Are you confused about Simon Harris’s new savings plan? The lack of full details – not expected until budget day on October 6th – is an issue. The public has been tantalised by the Tánaiste’s dance of the seven veils, as one detail after another slowly appears of what is in store, naturally all dressed up as a boon for middle Ireland. But there remains a lot of vital detail which we still don’t know.

This has fuelled a fundamental misunderstanding about what this scheme is about. And there is some danger here for Harris. The Irish public has put this into the same box as the Special Saving Incentive Accounts, introduced by then finance minister Charlie McCreevy in 2001, which offered a five year guaranteed 25 per cent State-funded top-up.

Savings under this new scheme will not offer any guarantee. Experience shows that investing in the financial markets offer a significantly higher long-term return than leaving money in a bank deposit. But, as the warning at the end of the radio ad goes, the value of investments can fall as well as rise.

The political risk is that – after all the Harris hoopla – the public finds it all a bit underwhelming, because the magic of investing in the markets comes not in a five-year hit, but in the long-term accumulation of gains over many years.

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So what might the members of Harris’s squeezed middle be looking at, as they contemplate this new world? By revealing this week that Ireland may base its approach on Sweden’s ISK accounts – held by close to half the adult population – the Minister for Finance has given us some guidance.

Take two examples: let’s imagine Ronan in Ratoath and Emma in Enniscorthy. Ronan might choose to pay some money each month into one of these special accounts. Emma might have a lump sum from, say, an inheritance, she is willing to put away for a few years.

[ Simon Harris outlines more details on new savings scheme to encourage Irish households to investOpens in new window ]

Both those who want to invest a lump sum and those planning regular contributions will have a range of offers from banks and brokers of funds they can use, and these will generally invest in a mix of international shares and bonds. They will have access to the money, but are likely to only really gain by leaving it there for a longish period.

This week’s spin has been that any gains they make will be free from capital gains tax – a 30 per cent charge on the rise in value of any investments in the market. (In some cases with funds the charge can be 38 per cent). This is a tax break, for sure. But there will also be a charge paid each year to the tax authorities based on the total value of the fund – in Sweden this is a bit over 1 per cent this year.

This may not sound like much – but remember this is a charge on the all the money in the fund, not just the gains, and is payable whether the value rises or falls. Swedish estimates are that doing away with capital gains and replacing it with this charge has offered the public some tax advantage, but not a large one. Until the scheme was sweetened in 2025, it might, on some calculations, have cut the tax bill by, at most, around one third.

In Sweden, the calculation has been that the vital attraction for people was not tax but simplicity. There is no need to make any tax return – the fund does that – the money is accessible and simple digital platforms make it all a lot easier than putting together a piece of Ikea furniture. And the long generally positive performance of international markets since the ISKs were introduced in 2012 has helped, too.

Ireland will try to mimic this Swedish simplicity – but first, Harris faces two key tax decisions.

The first is the rate at which the fixed charge on the funds will apply. And the second is whether investors can hold a certain amount tax-free, before the charge kicks in. In Sweden, up to 2025, the entire pot was subject to the charge. Now this has changed- and this year the first €26,000 in a Swedish ISK is not subject to the charge, with the tax only applying on the balance.

[ Canada or Sweden? Simon Harris considers Ireland’s savings futureOpens in new window ]

This substantially increases the tax advantage. A Swedish-style limit might keep the bulk of most Irish people’s pot free of any charge. Remember, households will still want to hold some money in the bank; if you need cash to buy a new fridge or take a break, you don’t want to be worrying about what the Dow Jones is doing.

Harris is correct to argue that investment is an area shut off from many people by complexity, but his contention that the scheme can also support growth and competitiveness in the wider economy is more questionable. Irish savers money may indeed go into companies listed on the stock market – but there are few enough Irish ones and most will go into global funds.

Sweden has a developed stock market, a long-term investment culture and a special growth sector for smaller local companies, allowing some fund money to go here. Here, the family home – heavily tax incentivised – is the key longer-term investment. Replacing it with an market investment culture will not be easy – and it certainly will not be quick.

There are arguments, for sure, for helping people to invest in the markets and get a better longer-term return on their money. And anomalies in investment tax which need to be ironed out. There are risks, too, in people moving existing investments into these funds, costing the exchequer lost tax.

If Ireland is cutting capital gains tax and – it appears from recent comments from the Taoiseach Micheál Martin – inheritance tax too, then the take from capital taxes, which is already low by international standards, will be chipped away further, even if the fixed charge makes up some of the loss.

The Commission on Taxation’s 2022 report made a convincing case for looking at the generous tax treatment of capital in other areas to raise more funds – the family home, businesses, and farms. But as long as corporation tax keeps rolling in, this is not going to happen.

And the risk is that if trouble does hit the public finances in the years ahead, then the State will resort to where it always goes to raise money in a hurry – higher tax on incomes.

© The Irish Times