BSA Budget submission
Dear Chancellor
Budget 2009
I am writing to urge you to take action to assist savers in your forthcoming Budget, as well as implementing measures to help support the housing market.
Help for Savers
You will appreciate that the current very low interest rate environment, while helpful for existing borrowers who are on standard variable rate and tracker mortgages, is causing difficulties for savers and particularly for those on fixed incomes. Low interest rates, together with other measures being taken by the Government, are intended to ensure that the current recession is as short-lived as possible and, of course, we hope the Government is successful in this.
However, the BSA considers there is an urgent need for action to ameliorate the adverse impact on savers. The Bank Rate was cut to 0.50% in March, a record low, having been 5.25% a year earlier, comparable to a fall in interest payments of more than 90%.
In the last twelve month period for which Bank of England data are available, retail savings balances in the UK increased by £40 billion, compared to an increase of £66 billion for the same period a year earlier. However, this includes any interest earned on existing balances that was credited to the accounts in these months, and this element will obviously be lower in the current environment. Stripping out an estimate of interest credited suggests there was a net receipt into UK savings accounts of approximately £5 billion in the last twelve months, compared to a net receipt of £21 billion for the same period a year earlier. These data show that many savers have recently either reduced the amount they save or have even taken money out of their savings accounts, possibly because of the reduced incentive to save from lower interest rates, concerns about the safety of deposits, or because of reductions in income or job losses. However, it should be noted that building societies actually attracted net receipts (before interest credited) of more than £9 billion in the last twelve months for which there is data, growing their share of UK retail balances to 21.4%.
Effect on savers
The current low level of the Bank Rate is without precedent, so it is impossible to accurately predict the effect it will have on savers’ behaviour. Currently, the reduced incentive to save because of the interest earned appears to be offset by an increased desire to build precautionary, ‘rainy day’ savings because of the heightened risk of job losses at this stage of the business cycle. In addition, the main alternative asset classes are also performing badly.
Savers might also be relatively unresponsive to differences in expected returns. However, this should not be assumed to continue indefinitely, particularly if the Official Bank Rate remains low for a sustained period.
Research shows that those in older age groups are more sensitive to interest rate changes than those in younger age groups (see “The Individual’s Saving Decision”, BSA 2007). About 42% of building society savers are aged 55 or over. A substantial proportion of these individuals are likely to be reliant on interest on their cash savings to supplement their pension and other income.
We recognise that decisions about the level of interest rates are matters for the Monetary Policy Committee rather than the Government (although the parameters within which the MPC operates are set by the Government), but fiscal measures are needed to ensure that savers are not penalised as much as they are currently.
Impact on building societies
Low interest rates constrain the extent to which building societies and others are able to attract new savers – and retain existing ones. The market for retail funding is intensively competitive, partly because other sources of mortgage funding remain restricted to all lenders. Furthermore, building societies are concerned about the unfair competitive disadvantages they face from the nationalised banks.
Current low interest rates, coupled with concerns about the safety of deposits resulting from the bank failures of last autumn combine to make explicitly Government-backed deposits, such as those offered by National Savings and Investments and Northern Rock more attractive relative to private sector deposit takers. Moreover, NS&I’s revised funding target for 2008-09 of £11billion (increased from £4billion, as announced in the 2008 Pre Budget Report), coupled with Northern Rock’s planned expansion of its mortgage lending book, which will be partly funded from the retail market, raise the prospect of crowding-out of private sector deposits.
Building societies are heavily reliant on retail funding to support their mortgage business – 70 per cent of the sector’s funding is from retail sources, ie personal customers. Put simply, the less money societies are able to attract into retail savings accounts, the less they have available to lend for house purchase.
Low rates not only cause difficulties in attracting funds, but the extremely low level of Bank Rate may also force lenders to scale back lending in order to widen retail margins. Longer term, such low levels of interest rate may pose challenges to the viability of some lenders’ business models. This has been acknowledged by the Bank of England in its discussions on the efficacy of the monetary transmission mechanism in its February Inflation Report.
What can be done to help savers?
Building societies are strongly of the view that the Government needs to act as a matter of urgency to protect the interests of savers who had the foresight to behave prudently prior to the current downturn. While it would not be beneficial for the economy in general if every household immediately increased their savings, severely punishing existing savers risks moral hazard by sending a signal that prudence is unnecessary because those that are reckless will ultimately be supported at the expense of those that have saved.
Therefore, the Building Societies Association calls on the Government to abolish the tax on savings interest for basic rate taxpayers. This would provide a greater incentive to save from the higher return earned by savers. At current rates the effect of this policy on the interest earned by a saver in absolute terms would be small, but the proportionate effect could be quite large.
A similar effect could be granted to all tax payers by increasing the annual subscription limit for cash ISAs. Furthermore, to enable individuals to manage their portfolios without being penalised by the loss of tax advantages from the ISA wrapper, transfers from stocks and shares ISAs to cash ISAs should be allowed. Currently transfers are allowed only from cash ISAs into stocks and shares ISAs.
If measures are to be confined to pensioners, who might be expected to be the group most reliant on savings interest income, the BSA would support
- The abolition of tax on savings interest received by pensioners who are basic rate taxpayers
- An increase in tax allowances for pensioners
- An increased ISA entitlement for pensioners
- Allowing transfers from stocks and shares ISAs to cash ISAs
However, if the focus is to be on supporting pensioners, the Government should consider the inconsistency between its acceptance of the need to provide assistance to pensioners with savings and the effect of its policies relating to age discrimination and ‘silver saver’ accounts, whereby savings accounts designed for the specific needs of older savings may be prohibited on grounds of age discrimination as a result of the Equalities Bill.
Supporting the housing market
The BSA also believes that the Government can help to support the housing market by assisting borrowers who are struggling to meet their mortgage payments and by helping to support demand.
Support for mortgage interest
Following changes to income support for mortgage interest (ISMI) that were introduced in January to enable more people to access support more quickly, the BSA would support an expansion of this scheme.
Further changes to ISMI would give greater certainty to borrowers in difficulty. The Government should look to amend the rate of interest at which ISMI is paid to reflect the interest rate charged on the mortgage, rather than using the current standard rate, which is linked to bank base rate. This will ensure that higher rate borrowers obtain adequate support in a low interest rate environment.
The Government should also look to increase the capital level to which ISMI is paid from £200,000 and ensure that this also covers additional loans secured on the property.
Providing such direct financial support to homeowners will affect Government finances. However, the Government could consider granting in some circumstances ISMI as an interest free loan to be paid back once the homeowner is back in permanent employment, with income above a certain level. The Government could secure their interest by adding a charge to the property. It would be important that such a scheme was as simple and straight forward as possible so that it was easy for societies and other lenders to operate and simple for borrowers to understand.
Longer term, people who buy a home need to be sure that they are going to be able to sustain the mortgage payments should their financial circumstances change. The Government needs to identify ways in which homeowners can be encouraged to take out payment protection insurance for mortgages to give them greater certainty in difficult times.
Stamp duty 3
We urge the Government to extend the current Stamp Duty holiday for properties costing less than £175,000 while it sponsors research into how the system could be reformed to reduce the distortions from the current “slab” structure of the tax that results in the bunching of transactions at prices just below the thresholds for different rates.
Conclusion
Building societies urge the Government to assist savers, who behaved prudently but have now suffered considerable falls in their interest income due to the rapid and substantial reductions in Bank Rate. The Government should abolish the tax on savings interest for basic rate tax payers, or at least raise the subscription limit for cash ISAs. Transfers from stocks and shares ISAs to cash ISAs should also be permitted. With the prospect of rising unemployment, it is also important that the Government expand ISMI to help those that might struggle to meet their mortgage payments.
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