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Can government help low income households to save?

DamonGibbonsLast month the prime minister gave a speech on the ‘life chances’ of people in poverty. As part of this he announced that government would create a ‘Help to Save’ scheme, to encourage low income households to build up a ‘rainy day’ fund. Full details are due to be announced in next month’s budget.

There is no doubt that households need to be supported to save. Around one in five low income adults have no savings, a figure that has risen significantly since 2011 as real wages have stagnated; the use of zero hours contracts have increased, and welfare benefits cut.

Those that already save tend to have little more than a few hundred pounds, and many are forced to turn to high cost lenders to fund essential items. There is an obvious contradiction between Cameron’s ambitions to help the poorest increase their savings while benefits are being reduced. But even with the straightjacket of ‘deficit reduction’ and welfare cuts, a decent scheme could still have a positive impact.

What should be the guiding principles of such a scheme? Firstly, eligibility requirements should be as simple as possible.

Secondly, the scheme needs to be attractive, offering a good rate of return, and preferably one that is guaranteed, while allowing people to access their savings to meet emergencies as they arise. Thirdly, the fund of deposits that is created should be used to support the financing of other economic priorities. Finally, it should be possible to track, and report upon, the usage and outcomes of the scheme.

‘The funds created by ‘Help to Save’ could be put

to use to support the community finance sector’

Taking these in turn. The need for simple eligibility requirements should be self-evident. That means we need to passport people in receipt of income related benefits, and particularly of universal credit. We could also passport people who are eligible for auto-pension enrolment (and importantly, ask that employers promote the savings scheme to them).

Getting the product right takes a little more thinking. The government is unlikely to simply revive the ‘matched savings’ approach that was pursued in the Savings Gateway scheme, successful though this was.

Delivering a ‘super high rate’ product is more likely to gain political traction. At the moment the highest rates on the market are available from peer-to-peer (P2P) lenders. Government is supporting the development of this sector, by investing through the British Business Bank in Funding Circle, which provides loans to small businesses.

However, there is no guarantee of returns to people investing their money through P2P. Government would need to address this by setting up a managed fund within a P2P platform for people to save into, and guaranteeing this. It could also deliver ‘super high’ interest by making a direct investment into the fund and sharing its own interest returns on that between savers.

Importantly, this guarantee and investment could be made not directly by government, but by the Bank of England. A new bank fund could be established or it may be possible to divert the current Funding for Lending scheme, which was designed to support an additional £70bn of lending to SMEs into a cheap form of guarantee and funds for P2P platforms to match against low income household savings.

The issue of access to funds also needs to be considered in the round. Low income families often face emergencies and are likely to need to dip into their savings from time to time. However, many also welcome the fact that at least some money is locked away. A compromise needs to be struck, with people asked to set their own minimum level (e.g. £200) to keep in the account for a given period (at least 6 months), but allowed to dip in and out of the account in respect of any sums saved above this.

Government also needs to think about what to do with the funds that people are depositing. The advantage of creating a managed fund within a P2P platform is that it can place conditions on how this is to be invested (lent out). Aligning with government priorities to support SMEs makes sense, but the funds could also be put to use to support the community finance sector, by providing credit unions, community development finance organisations, and others with more capital for lending. In that sense, the fund would not only be helping low income households to save, but also helping those who continue to need to borrow by expanding affordable sources of credit.

Finally, the managed fund approach also ensures that government is able to monitor and report on the numbers of people taking up the scheme; the savings generated, and how the consequent monies are being used to assist the real economy.

Whatever scheme is unveiled in the budget, government must be accountable on these points.

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