Her Majesty’s Treasury set NS&I an annual target of net financing to raise. In July, this was revised from the £6 billion set at the Budget to £35 billion to support the Government’s higher financing requirement. NS&I reviews the interest rates on its products regularly and recommended a reduction in interest rates, with the objective of meeting its financing target, while returning to a more normal market position.
My Lords, I declare my interest as an optimistic holder of Premium Bonds. NS&I’s decision to cut interest rates drastically to near zero was a direct consequence, as my noble friend has just said, of the Government’s net financing target—a devastating decision for millions of savers who find their income decimated, or worse. NS&I is a key source of government borrowing but has a broader mission. I quote from its annual report:
“We want to inspire a stronger savings culture”.
That objective is out of the window. Earlier this year, a decision to reduce interest rates was reversed. Will the Government now enable NS&I to reverse this latest decision before it comes into effect in November?
My Lords, perhaps I should also declare my interest as a holder of NS&I savings products. I can understand people’s disappointment at the rate reductions. I reassure my noble friend that the prize fund rate for Premium Bonds, at 1%, even after the reductions, remains competitive relative to the savings market. I remind him that although NS&I has a remit to encourage a savings culture, it also has to balance that against providing value for money for the taxpayer and its position and effect on the broader financial services sector.
I will deviate slightly from NS&I, important though that institution is to millions of British savers. Noble Lords will know that for various reasons a sizable number of people find it impossible to save at all. One in three adults had no savings at the onset of Covid, and one in four families had less than £100. Step Change estimates that 4 million people took on £6 billion of personal debt in the first months of the crisis—an average of £1,500 each. That figure is likely to grow as we enter a second wave. Does the Minister agree that, important as it is to consider the specifics of incentivising savings, we must give broader consideration to how we enable everyone to have a degree of financial resilience? With the furlough scheme due to be wound up within weeks, what steps are the Government taking to prevent those with no financial fallback experiencing serious hardship in the coming months?
My Lords, the noble Lord is correct to say that we need to help those on low incomes to save, so that they have a buffer if they face unexpected financial events. That is why we have introduced Help to Save, a government-backed savings account that offers a 50% bonus on savings of up to £50 a month for those in receipt of working tax credits or universal credit, with a weekly earnings equivalent to at least 16 times the national living wage. Returning to National Savings and Investments, one of the other benefits of NS&I accounts, including Premium Bonds, is the low level of savings, at £25, with which people can start those accounts and access those rates.
My Lords, I have savings products with NS&I and was stunned yesterday morning to get an email announcing savage cuts to its rates. Every bank will now cut its offers in light of the NS&I decision, leaving millions of small savers with essentially zero returns. As the noble Lord, Lord Young, said, the rate cut rests at the door of the Treasury because it sets the funding target for NS&I. Does the Minister accept that this will destroy confidence and make savers even more reluctant to spend? It is an act of self-harm for an economy already in free-fall.
My Lords, I disagree with the noble Baroness that the decision on NS&I interest rates will have an impact on interest rates in the wider market. It is partly because NS&I rates were so out of line with the wider market that this decision was taken. I should also point out that the interest rate decision was taken in light of the Government’s net financing target, which was increased from £6 billion to £35 billion in response to the pandemic.
My Lords, I congratulate my noble friend for tabling this Question. After 12 years of miserly returns, surely, we need to encourage savers rather than punish them. Banks do not need savers’ money. In the current environment, might the Government consider “corona bonds” to help finance the current emergency spending and demonstrate that they believe in a savings culture?
In effect, customers’ deposits with NS&I are a form of government borrowing and could be interpreted in that way. The increase in the financing remit for NS&I has allowed it to offer those products to many more people without exceeding that remit. However, we have reached a difficult moment whereby it is on track to grossly exceed that remit if action is not taken. However, the Government want to encourage savings and that is why, over recent years, we have taken the vast majority of savers out of paying tax on their savings. We will of course continue to look at what more we can do.
My Lords, surely NS&I interest rates should roughly reflect market rates for different amounts and terms if government policy is to offer a modest premium over market rates to encourage saving. The proposed cuts look to take NS&I rates below market rates. They are too large and will damage saving. Is wanting to inspire a stronger savings culture still government policy?
I assure my noble friend that that is still government policy, but I disagree with him on the fact that the changes to NS&I’s interest rates take it below competitive rates in the market. As I have pointed out, on premium bonds, a 1% prize fund rate is extremely competitive while on a number of other tax-free instant access products, the rates remain in line with the rest of the market.
My Lords, I must start with a disclosure. Many years ago, I invested what to me was a substantial sum of money in NS&I. We are now seeing the rates go down to well below 1%—indeed, to a fraction of 1%. Is it going to stop there? Will the Government look at negative rates? If not, will they make a clear commitment to move away from them? How much of that target of £35 billion has been achieved? Is there likely to be more than just that target? If so, will there be any return to those people who are dependent on National Savings?
In response to my noble friend’s question about whether the net financing target is due to be exceeded, I can tell him that in quarter 1 of the 2020-21 financial year, NS&I saw an inflow of £19.9 billion and delivered £14.5 billion of net financing. Demand for NS&I products has remained at similarly high levels during Q2. If the current trajectory continues, it will be on track vastly to exceed that net financing target.
My Lords, the Minister seems to have felt the need to disagree with almost all the noble Lords who have spoken. In particular, she disagreed with my noble friend Lady Kramer, who suggested that the impact of the NS&I cuts—[Interruption.] I am extremely sorry for that interruption; it was possibly from a website trying to sell me bonds because I have been looking up NS&I activities. My noble friend Lady Kramer suggested that the cuts in NS&I rates would have a knock-on effect. The Minister disagreed. However, as that website has just pointed out, other banks have followed suit with their products in trying to match the NS&I higher rates. The fact that they are now being cut is likely to have a knock-on effect. Surely the Government cannot claim that they want to have a savings culture any longer.
My Lords, I also expressed sympathy with those savers, including many noble Lords, who have been affected by the decision to change the interest rates. It is not an easy decision but I have tried to explain to noble Lords that the Government take several factors into account in this decision. One of them is the interests of savers. Premium bonds continue to offer a market-leading rate for those savers. However, that must be balanced against the need to protect the interests of taxpayers and the broader financial services sector.
My Lords, I congratulate my noble friend Lord Young on securing this Question. Like him, I declare my interest as a holder of NS&I products. There is a particular cohort that has not been raised, and that is pensioners and others living on fixed incomes. After having saved all their lives to have a top-up on those fixed incomes, they will be devastated. Will my noble friend consider something like that put forward by my noble friend Lady Altmann: a form of corona bond for pensioners?
The Government will continue to consider all the ways that they can to encourage saving. I am happy to assure both of my noble friends that I will take the specific idea of targeting toward pensioners back to Her Majesty’s Treasury.