Gordon Brown has made it up with the IFS and needs help on reforming savingsby John Plender / March 20, 1998 / Leave a comment
A frequent criticism of the welfare state is that it has degenerated into a middle class racket. This is probably half true; but there are plenty of other very blatant middle class rackets that cry out for the attention of a reforming Labour chancellor-not least the tax breaks on savings.
So much the better, you might think, that Gordon Brown wants to make the tax system more friendly to those on low incomes by introducing individual savings accounts (ISAs) in the forthcoming budget. But, as with the more general reform of welfare, it is monstrously difficult to achieve change that amounts to anything more than a slightly different kind of middle class racket.
The purpose of ISAs is to help the poorest savers, most of whom put their money into instant access bank and building society accounts with no tax breaks on the interest earned. ISAs are also intended to encourage non-savers to start saving. Yet a tax break on savings is worth absolutely nothing to the poorest members of society who pay no tax. And as many as one third of households in Britain have no financial assets at all. At current rates of interest on instant access accounts, the gain to an ISA saver on a cash investment of ?1,000 would be less than ?7 a year at the basic or lower rate of tax-so says the Institute for Fiscal Studies (IFS).
The IFS also calculates that if the government were to exempt all interest and dividend income from tax, the average gain on uncapped contributions would be ?2.24 a year for tax-payers with a bank account, ?19.92 for those with a building society account and ?34.68 for tax-payers with stocks and shares. Since the chancellor and his economic adviser Ed Balls are now back on speaking terms with the IFS’s Andrew Dilnot after a period of palpable froideur, this point will surely not have escaped the Treasury’s notice.
Then there is the penalty many poorer savers will suffer if they end up on means-tested income support. The marginal tax rates inflicted on those whose nest egg exceeds the paltry permissible limit can amount to more than 120 per cent. So come what may, ISAs-although more equitable that Peps and Tessas-will end up as yet another middle class racket. As with all tax breaks on savings, much of the relief will go to those who would have…