Ireland Considers New State-Backed Investment Scheme to Boost Savings

The Irish government is exploring the introduction of a new state-backed savings scheme aimed at encouraging investment, particularly as Irish banks offer low interest rates on deposits. The potential initiative seeks to address the issue of stagnating savings returns and increase participation in the stock market, although avoiding pitfalls of past schemes and ensuring accessibility for a broad range of investors.

A Successor to SSIA?

The proposed scheme is distinct from the Special Savings Incentive Accounts (SSIAs) which operated until 2002. SSIAs provided a 25% state top-up on deposits as reported by The Irish Times. The new initiative is more likely to focus on offering savers a range of funds invested in the stock market with limited tax-free returns.

Addressing Low Deposit Rates

Ireland lags behind many European countries in offering state-backed investment accounts. Currently, Irish banks offer significantly lower interest rates on deposits compared to potential returns from stock market investments. Calculations suggest banks paid just 0.25% interest on deposits in the first half of 2024, falling below the current inflation rate of 2.7% as reported by The Irish Times, effectively eroding the value of savings.

Scheme Details and Potential Structure

The scheme, as currently envisioned, would allow consumers to invest in a variety of funds with differing risk profiles. Tax-free returns up to a certain amount are being considered, with gains exceeding that limit potentially subject to a new levy. A cap on investment amounts, similar to the £20,000 annual limit in the UK, is also likely.

Lessons from Abroad

Similar schemes are already in operation in several countries, including Poland, Sweden, France, Japan and Canada. In Sweden, the introduction of such a scheme in 2012 led to 30% of the country’s GDP being held in these accounts.

Concerns and Potential Pitfalls

Experts caution that the scheme must be accessible to a wide range of people and avoid becoming a tax break primarily benefiting the wealthy. Concerns have also been raised about the potential for high fees charged by financial institutions to diminish investor returns. The government will require to ensure transparency in fees.

The Irish experience with the privatization of Eircom in 1999, where investors suffered significant losses following a stock market flotation, serves as a cautionary tale. Diversification across a broad range of companies and sectors is crucial to mitigate risk.

Economic Considerations

Some economists argue that the scheme will primarily benefit higher-income households with existing savings, rather than the “squeezed middle.” There are also concerns about potential tax revenue losses at a time when Ireland relies heavily on revenue from multinational corporations.

Timeline and Future Plans

Minister for Finance Simon Harris has stated that the initiative will be a key priority over the next two budgets. The first accounts under the new scheme could potentially be opened in 2027. During the 2024 General Election, Fine Gael proposed a savings account for children, and a future iteration of the scheme may target under-18s.