§ I come now to a new scheme for contractual savings. In working this out I have been greatly assisted by contributions from a number of bodies to which I am very grateful. In particular, I would like to express my thanks to the National Savings Committees, with the devoted support of many voluntary workers, and under the leadership of Sir Miles Thomas and Lord Birsay, for their efforts in sustaining the work of their Movement as well as giving their time and knowledge to the study of new incentives.
1036§ It is, of course, immensely desirable to encourage those who already have the habit of saving to increase their rate. But still more important is the need to swell the numbers of savers, to tap that vast reservoir of people who at present save little or nothing, and to tap it in as habit-forming a way as possible. My new incentives are, therefore, directed primarily to this group.
§ At first I thought the best approach would be to give tax relief at the point of saving. Superficially this certainly looks the method with the biggest pull. But there are compelling objections, which have not merely to be put in the balance, but also undermine a large part of the attraction itself. I would like to explain these objections to the House.
§ First, the concession would have to be very closely supervised, with every possible attempt made to ensure that it only attracted genuine new savings and not switching. From the point of view of demand management it is no use giving a generalised concession which could not, even in theory, bring in more new savings than had been given away in tax, and in practice would almost certainly bring in a great deal less. Otherwise, at the end of the day, purchasing power and consumption would have been increased, rather than the reverse. The exercise would be worse than self-defeating.
§ Second, substantial P.A.Y.E. re-coding and continued and detailed surveillance by the Inland Revenue would be needed. The administrative cost of the scheme would be very high, and the recruitment—even assuming they could be obtained—of substantial numbers of additional Inland Revenue staff would be unavoidable.
§ On top of that there would be no incentive at all to those outside the tax range, and relatively little to those paying at the reduced rate. It would be quite wrong to exclude these people from the attractions of the scheme.
§ And even for those paying tax at the full rate, the weekly psychological pull of a realistic tax remission scheme can be greatly exaggerated. For example, if relief were given as for life assurance premiums, a proposal which I examined hopefully, a married wage earner with two children on £30 a week, who contracted to save £1 a week would find his weekly income tax deduction cut by little 1037 more than 3s. out of a total of £4 16s. I doubt whether this would be a very dramatic incentive.
§ Last, while the essence of a contractual scheme is that the great majority should be persuaded to stay in for the full period, some provision has to be made for those whose circumstances change and who therefore have to draw out the money earlier. In this event a loss of a future bonus is reasonable. But if the bonus is given at the point of saving, it would have to be clawed back in the event of premature withdrawal. The saver would thus find himself with less money than he thought he had accumulated, having to encash his savings at less than their par value. I think this would arouse widespread resentment.
§ I have concluded, therefore—and this is strongly the view of the National Savings Movement—that it would be best to give the actual reward in good sized tax-free lump sums at the end of the period of contract. I believe that this will make the greatest appeal to the kind of new saver I am especially anxious to attract.
§ The new scheme of contractual savings which I propose will be operated by the Department for National Savings; and I am glad to appropriate for it the title "Save As You Earn". The scheme will, however, differ from some of those which have been put forward under that title. It will offer a generous reward on contracts to save regularly monthly amounts in deposits with the D.N.S. over a five-year period. Everyone over 16 will be able to make savings up to a maximum amount of £10 a month. The D.N.S. will accept savings through deductions from pay, by standing orders on banks and the Giro, or in cash over Post Office counters. But I attach particular importance to securing regular savings by means of deductions from pay. I hope that with the co-operation of employers and trade unions, which I am sure will be forthcoming, the new scheme will attract a useful volume of new savings through such voluntary and regular deductions.
§ The reward for a completed five-year contract will take the form of a terminal bonus completely free of all tax. I propose to make this bonus £12 at the end of five years for every £60 saved over the period through subscriptions of £1 a month. This bonus will be doubled 1038 to £24 if the savings are left in for a further two years without any further subscriptions by the saver. In other words, people saving under this scheme will have two options: their money back, with a bonus equivalent to an extra year's savings after five years, or with double that bonus after seven years.
§ Those who are contemplating a firm commitment to save over five years will naturally ask what is likely to be the real value of their bonus and repayments at the end of the period. This is not a simple calculation to make because, although some of the money contributed in the early years will be outstanding for some time, money contributed towards the end of the period will only be invested for a short time before it is repaid. If this scheme had started five years ago the bonus today would have compensated fully for changes in purchasing power over the period, and in addition would have given a positive tax free return of over 4 per cent. a year on the money subscribed. In fact the proposed bonus properly calculated by reference to the period for which each monthly subscription lies invested, is comparable to a grossed up rate of return of 12 per cent. a year to the standard rate taxpayer by the end of a five-year contract, and higher still by the end of the seven-year period. This is a very high rate indeed, but I am satisfied that it is right to make this offer in order to create new habits and get the new scheme off to a good start.
§ We must, as I indicated earlier, make some allowance for those who find themselves obliged to terminate their contracts prematurely. Participants will therefore be able to withdraw their contributions during the period. If they do they will receive interest at the rate of 2½ per cent. tax-free on withdrawals after the first year of the period.
§ Some further particulars of the scheme are being given in a Press release today. Full details will be incorporated in a prospectus and regulations in due course. I am determined to get the scheme started quickly, though this cannot be until October at the earliest. But we shall take advantage of the interim to perfect the scheme, and in particular to discuss ways of making the pay-deduction method as attractive as possible to employers and workpeople.
1039§ I also hope that the Trustee Savings Banks will be able to co-operate fully in promoting the "Save As You Earn" scheme. The £10-a-month limit for the scheme would, however, apply whether the savings were made through a T.S.B. or through the D.N.S. In addition, I am prepared that the tax reliefs should be extended to a similar contractual scheme run by the building societies. In their case I would propose a separate and additional amount, again up to a maximum of £10 a month, which the individual could subscribe. I think that this is much the most practical help that I can give to the building societies in the present difficult circumstances. But it will be necessary to hold talks with the representatives of the building societies about the exact form in which they would operate such a scheme. And in the course of these talks I would need to be assured that the societies would apply the benefit arising from this substantial tax concession in the best interests of house purchasers.
§ I shall seek powers in the Finance Bill to exempt interest and bonuses on these new contracts from Income Tax, Surtax and Capital Gains Tax.
§ I hope and believe that there will be a good response to the opportunity of these new savings inducements, and that over the next few years we shall see a very substantial amount of new savings. But I propose to measure the response when I see it—and not before. It is difficult to over-estimate the benefits that the scheme could bring, both to the economy as a whole and to the amounts of direct and indirect taxation we all have to pay. The personal savings ratio fell slightly in 1968. We have to halt this decline, and reverse the trend. If we can achieve that, I see no reason to grudge the high rate of interest which I am now proposing to pay.