Letter from... Ireland

Ireland is in the grip of a massive spending boom thanks to a government-sponsored savings scheme that has begun to release 16bn euros into the economy. The controversial scheme was introduced in 2001 to encourage Irish people living in Europe’s fastest growing economy to curb their spending. The Government said it would stifle inflation and force people to put something away for the future.

It was the brainchild of Ireland’s former Finance Minister, Charlie McCreevy, now the EU Commissioner for Internal Markets and Services. He likes to pride himself on the scheme’s simplicity and has never entertained any criticism of his initiative, including the most recent, that it will in fact fuel inflation. The savings scheme was offered to anyone who opened an account with a view to saving anything from 10 euros to a maximum of 254 euros a month for up to five years. To sweeten the deal, the Government, itself awash with cash from the boom, very generously said it would add 1 euro for every 4 euro saved up to a maximum of 3,810 euros over that period. It was clearly a good deal and, over a 12-month period, 1.1m people scrambled to open these accounts and to take the Government’s money.

The funds could be put into a straightforward deposit account with an attractive rate of interest guaranteed for the duration. There was also an option to have an account that was invested in the equity markets or a combination of both. McCreevy is very proud of the scheme. ‘People said it wouldn’t work, couldn’t work and never would work. But, of course, the people of Ireland aren’t stupid. It was simple and attractive, it gave them a break and they took it,’ he said in a recent interview. Research by the Central Statistics office found that most people were indeed very enthusiastic about it, and happily signed up to save the maximum contribution of 254 euros a month. Some two-thirds of savers put that sum away consistently for the full five years which was then topped up by the Government contribution.

The accounts began to mature in May 2005 and the majority will close between next February and May. On average, those who made the maximum contribution are rubbing their hands and making plans for lump sums of around 20,000 euros each. A consumer survey suggests that about 5bn euros will be spent on items such as home improvements, holidays and cars. Some 3% of account holders told the survey they were considering spending some of the proceeds on cosmetic surgery. Charities are also reporting a surge in donations.

McCreevy said he intends to invest the proceeds of his account in one of the new savings products being offered by the financial institutions, and is encouraging others to continue the savings habit. The Government has also taken some steps to try to encourage account holders who earn less than 50,000 euros a year to put some of their savings into a pension. The consumer survey suggests that while everyone will treat themselves to some degree with their new-found wealth, some 46% – or close to 500,000 people – will re-invest most of the proceeds in new products, including pensions. Another 10% said they would use the funds to repay debts. McCreevy will be pleased that the scheme has achieved its goal of encouraging people to save for the future.

Did I mention that all of the 16bn euros will have trickled into people’s pockets just a few weeks before the next election? The scheme, which has cost the Government 2.8bn euros, has certainly created a feel-good factor amongst the electorate. Only time will tell whether it will help to return our benevolent politicians to power.

Siobhán Creaton is an Irish Times journalist and author.