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Ireland May Turn To Low Tax Savings Schemes To Help Curb Inflation

Lisa Ugur, Tax-news.com, London

20 July 2000

Ireland's charging inflation rate is well documented and in June surged to a 15 year high of 5.5 per cent. The Irish government has tried to calm concern over inflation and has called for time to introduce measures to bring the level down. These measures are numerous but part of the government's response could be to siphon cash out of the economy by introducing savings schemes with attractive tax incentives.

Minister for Enterprise, Trade and Employment Mary Harney said that the idea of offering tax-related incentives to encourage people to put money into long-term savings accounts, perhaps around five years, is a new one which had not yet been discussed by the government, but it would be put forward in the period leading up to the next budget.

Ms Harney is distinctly in favour of reducing personal income tax rates and said the savings accounts idea would be in addition to, and not a replacement for, tax cuts. She said of the proposed scheme: 'I think if there was a well thought-out earnings-related savings scheme, like they have in the United States and other countries, that would be very attractive to a substantial number of people who at the moment don't see many alteratives for saving because of the low rate of interest that applies.' Ms Harney sees the idea of savings account as having a medium to long-term effect on inflation, rather than a temporary "dampening down", as other measures have intended.

Blaming inflation on too much cash chasing a limited supply of goods and services, Small Firms Association chairman Mr Kieran Crowley has suggested a new savings bond. This bond should "carry a decent interest coupon" - savings would be like pension contributions in that they would come out of gross income with the tax deferred for about five years and the bond should be exempt from inheritance and capital taxes.

Despite Ms Harney's enthusiasm, financial experts are warning that any plan to establish special savings schemes would need to be structured carefully to avoid deflecting personal savings from pension plans or causing a tide of cash to flow back into the market a few years down the line. They aso argue that such schemes could prove costly for the State.

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