Question mark over savings tax breaks

The giving of tax breaks in order to stimulate further savings may not succeed in its aims nor be economically useful, according to research, writes Nic Cicutti.

Existing measurements for assessing savings rates are flawed, as is the usual notion of the relationship between saving and investment, Don Harding claims.

Traditionally, economists have argued that there is a correlation between high savings levels, permitting investments in capital projects, and economic success.

Mr Harding, an academic writing for New Economy, a journal by the Institute for Public Policy Research, points out that existing formulae treat spending on intangible assets such as health as consumption.

"This means that countries with high investment in such things as health and education, appear to be under-saving," he says. Once such spending is included, many countries usually classified in this category emerge as heavy investors.

He argues that governments should not be actively encouraging savings. "Schemes to encourage savings cost. Not only is tax actually forgone but they require the scarce attention of bureaucrats if they are to be designed, sold to the public and implemented effectively."

James Banks, a programme director at the Institute for Fiscal Studies, adds that tax incentives, such as Tessas and personal equity plans, do not necessarily increase propensity to save.

Mr Banks points out that the take-up of Tessas traditionally grows substantially in the first quarter of each year, suggesting other accounts have been raided.

Half of all savings in PEPs also come from individuals who hold direct equities.

"[This] means the proportion of funds being substituted from other holdings rather than coming from new saving may be large," Mr Banks concludes.