The Republic's largest building society has proposed a radical savings scheme to the Government that would involve the State paying savers £28 (€35) for every £100 they put aside. The Minister for Finance, Mr McCreevy, is considering the EBS building society's scheme before next month's Budget when a tax incentive for savers is expected.
Encouraging people to save is one of the few weapons available to the Government to cool the economy following the ceding of control over interest and exchange rates to the European Central Bank, according to Mr Martin Walsh, head of lending at EBS. The building society proposes that people be encouraged to save £2,400 a year in monthly instalments of £200.
The top-up payments from the Government would technically be in the form of a special tax credit for savings of £3,076.92 applicable at the basic 22 per cent rate, the net effect of which would be £20.28 payment for every £100 saved.
Participants would pay into the designated account in monthly instalments of up to £200. Each month the state would pay £28.20 into a parallel account for every £100 paid into the savings account that month.
At the end of a 10-year period the savers would have access to the funds in the parallel account.
The savings would also effectively be free of deposit income retention tax. DIRT would be deducted but the Government would make an offsetting payment into the parallel account.
Savers leaving the scheme before the 10 years were up would forgo the funds in the second account. Several exceptions are envisaged including the use of the money by first-time buyers to buy a home.
The scheme's attraction for the Government is that for every pound it pays roughly another £4 is taken out of circulation in the already booming economy, says Mr Walsh. The accounts should be seen as a tool for managing the economy in the current climate, he adds. The EBS plan recommends that all financial institutions be included in the scheme, not just building societies.
The Government is actively looking at introducing some sort of saving incentive in the Budget. Measures to encourage credit union members to lock their money up for either three or five years have already been agreed. Savers who avail of the credit union scheme will not pay tax on the first £375 and £500 of dividends payments respectively.
The measures are part of a larger deal to resolve the three-year standoff between Mr McCreevy and the credit union over the taxation of members savings. The Minister has agreed that any members who so wish can continue to receive their dividends free of tax. He has also agreed that credit unions will not be subject to corporation tax.
The introduction of a similar incentive scheme for savers with the banks and building societies would go a long way to heading off any objections they might have to the deal Mr McCreevy has done with the credit unions.
The Irish Bankers' Federation (IBF), which represents the commercial banks, has not commented directly on the proposals other than saying it is keen to see a level playing field. The IBF has previously complained to the European Commission about what it sees as the unfair advantage conferred on credit unions in the Republic.
The proposals are being considered by the individual credit unions that make up the league. Only a few have raised questions and they mostly relate to technical problems involved in operating the news accounts, according to the league.
An IBF spokesman said it had not had a chance to study fully the proposed changes. He added that they had not had any formal contact with the Government concerning the extension of the DIRT concessions to banks and building societies in the Budget.
