The government have finally announced the details of their National Solidarity Bond mentioned in the last budget and previously recommended by ICTU and Fine Gael. The brochure is here. The bonds will pay an interest coupon subject to DIRT of 1% per year and then have a final tax-free balloon payment of 40% when the bond matures at ten years. You can get your money out at any time with seven days notice but the tax free lump sum element is much smaller in this case. Held to maturity, the bond has an after tax Annual Equivalent Return of 3.96%.
On the face of it, the initiative is a bit puzzling. This after-tax rate of interest is lower than the current yield on ten-year government bonds, which is now at 5.2%. However, this scheme will most likely move money out of domestic bank savings accounts (at a time when they really need them) and the government will then be forgoing the DIRT tax that these funds would have paid on the interest payments from those accounts.
For example, if the alternative investment strategy was to obtain a 4% rate for a similar long term savings account, then with DIRT at 25%, the government would be foregoing 1% per year in tax payments. This would bring the real net cost of this scheme to 4.96% per year. Add in the additional administrative cost of dealing with lots of small investors and this doesn’t seem to be a particularly cheap source of borrowing.
In addition, the NTMA already offers a range of products aimed at small investors that carry slightly lower rates with maturities of three or five years. The Solidarnosc bond offers a higher AER in return for tying up your money for a longer period. It seems more like a term premium than national solidarity.
I suspect, however, that my behavioural friends out there will tell me that the existence of a bond with a catchy name like this will uncover a large previously untapped source of funds for the government. Perhaps. I guess we’ll find out. Alternatively, a simple advertising campaign to inform the public about the existence of state savings schemes may have worked just as well.
Finally, I’d note that I don’t agree with Fine Gael’s Simon Coveney that the proceeds from this bond should be ring-fenced for infrastructural projects. Money is fungible. The fact that some money is raised from a new source with a catchy name shouldn’t in any way change the processes used to assess which types of public spending should be prioritised.