Governor says savings scheme should only pay out in recession
A POPULAR Government saving scheme that offered 25% interest may be reintroduced – but only if payday comes during an economic downturn, the governor of the Irish Central Bank has said.
Philip Lane said the problem with the original Special Savings Incentive Account, set up in 2001, was that it paid out while the economy was still booming, thereby feeding into the consumption spiral that led to the financial crash in 2008.
But yesterday he said a similar scheme would be a good idea in the future – but it must be designed to only pay out when the economy turns sour.
To achieve that, the Government would have to scrap the five-year timeline built in in 2001, and replace it with a scheme that is based on the economy – if things go bad, then people can get their money back, plus big interest on top.
Speaking on RTÉ Radio’s News At One, Mr Lane pointed out that the SSIA did not achieve its aim last time around.
‘As you know, we had this episode 15 years ago where he had the Special Savings Incentive Scheme. If such a scheme were correctly designed, that could have a role – not as of now, but if the economy continues to grow quickly,’ he said.
But he added said that the SSIAs, introduced by Fianna Fáil’s finance minister Charlie McCreevy was flawed because it had a five-year payout limit.
‘I have written repeatedly that there were attractions to it but it had a five-year window, so people received a payout in ’06 and ’07, when conditions were still good.
‘If the payout from the scheme had been more “if a recession hits, then money can be taken out of the scheme”, that would have been better from a cyclical point of view. If the SSIAs had paid out in late 2008, early 2009, that would have been better to manage.’
He said a similar scheme should be based on ‘you pay in during good years and during bad times you can take money out’.
‘This is for the Oireachtas and the Government to think about,’ he added. ‘My role as governor is to say from an economic point of view, from a technical point of view, what kind of policy is advisable.’
Mr Lane added that Ireland should move towards lower public debt, and running a fiscal surplus.
Separately, in his annual prebudget letter to the Government, Mr Lane urged Finance Minister Paschal Donohoe to reduce the national debt to ensure our ability to borrow is not damaged in the event of a recession.
He said the Government should raise revenues to beef up the public finances at a time of strong economic growth. ‘If fiscal buffers are not built up there is a risk of repeating the historical patterns by which economic downturns have been amplified by pro-cyclical fiscal austerity,’ he warned.
He went on to defend the controversial sale of distressed mortgages by the likes of AIB and PTSB to vulture funds. And he noted that while the Central Bank’s mortgage rules limit the amount of money people can borrow, Irish banks are still at risk because of their high level of non-performing loans.
He said: ‘While the direct restructuring of troubled loans by banks plays a vital role, the sale of loan portfolios to international investors is also an important element in macro-financial risk management by reducing national exposure to adverse shocks.
‘The current upturn in the European economy also provides an opportunity to address legacy issues such as the excessive stock of non-performing loans that accumulated in the wake of the crisis.’
SSIA-style scheme could have a role Irish banks are still at risk