Savers will carefully examine the offer made by the Government to top up savings which are locked away for five years. The financial institutions will shortly start to market products based on this incentive, which offers a 25 per cent top-up for monthly deposits of between £10 and £200. The returns could be quite attractive; savers will be able to opt for straight deposit schemes, with a relatively fixed but secure return, or for savings based on the stock market, involving higher risk but a higher potential return. Either way, the Government will put in £1 for every £4 invested by the saver.
The Government is presenting the scheme as a device to encourage savings. It should certainly achieve this goal. It is impossible to calculate how much money will be invested in the scheme. However, the sums involved will run into hundreds of millions of pounds. The overall impact of the measure on the economy is debatable. The Minister for Finance, Mr McCreevy, will sell it in Brussels as a prudent measure to help take money out of circulation and slow consumer spending. It may go some way to achieving these goals although, as Mr McCreevy pointed out to his fellow finance ministers this week, the main factors influencing economic growth and inflationary pressures are external factors, such as the value of the euro and the trend in oil prices.
The savings scheme does seem a reasonable way to give cash back to people in a way which does not encourage immediate consumption, while also giving a welcome boost to savings. There are issues, as SIPTU pointed out, in relation to pensions. The Government must ensure that saving in promised new pensions vehicles is just as attractive - otherwise the danger will be that short-term saving is favoured at the expense of long-term.
If there is a very strong take-up of the scheme, the longer term implications for the public finances will have to be carefully monitored. The incentives offered are generous and in many cases the State will effectively be giving money to people who would be saving anyway. This may be all very well at a time of strong Exchequer surplus, but could become an issue if growth slows and the surplus starts to shrink.
What of the other provisions of the Bill? It will enact the tax reductions announced on Budget day, about which there has already been much debate. Also, the tax rate on share option schemes has also been reduced to 20 per cent. This will encourage the spread of such schemes and may help take pressure off wages in some areas, while also helping companies to hold on to key staff. However, it is disappointing that the Government has still to bring forward wider measures to encourage profit and gain-sharing by businesses with all their employees.
The decision to reduce the capital gains tax penalty for those releasing building land on to the market after 2002, meanwhile, is hard to understand. The Government maintains that the measure has already had the intended effect, but the risk is that it could give another upward push to house prices. From a political point of view, Mr McCreevy has, of course, added further to the "feelgood" factor from the tax reductions already announced on Budget day. The question now is whether the recent disagreement with Brussels will stop him doing the same again in the 2002 Budget, due to be delivered in October.