Salvation through savings

BUSINESS VIEWPOINT HENRY CLARK

Henry Clark is MP for North Antrim, and a director of Eric White and Partners and of Trident industries.

Jeremiah got little joy from his successful pre- dictions, and ended in prison for his pains. Those who prophesied the disastrous effect of the budget on the level of personal saving get as little satisfaction as events prove the truth of their forebodings.

The pre-budget spending spree had already cut savings. Economic Trend figures show saving at only 5.2 per cent of disposable per- sonal incomes in the first quarter of the year compared with 7.1 per cent in 1967 and 8.1 per cent in 1965. The figures are not available yet for the post-budget quarter, but the perform- ance of saving media suggests that the trend con-

'C:1- tinues downward. National Savings lost ground in May, June lind July this year, registering a reduction of total assets of £37 million com- pared with a net increase of £39 million in the same three months of 1967. Unit trusts pre- dictably recorded an improvement, for the stock market can seldom have been more attrac- tive, with a net increase of £64 million in contrast to £19 million for the same three months of 1967. Some of the gain in unit trusts was probably made at the expense of bank balances and overdrafts, and it is offset completely by a drop in building society re- ceipts of £90 million in May, June and July. Aggregate saving in these media fell by £118 million, or 35 per cent, against their per- formance in the summer of 1967.

This drop in savings immediately offsets some of the deflationary effect of Jenkins's penal taxation and proves once again that people will do almost anything to maintain their standard of living. Faced with increased taxes on con- sumption, they reduce their level of saving, or run overdrafts, rather than cut down on cigarettes, sell the family car, or reduce the children's spending money.

There is, however, some good news for those who believe that increased personal saving is one of the basic remedies for the economy. The orthodox Keynesian doctrine that per- sonal saving is as effective a deflationary measure as high taxes and a budget surplus is coming back into fashion. The Socialists have always preferred budget surpluses on ideo- logical grounds but even in his budget speech Mr Jenkins gave more than the usual lip service to saving. In July he went so far as to promise that he would discuss new forms of contractual saving with the ruc and the CBI. He was having the possibility of a scheme especially geared to the needs of employees re-examined as a matter of urgency and hoped to report progress in the new year. It was interesting to note, too, that when the possibility of a wealth tax was announced to encourage the left wing before the Labour party conference, the proposals were qualified by the promise that it would not be at a level to hit the average man's life savings. In fact the majority of Labour MPS would welcome schemes which encouraged thrift and saving even if the inevitable result is some in- herited wealth.

Labour party acquiescence to tax incentive for personal saving is completely overshadowed by Conservative enthusiasm. From a simple mention in Mr Iain Macleod's speech at Brighton in 1965, 'a capital-earning democracy' became the economic theme of last week's Tory conference. Increased saving has moved up to second place, next after lower taxes, in the Conservative economic programme. Mr Heath seems as enthusiastic as Mr Macleod, and re- ferred to savings in his speech on the budget in March and several times in his recent mid-term manifesto Make life better.

Obviously share certificates under every bed fits the Conservative social objective as it does their economic plans, but details of the methods which they would use to boost savings has not been published. On Panorama Mr Heath seemed to favour the plan put forward by Mr Brian Reading in a recent Tory pamphlet, but went on to imply that there should be several schemes to suit different circumstances and in- come groups.

The Reading scheme envisages tax free de- ductions from wages and salaries on a 'save as you earn' basis. The money deducted would be frozen for two years in a non-interest-earning government fund, but after the. two years the saver could withdraw his money without any tax liabilities. As a short term saving scheme this could hardly be bettered, and- the total amount frozen at any one time would grow steadily as the big overtime earners learned of this simple method of tax avoidance.

My own pet scheme avoids further complica- ting PAYE, and proposes that contributions- should be paid from taxed incomes to any approved savings institution or unit trust for a contractual period of five or seven years. At the end of each year the institution would claim back from the Treasury a high percentage of the tax which the saver had paid and add it to his credit balance. The whole amount could be withdrawn at the end of the contract.

The an in consultation with the TUC have put forward a scheme based on tax-free deduc- tion from wages of between ten shillings and £3 per week to be invested in a new government security tied to a value-of-money index, a special building society fund, or a new unit

trust promoted by the on and ruc jointly. Again, money could be withdrawn only con- ditionally or at the end of a period of years.

The Wider Share Ownership Council, who have been longest in the field. favour the well- tried American system. Tax-free deductions from wages are invested in a trust promoted by the employer, withdrawal to be tax free after three years or on retirement. There are addi- tional provisions to favour employee profit sharing by investing part of the fund in the employer's own equity.

All these schemes look more attractive than the present tax incentive allowed on life in- surance. It seems certain that one or other would be introduced by a Conservative govern- ment after the election or even by Labour next year. The change from past over-emphasis on assisting house purchase is welcome, although the economics of house purchase will receive a major boost if the Conservatives reduce or abolish housing subsidies for the more affluent.

The choice of scheme must be made on the criteria of administrative simplicity and the degree to which the existing saving media can be drawn in to assist. Choosing the schemes which will appeal most to the public, however, will be better left to modern market research techniques than to the Treasury's hunch. Mar- keting savings and making a small investment income a popular status symbol will be a challenge to the whole advertising industry. Saving for investment is still today an activity which marks the boundary between the middle and working classes.

That the job can be done is shown by Inter- national Nickel. In America 90 per cent of their employees save on a contractual basis while in the United Kingdom barely 20 per cent of their employees buy National Savings.

There must, of course, be a limit on annual contributions to any scheme to prevent people cashing in on the benefits by transferring exist- ing capital. Five or ten per cent of earned in- come has been suggested but there is a vital advantage in keeping the limit flexible. If the Chancellor can vary the upper limit, the length of the contractual period, and the tax incentives for new savers, he can encourage or discourage saving as the state of the economy demands. Contract saving could become not only a stabilising factor but the new control mechanism that the economy badly needs. The possibilities are exciting.