Siphoning cash out of the market through a savings scheme with attractive tax incentives could help reduce inflationary pressures in the economy. Small Firms' Association chairman Mr Kieran Crowley has suggested a savings bond with tax incentives to encourage savers to participate. And the Minister for Enterprise, Trade and Employment, Ms Harney, expects to propose to Government the introduction of medium to longterm savings accounts with tax-based incentives.

But 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. Some suggested that because in the current environment savers would have to be offered some hedge against rising inflation to encourage them to tie up their money for a number of years, such schemes could prove costly for the State.

Offering tax incentives to encourage saving is not new. Savers have been able to earn tax-free interest on their savings with An Post through its National Instalment Savings Scheme, Savings Certificates and Savings Bonds for many years.

In the early 1990s Special Savings Accounts were introduced whereby savers could put their funds into a bank or building society account and pay tax on their interest earnings of just 10 per cent. This special rate compared with tax of 27 per cent plus levies of 2.25 per cent on the interest earned on other deposits.

But budget changes in recent years have made ordinary savings and investment schemes a lot less attractive. The standard income tax rate has been lowered - to 26 per cent in 1997/98, 24 per cent in 1998/99 and 22 per cent in 2000/2001. But the tax rate charged on the special savings/ investment schemes has been increased - from the 10 per cent level to 15 per cent and then to 20 per cent.

Blaming inflation on too much cash chasing a limited supply of goods and services, Small Firms Association chairman Mr Kieran Crowley has suggested a new savings bond. This bond should "carry a decent interest coupon" - savings would be like pension contributions in that they would come out of gross income with the tax deferred for about five years and the bond should be exempt from inheritance and capital taxes.

The funds raised should be used to finance the construction of roads and bridges under the National Development Plan, he suggested. The Department of Finance has said it will examine the proposal when it is received.