McCreevy's flaw revealed by the SSIA giveaway

BUSINESS OPINION: In November 2000 the outgoing Minister for Finance, Mr McCreevy, received the following bit of advice from his civil servants: "Given the uncertain effectiveness of tax incentives for savings, the potential cost and significant deadweight, the provision of tax relief for capital investment in medium-term savings schemes is not recommended."

Mr McCreevy promptly proceeded to bin this recommendation and push ahead with the establishment of the Special Savings Incentive schemes. As the 40 per cent of the adult population who availed of the scheme by the time it closed last Tuesday know, the next Government is committed to give you €1 for every €4 you put into your special savings account over the next five years.

The cost of this initiative to the incoming government will be something in the region of €2.4 billion. This is almost two-thirds of the amount of capital spending that will be required to modernise the health service, according to the Fianna Fáil election manifesto. It is also almost exactly equivalent to the amount of money that will be borrowed every year by the next government if Mr McCreevy is lucky enough to enjoy another five-year term as finance minister. To put this another way: during the life of the next government one entire year's borrowing requirement will go towards paying for the SSIA scheme.

So what will the Government get in return? The simple answer is that nobody knows, but what little research that is available indicates that benefits will be negligible. The objective of the scheme was to encourage savings and in the process take money out of circulation with positive implications for Irish inflation which remains among the highest in Europe.

Documents released under the Freedom of Information Act show that officials in Mr McCreevy's Department have trawled high and low to see if incentivised savings schemes actually boosted the national savings level. Their research led to the conclusion quoted above.

They found a comprehensive review carried out by the OECD in 1994 concluded: "There is no clear evidence that the level of taxation generally affects the overall level of household saving."

They also referred to a study by the Senate Committee on Taxation in the US which concluded: "Empirical investigations on the responsiveness of personal savings to after-tax returns provide no conclusive evidence."

A third source cited by the research paper was the Institute of Fiscal Studies in the UK which concluded that "the degree to which schemes have succeeded in encouraging new savings or new savers is still an open question".

So, despite being presented with an impressive array of evidence by his Government advisers, the Minister appears to have blundered on in his own inimitable style with a scheme that will cost the new government some €2.4 billion it cannot afford and probably will not work.

Even at the eleventh hour the Minister's officials were sounding warnings. A hand-written note on a paper prepared for the Minister in February 2001 sounded a cautious note. "This scheme could be very costly even on a limited take-up basis. You may wish to discuss measures to limit the cost escalating or to ensure we can close the scheme if the costs become unacceptable," wrote the official. If such a discussion took place there appears little evidence that the advice was heeded.

What makes Mr McCreevy's position so hard to understand is the absence of memo or note in the bundle of documents released under the Freedom of Information Act which puts forward either the intellectual, financial or even political case for his actions. He does not appear to have produced an argument to back up his decision to override the advice of his most senior civil service advisers.

The SSIAs are just one of several policy initiatives taken by Mr McCreevy during his five years in office which appear to have come from nowhere and have been pushed through against the advice of his civil servants. Mr McCreevy's stock response when challenged on these issues is that advice from the Department of Finance is just advice and that "he takes all advice into consideration and then proceeds with what he considers to be the most appropriate course of action".

As we get ready to go to the polls - potentially to elect a Government that will put Mr McCreevy back into the Ministerial suite on Merrion Street - perhaps we should give a little more thought to his modus operandi. Some questions spring to mind including whether we want a minister who relegates the considered opinion of the Department to that of "just advice" and by implication considers it of no greater weight than the various other bits of advice he gets from undisclosed sources.

Similarly, do we want a Minister who feels under no obligation to explain why he went against the advice of the organisation that arguably knows more about how the Irish economy works than any other? After all, whatever else we elect politicians for, we do not give them a mandate to ignore the advice of the civil service without a very good reason.

Some people may think the answer to both the questions posed above is yes. Supporters of Mr McCreevy - and no doubt the minister himself - will argue that his independence of thought is probably his greatest attribute. The trouble is that he ends up looking pretty stupid when he overrides good advice to push through something that then blows up in his face. It also raises questions about the Fianna Fáil manifesto and how well thought out might be the "big idea" it contains - the use of off-balance sheet borrowing.

It is too late to worry about the Fianna Fáil manifesto, but let's hope that if he does return to the Department of Finance, the €2.4 billion he will have to borrow to pay for the SSIAs will make Mr McCreevy think twice before throwing a Department of Finance memo in the bin.