their working lives in order to get a decent pension and instead they are at the whim of government. What will the winter fuel allowance be next year? Will I have to pay the television licence myself now that the government has run out of money? Will my state pension be increased in line with the increase in my food and gas prices? Will I get anything more when the Council Tax goes up next year? And so it goes on. Much of a generation is now at the beck-and-call of the Treasury because they were given no reason to save and provide for themselves. Of course they were told they were saving and providing for themselves through their National Insurance Contributions. No one told them those contributions did not go into a big pension fund but were spent by government just like all other tax revenue.

The need for people to save for their old age is more pressing now than it has ever been. Tax relief on pension contributions has existed for many years and most of those in so-called middle class occupations are involved in a private pensions scheme of some sort. As always, it is those at the bottom of the economic pile who are at greatest risk. The time is approaching, if it has not already arrived, when the state pension simply will not provide enough. Even those on modest earnings will have to have their own private pension in order for old age to be bearable. One might think that a tax break on savings will not affect the position because there are already tax breaks on pension contributions. The problem is that too few people are making private pension provision because there is no culture of saving and they hear the constant message "the government will provide".

To my mind an awful lot of what we do as a country depends on the general atmosphere created by government. When they create an atmosphere of increased wealth people act as though they are wealthy. When they create an atmosphere of terrorists and paedophiles lurking in every doorway people submit to extraordinarily oppressive laws to combat the perceived threat. When they create an atmosphere of more government being the answer to every problem people abdicate personal responsibility and rely on the perceived safety net. The brutal consequences of poor Gordon's doomed boom give an opportunity to change the atmosphere. David Cameron's proposal to relieve standard rate tax payers of the burden of losing 20% of the interest they earn on savings is a step in the right direction. It tilts the balance a little towards self-sufficiency. It gives a little encouragement to provide for yourself without your efforts involving an overall loss after inflation. A small step in the right direction.


Mark Wadsworth said...

TFB, you have fallen for all the propaganda about saving. While agreeing that the overall tax burden is far, far too high, further tax breaks for saving are completely pointless. All income should be taxed at the same flat rate, that hampers the economy least.

james1071 said...


I understand that you want to applaud David Cameron's new initiative, which is designed to appeal to savers and boost his opinion poll ratings.

It is, however, a totally stupid idea economically.Any fiscal stimulus should be designed to boost aggregate demand, and this will do absolutely nothing to help.

TheFatBigot said...

Mr W, you have fallen into the trap of forgetting that economic policy is not just about a balance sheet but also about politics.

If, as I believe to be the case, it is necessary to shift away from reliance on credit and tax-funded provision and towards self-sufficiency, the question arises whether there is anything the government can do to help that shift.

Giving tax breaks to savers might not give them much more money but it will give them a little more and, in that way, will encourage more saving. There is very little government can do in this field, but the need for the shift is so great that every little helps.

The simple fact is that all income is not taxed at a flat rate. We are where we are and must deal with the problems the current situations brings.

TheFatBigot said...

Welcome to my little world Mr James.

Two comments in one day, both spouting standard New Labour catch-phrases. Who would have thought my modest ramblings would be of such interest to the Rapid Response Unit?

Incidentally, if you want to comment on a post, do try to relate your comment to the subject addressed. Not once did I suggest that Mr Cameron's proposal was any kind of short-term stimulant to help us out of the mire in which your friend Gordon has landed us.

Bob's Head Revisited said...

Letter From A Tory has written a similiar post today, his being a response to Heffer's Cameron-bashing piece in the Telegraph.

I agree with LFAT and yourself. There may be lots of things we want Cameron to do and say and many of them would be radical. But to say them would simply be bad strategy.

He's in a tricky spot. His policy ideas are either nicked by Brown or attacked as the policies of a typical uncaring Tory toff.

I actually think he is being (mostly) quite canny. Well, as canny as he can be.
What he somehow has to do is to make sure voters can see a definite difference between his crowd and the other lot. One way of dong that is to show to savers that he is on their side. Brown certainly isn't. It's a tiny step, but an inch is better that a mile, as they say.