The chancellor’s hints of helping savers by waiving income tax is pointless. Receiving 100 per cent of next to nothing is still next to nothing.

Savings rates have fallen by more than 80 per cent on average. The person who accumulated £100,000 and who received £5,000 interest last year is now lucky to receive £1,000 before tax. After tax that is a cut from £4,000 to £800. Yet making the interest tax-free only increases the income by £200 and does little to offset a £3,200 fall.

Making the interest tax-free merely trims an 80 per cent fall in interest income to 75 per cent. For the pensioners who rely on interest income, that still leaves them in greatly reduced circumstances.

So any plan by Alistair Darling to announce in the Budget to increase interest income tax thresholds, raise ISA ceilings or make interest tax-free (whether for the old or everyone) fails to tackle the problem.

Slashing interest rates to 1 per cent (with calls to go lower) to save the economy is bailing out the profligate at the expense of the prudent and provident.  But one group’s gain is not even the other group’s loss: savers are hurt far more than borrowers are helped.

Mortgage borrowers have seen their interest rates fall by half if they are lucky; credit card that fall from 30 to 27 per cent cut their customers’ costs by just one tenth. Yet savings incomes have been almost eliminated.

The economists’ response would be that interest is paid to compensate savers for the effects of inflation (as well as risk and loss of liquidity) and that if price rises fall to almost nothing, savers’ income should follow. But while savers could previously live on their income without reducing their capital (even if its purchasing power fell), low savings rates mean they must dip into capital to live – and that means less income from the reduced principal in future years.

Darling needs to find a to pay savers a higher rate, not to cut tax on the negligible interest paid paid. He charged the banks 12 per cent on preference shares to give them new capital; an issue at 6 per cent (with a government guarantee) by the banks directly to the public - or a state issue to provide new capital for the banks - would help both the borrowers and lenders.

The chancellor could limit such an issue to the old (like Granny Bonds) if he wants and cap each person’s investment (like Premium Bonds). But he needs to do something more radical than waiving an insignificant tax charge.

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