The wrong way to promote saving

The Conservatives' newly announced tax plans have come in for a lot of criticism, with Polly Toynbee providing a good summary of the case against in The Guardian. So far as the proposal to exempt savings income from tax for base-rate taxpayers is concerned, the criticism so far has tended to focus on the possible bad macroeconomic effects of increased saving. There is, however, another important line of criticism to be made: tax relief isn't an effective way to promote saving amongst those who have least assets.

From a progressive point of view - and, recall, the Cameron Conservatives are keen to claim the highground of being 'progressive' - a key test of savings policy is how policy affects the distribution of wealth. Will the policy help build asset ownership amongst those who have little or no assets?

There is a long history of using tax relief to promote saving in this country, and the lesson that comes out loudly and clearly from this historical experience is that tax relief doesn't have much effect on increasing saving and asset ownership amongst those at the bottom of the wealth distribution. In fiscal terms, the benefits of tax relief are often skewed towards those at the top end of the income distribution. This particular problem is handled to some extent in the current Conservative proposal by limiting relief to baserate taxpayers. But there still remains the problem that tax relief in general doesn't seem to boost saving where, from a distributional point of view, it really matters.

Is there an alternative? Yes: its called matched savings. Instead of giving tax relief, the government offers to match saving: e.g., if the individual saves £1 the state will match that with 50p (or whatever). In the USA, the 1996 welfare reform led to widespread experimentation with so-called Individual Development Accounts (IDAs) which offered matched savings programs specifically for low-income/low-asset households. They seem to have a good record of boosting saving amongst genuinely disadvantaged households. And, of course, the Labour government has recently announced it will roll-out nationally a similar program, the Saving Gateway, for low-income households in the UK (following two successful pilots).

So in responding to the Conservatives' new tax plans, progressives should not allow the Conservatives to claim the mantle of being pro-saving. The point should be not only that increased saving might have bad macroeconomic effects, but that if one does want to promote saving, this is the wrong way to do it.