A new scheme to provide more attractive investment options to households is an idea worth exploring. As well as providing a better return for savers, who have é170 billion in deposit accounts, much of it earning little interest, it could also provide a new source of funding for businesses.
Minister for Finance, Simon Harris, has promised to progress the idea, no doubt hoping it would appeal to the Fine Gael voter base. And EU moves towards progressing the long-discussed savings and investment union – allowing businesses to access a much larger pool of capital – are also putting pressure on for new approaches here.
There are a few interlocking issues. One is that change is needed in the way investment gains are taxed in Ireland, which in some cases involve complexity and undue cost for investors. Investment returns generally should have a tax liability. But there are measures which could be taken to make the taxation of products such as exchange traded funds less punitive, encouraging people to have some exposure to the stock market.
One of the reasons why Irish people have invested so much in property is its generous tax treatment, particularly in relation to the family home, compared to what is faced on investment markets. Change may be needed, though within a framework that capital taxes in Ireland generally remain relatively low.
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The second key issue is whether special incentivised products are needed to encourage savers to move funds into investments. There are, as Harris has said , international models which generally offer a tax advantage for putting money into investments, subject to certain limits. This may be an approach worth pursuing here. But if there is to be an incentive, it cannot apply to basic cash savings and must be to compensate for taking some risk. In other words, there cannot be a new SSIA-style “giveaway” to try to win political plaudits.
The final issue is that any new scheme cannot be a licence for financial service providers to print money. Bank profits in Ireland are already boosted by paying low returns on deposits – thanks in large part to limited competition – and wealth and pension managers all too often levy heavy fees. The Government must use its muscle and the significant amount of new investment likely under any scheme to ensure transparent and reasonable fees. The banks will lose some deposits, but as they own much of the wealth management industry they will pick up business, too.
The Government is right to consult on the details of a new scheme, but it must not allow itself to be “captured” by the banks and brokers, which will not be shy about putting their case. The Coalition’s job is to make sure any scheme is in the wider interest and not designed to line the already well upholstered pockets of the financial sector.
