Joe O'Reilly: Norway, Not Canada on National Savings

Thank you, and welcome to you both, and welcome to you both, and I was caught in the channet for your presentations, but we did have the advance papers, which is good. So, if I could start by asking you, Dr. Harrington, you say that the proposed scheme, as you understand it, the proposed scheme is regressive. How would you, how do you think that could be broadened to facilitate greater participation among lower and middle-income households? What way could you get over that, what you suggest is regressive? I don't imagine that any scheme like this will overcome this barrier of people that don't have anything to save. I think we need to take it as given that if we're going to pursue this policy, we need to take it as given that people who have no ability to save will not participate in it. Consequently, my concern about progressivity or regressivity is focused on the top, making sure that the top 1% are not able to get enormous sums of money into these accounts. Yeah. Now, given that we have high deposit levels in Ireland, as is well, it's just known, how would you suggest that we could structure a scheme that would get Irish savings into high-impact investments in national infrastructure, in social housing and whatever? I would start by suggesting that most economists would not support targeting the investments towards a particular goal. Most economists would let people invest what they feel comfortable with. Often, we do observe that people do tend to invest in economic sustainable things, if they tend to like that sort of thing, or indeed, we refer to the home bias of investment. People tend to invest in products from their own country. This might happen naturally. If we let people invest in whatever they want, and they have a tendency to invest in Ireland anyway, these things might occur anyway. It would be a smart product. If a financial company were to come around, it would be a smart product to offer. We will support Irish business. I expect you'd see a lot of people signing up for that. Thank you. Then, it's widely assumed, and maybe you contradict that too, and that's fine, if that's what we're here for, that the Canadian tax-free savings account scheme is a big success. What could we do in Ireland to adopt something similar that would be equally successful, or could it be applied in an Irish context, as it stands? Sure. So, Senator, I think one thing I suppose I'd caution on is, what do we mean by success? Yes, there's very high participation in the Canadian scheme. There's also, as Dr. Harrigan mentioned earlier, there was a lot of just a diversion of funds, funds that were already invested, just being invested in this scheme instead of something else. And I think one thing that I highlighted in my opening statement, and I think it's particularly important for the Committee on the Oireachtas to consider, is an issue with the Canadian scheme, and indeed the UK scheme and the Swedish scheme, is that it ends up taxing low-return investments at a much higher rate than high-return investments. And that's fundamentally down to the design of that scheme. If you go down that approach, whereby you essentially don't have a tax, or you have a tax levied on the value of funds, that's what's going to happen. And I've had a bit of a discussion here about why I think that's not a good idea. For one, those high-return investments are the ones which will be least responsive to taxation, so therefore there's the greatest scope to tax. In addition, we know that the people who tend to get the very high-return investments are the very, very well-off and high-ability investors, savvy investors. And so again, I think a much better approach to go down, that I suggest to the Committee, would be to look at the Norwegian approach and the way they apply that, or also the way that we tax pension saving here, the what's sometimes called the exempt-exempt tax approach. I think that that provides a much better approach than either the Canadian, Swedish, or indeed the British model. Yeah. What's sometimes called the exempt-exempt tax approach. I think that that provides a much better approach than either the Canadian, Swedish, or indeed the British model. Yeah, thank you very much. You've highlighted that households benefit from a long-term equity premium when investing consistently over their careers. Could you elaborate on the tangible benefits it could bring to the people of Ireland, such a type of investment? Yes, absolutely. If this is successfully taken up by a large fraction of the population, they will be able to have tens of thousands of euro from engaging in the financial markets that they would not otherwise have, be that at retirement, or be that to help kids go through college, or whatever it is. And also, if this is not taxed at a zero rate, the exchequer benefits and the benefits can flow to people that way too. Thank you. If I could turn to Dr. Rowntree, Dr. Barrow Rowntree, and welcome to you too. You suggest that Norway provides a more appropriate model for us to look to than Sweden for designing a national savings scheme. Could you outline the specific features of the Norwegian model you believe that would be relevant to Ireland to emulate, as opposed to the Swedish one? So essentially the Norwegian approach or Norwegian model here is that the amount that you initially invest is uprated, kind of in line with, like capital gains, inflation indexation that Deputy Timmons mentioned earlier on. It's essentially the amount that you initially put in is increased, so you only pay tax then on the amount that's above that allowance. So that allowance is essentially determined by how much you initially invested and also a risk-free rate, which is decided by the tax authority in advance. Again, it could be inflation or it could be something a little bit above inflation to account for that risk-free rate. And so in effect what it does is it steps up your investment each year and you only pay tax if your gain has been above that stepped-up amount. And so from that point of view what it achieves and what it succeeds in doing is that it doesn't tax the normal return to saving, which there are very good economic reasons for not for doing, for not taxing that, whereas it does tax the higher returns, sometimes called the excess returns to saving. Thank you. Could I ask you that from a macroeconomic standpoint, do you see a well-designed national savings and investment scheme as having the potential to increase domestic investment levels and support stronger long-term capital formation in the country within the Irish economy? Do you know that from a macro point of view? What's your response to that? So I think it could do a little bit of the latter. I think it has the potential to, if well-designed, increase the amount of savings and more importantly to increase the rate of return that savers are getting and so therefore would aid capital formation. I think it is very unlikely to have a meaningful effect on investment, particularly if there are no restrictions as there shouldn't be placed on where these funds can be invested in terms of their location. And again, I think this is one, you know, the motivation or rationale for the proposal sometimes shifts around a little bit, but I think this is one thing where it's not exactly like this country is short of investment at the moment. We're short of the capital stock, but in terms of the amount that's being invested day-to-day, that like public investment has ramped up significantly now after being far too low for so long. Private investment is also quite high. I think actually the greater constraint on our ability to achieve increases in infrastructure and the capital stock is actually on the capacity of the economy. It's not about a lack of investment. And so from that point of view, I'd be cautious about the idea that this proposal will somehow unlock some private investment in the Irish economy that was hitherto kind of constrained. I don't think that's really where we're at. I think really the issue is at the moment that we have very large capacity constraints in terms of the number of workers. The final question, if I understand you correctly, you're basically saying we should leave well enough alone and let things be as they are. Maybe that's not what you're saying, but on a superficial understanding, that might be. And see, we still have that 170 million on deposits. And if we're to leave everything as is, is that healthier? No, so that's very much not what I'm saying. Again, as I outlined in my statement, I think the taxation of savings investment are in need of radical reform. I think lots of these bits won't be done by the ROCTUS, in particular tackling the very enormous tax advantages for owner-occupied housing, for, you know, in a pension through the tax-free lump sum. I think there is a role for some kind of personal savings product. Again, I think more along the lines of the Norwegian than the Swedish model. But again, I think I'd also encourage the committee and the ROCTUS to maybe try to get a better handle on the statistics about how much deposits are actually there and who holds them, because I think that 150 billion figure that is often mentioned is, I think it's important to understand, well, who are the people who hold that and why are they holding that? Right. Thank you. Appreciate those answers.