A consensus is emerging across the political spectrum that this budget was in no way progressive. It is likely to hit the poorest in out communities the hardest. VAT will be increased to 20% and is a regressive tax paid hitting those on lower incomes most. Benefits will be year on year reduced through their new indexation. But nowhere is this more true that the measures that have been announced in relation to individual savings.
Having derided the low levels of individual savings amongst those on lower incomes and high levels of personal debt whilst in opposition, far from building incentives to save and supporting saving, Osborne has done the opposite.
The Child Trust Fund which had the potential to provide a vital nest egg for many on low incomes has not been slimed down to be provided to those who need it most, it has been abolished. The Saving Gateway, arguably one of Labour’s most innovative ways of supporting the out of work and low paid, is gone.
Instead the Government says it will index link annual ISA subscriptions. ISAs are also a Labour innovation and offer tax free savings that is interest on saving that is exempt from tax. For tax payers they offer a strong saving incentive and the more tax you pay the more incentive there is. A higher rate tax payer will get 40% tax relief on their savings interest. But, this isn’t much use if you pay no or a low rate of tax.
Instead, the Labour Government spent nine years piloting the Saving Gateway specifically for lower income savers. Through this scheme the Government matched the savings that people saved into their accounts either pound for pound or at a lower rate. Intuitively you’d think this encouraged people to save – and it did. In particular, the pilots showed that women and ethnic minorities found the scheme particularly accessible. For many this was the first time in their lives that they had the opportunity to build up a small stock of savings to help with a ‘rainy day’. The amounts were relatively small to many, perhaps no more that £200, but for lots of people this amount would provide resilience against a sudden loss in income. There were psychological benefits too as people were able to better control their finances through the additional support.
The cost of the Saving Gateway to the Government was minimal. When you look at the Red Book this would have been a mere scratch on the surface compared to the cost of reducing the rate of Corporation Tax. This could have been reduced further with a lower match rate offered to savers or a lower eligibility threshold. It would also be interesting to see how much the uprating of ISAs will cost. Would this have covered the cost of the Saving Gateway or the provision of the Child Trust Fund to lower income savers in their entirety?
The savings agenda set out on Tuesday demonstrates the ideological underpinning of the Government. It underlines that Cameron’s ‘big society’ means a larger better society for the few not the many. Whilst income matters so too do levels of personal saving offering a much needed buffer against a loss of income or enabling people to save for larger purchases. The lack of support for saving for those on lower incomes will add to the financial insecurity for the poorest in our society for years to come.