Timely opportunity to counterbalance culture of spend, spend, spend

The Government is to be congratulated on its proposal for a new savings scheme. I must first declare an interest in that the scheme closely follows the submission made by EBS last August and that we, as well as most financial institutions, will benefit as more savings are encouraged.

That being said, there are many important benefits attached to increased savings and to this proposal in particular.

The savings ratio has been falling rapidly in Ireland. Having been about 910 per cent since 1995, it has fallen to 6 per cent. As the economy has boomed we have lost the habit of saving and have spent a higher proportion of our incomes. When finance is required for any purpose many have recourse to borrowing. This is viable in many cases, particularly when times are good.

But it leads to a situation where many individuals have no financial resources to fall back on in a personal or family crisis. Similarly many young couples find they have not got an adequate deposit when trying to buy a house.

Under the scheme, all individuals aged over 18, can save £10£200 a month. This can be by way of deposits, quoted shares, Government securities, collective funds or life assurance products. By investing in an equity-based fund the return could be higher if the individual accepts a certain level of risk.

The return earned, although important, is not the main reason for saving.

It is what regular savings can amount to in a short number of years that counts. Under the proposed scheme individuals are encouraged to build up personal capital. The examples provided by the Department of Finance shows this very clearly.

Assuming an interest rate of 4 per cent, £50 a month would grow to £4,050 over five years. Similarly £200 a month would grow to more than £16,000. Thus a couple saving £400 a month between them could accumulate more than £32,000, risk free, in five years - a substantial sum in anybody's terms.

In summary, the great feature of this scheme is that it will get people into the habit of regular savings and at the same time give them a high return.

Some concern has been expressed that the scheme could be abused or that large amounts would be drawn from existing savings. The maximum monthly amount of £200 is realistic for a large number of savers while at the same time severely limits the extent to which substantial existing savings could be transferred to the new scheme. Every one must supply their personal public service number to the financial institution and this will eliminate the possibility of multiple accounts. Also an account cannot be used as security for a loan so this eliminates the risk of loans being used to fund a savings account.

As increased incomes and lower tax rates feed through over the next few months there has never been a better time to promote savings. This will be a timely opportunity to counterbalance the spend, spend, spend culture which has emerged in Ireland in recent years. The economy continues to grow rapidly and undoubtedly there are some inflationary pressures. A higher level of savings will help defer spending and help reduce these pressures.

Everybody should aim to start one of these new accounts, including those on modest incomes - even if they start with the minimum £10 a month. While the benefits apply to all savers the real beneficiaries will be those who need to save for a deposit on a house, older individuals facing retirement or parents planning to meet education costs. These are frequently cited as serious reasons for saving. There are many other reasons for saving, from building up a nest egg for a rainy day to paying for a round the world trip. They all make sense and are a lot easier if you save regularly.

A clever feature of the scheme is that the allowance must be used each month. While the scheme is open for a year individuals should start saving as soon as possible as, if it proves successful, it could be followed by another scheme when it expires and any allowance lost now will be lost forever. Another aspect is to start immediately the new tax cuts come through, before the higher takehome pay disappears in day-today spending.

This scheme has benefits for individuals and for the economy in general. Consequently all opinion formers should encourage it. Given the potential benefit to employees, employers should be ready to help staff to get started by making it easy to enter the scheme by way of salary or payroll deduction.

Obviously it will take some time to judge how successful the scheme will be. The key criterion for judging it will be the extent to which more individuals are encouraged to take up the savings habit. Overall the proposal is good and deserves to succeed.

Martin Walsh is general manager, head of lending, EBS Building Society