Crunch for National Savings

The traditional means of meeting Government revenue shortfalls could be sold off to pay for pre-election tax cuts

THE next financial year could be a make or break one for the National Savings movement, which now raises less than 10 per cent of the Government's borrowing requirement. It also faces intense competition from the private sector, which is now equipped with a full set of competitive and tax-efficient savings channels, including Tessas, PEPs, and now Corporate Bond PEPs, invented by successive Chancellors from John Major to Kenneth Clarke.

The high point in the movement's recent career was in 1991/92 when it was set the task of raising pounds 4.5bn or just over 20 per cent of the borrowing requirement including privatisation proceeds. Since then, the target has been scaled down, although the PSBR continued to grow, and the role of the movement has gradually diminished.

The target set by the Chancellor for the current financial year for the National Savings movement is to raise pounds 2.5bn, but altogether the Government will need to borrow at least pounds 27bn in the current financial year (if the likely overshoot indicated in the latest figures for the first five months of the financial year is not miraculously reversed).

The deficit could be at least as large in 1996/97, if the Chancellor succumbs to the growing pressure from Conservative backbenchers for a tax-cutting, vote-winning Budget in the leadup to the next election. The National Savings movement has worked hard to cut its costs, reducing the margin over gilt-edged stocks from almost 1 per cent to under 0.2 per cent over the last financial year. But further economies will be harder to achieve.

The Government is, however, already determined to raise a greater proportion of its future borrowing needs through the sale of gilt-edged stocks. Plans are well advanced to launch "strips", which will in effect split gilt- edged stocks into their capital gains and their dividend income and allow them to be traded separately. The Bank of England is also promoting plans to fund more of the borrowing requirement through the sale of index-linked stocks, where both the interest and the capital is proofed against inflation.

With so much competition, actual and potential, it is difficult to see how the Government could squeeze much greater sums out of National Savings, without drastically improving the yield on the investments it retails to the public across post office counters and greatly increasing the cost of the contributions it makes to the borrowing requirement.

In recent years, only premium bonds, helped by the introduction of pounds 1m jackpot in April last year and the fall in interest rates that has made the 4 per cent contribution the Treasury pays into the prize money pot look more attractive, have made a big contribution to the annual targets set by the Chancellor for the National Savings movement.

In the last financial year, premium bonds raised almost pounds 1.5bn out of the pounds 3.5bn net contribution of National Savings to the borrowing requirement. In the first five months of the current financial year, they have contributed pounds 462m of the pounds 1bn raised by the movement to date. But Premium Bonds, like the football pools, face a serious challenge from the National Lottery and could be past their peak as a fund-raiser, unless the Chancellor decides to increase the prize money.

A rethink on the future of National Savings is therefore on the cards, and the Budget is a likely place to announce it. A number of observers in the private sector - and they are not entirely joking - claim they would not be surprised if the Chancellor decided to try and privatise the National Savings movement and sell it off in whole or in part to the highest bidder, perhaps a building society anxious to consolidate its position in the market-place. The nearest analogy would be with the Post Office Girobank, which was sold to the Alliance & Leicester Building Society in 1992.

Who knows what it might be worth as a one-off contribution to the Government's election fighting fund? Correction: who knows what it might be worth as a one-off contribution to the Government's campaign to reduce the borrowing requirement, reduce bureaucracy and red tape, and eliminate the last vestiges of state involvement in the financial sector.