MONEY MUSINGS: The Sanctity of Savings
Jamaican Finance Minister Dr Peter Phillips recently announced new taxation measures that would affect all persons who utilise our banking sector. Dr Phillips revealed that withdrawals from deposit-taking institutions would be subject to a graduated tax system.
All forms of withdrawals, including those done inside branch offices, point-of-sale transactions using debit cards, issuing cheques, and getting cash from ATMs would be affected. Electronic transactions would also be taxed, except transfers made by persons between accounts at the same institution.
The finance minister indicated that withdrawals of less than J$1m would be taxed at 0.1 per cent of the value, which would mean that persons would pay $1 for every $1,000 taken from their accounts. The percentage tax would decrease on a tiered system for larger sums of money withdrawn.
Although the tax is to be applied to the financial institutions, it stands to reason that the final effect of this withdrawal levy would be felt by the account holders themselves. Predictably, the pronouncement has sparked much negative feedback from various sources across the nation.
Savings under stress
The withdrawal tax could be seen as yet another blow to the already overburdened taxpayers in Jamaica. Apart from ensuring that a larger portion of our hard-earned income is channelled into the government's coffers, it has several implications that could affect the institution of saving itself.
In Jamaica, we have observed the trend in which more persons are choosing to forgo long-term savings goals in favour of funding immediate acquisitions. In addition, our growing appetite for consumer debt redirects more money away from savings and into the profits of lending agencies.
Another challenge that retards savings growth is the low interest rate received by account holders in comparison to the high rate of inflation. Many people are reluctant to leave their money in savings when its spending power decreases steadily; in their minds it makes better sense to spend it.
With the present discontent about high banking fees charged by some financial institutions, this new tax measure will only serve to further discourage persons from choosing to save. Why deposit your money into a savings account when you may end up getting back less than you put in?
Savings lead to economic growth
Savings is the foundation upon which personal wealth is created. Although savings plans do not usually generate large interest returns, they can allow for the creation of a pool of funds which account holders can use to take advantage of lucrative opportunities to acquire assets when they arise.
Economically advanced nations generally demonstrate a high level of savings from their citizens, as their nest egg dollars help to fund long-term investments and create a sense of financial stability. On the other hand, a country with anaemic savings levels will usually face serious economic challenges.
Low savings levels indicate that more people will be devoid of rainy-day funds to meet emergency needs. In the event of medical challenges, they may be more likely to depend on the overburdened public healthcare system; it will also be more difficult for them to recover from job loss or other eventualities.
With a continued decrease in the level of savings from ordinary citizens, banks will be hard-pressed to find sufficient capital for funding productive loans and investments. Credit unions and building societies will also find it difficult to continue their mandate of serving their membership without sufficient savings.
Saving should be promoted
As it deducts a fee whenever people withdraw from their accounts, it could be said that the new tax may force people to leave more money in their financial institutions. However, I believe that the withdrawal tax will definitely have a negative effect on people's desire to save in the formal system.
More people may choose to keep their funds in cash and avoid the banking sector altogether. This has implications on safety and security for those who opt to do large cash transactions. People may also decide to increase their utilisation of informal savings methods such as partner plans.
Although people will try to find ways to overcome the new tax burden, the majority will still have to move their funds through financial institutions to facilitate their everyday transactions. After a while, perhaps the new tax will become grudgingly accepted like other revenue measures that we have had to endure in the past.
However, given the importance of saving for wealth creation and national development, I believe that the Government should seek to encourage savings growth instead of instituting measures that retard it. We need to be more creative in finding solutions for our economic woes that promote productivity, instead of penalising it.
Congrats to Cherryl on the birth of her daughter Victoria Abigail Simpson.
Cherryl is a money coach, business mentor and founder of Financially S.M.A.R.T. Services. Her upcoming book, The 3 Ms of Money will reveal all the secrets she learned about financial success. Read more on money and business matters at financiallysmartadvice.com and entrepreneursinjamaica.com. Email comments to email@example.com.