ECONOMIC: Although the savings habit is alive, well and thriving in the Republic, the population remains unimpressed with special savings incentive accounts

In May 2001, the Government introduced an extraordinary measure designed to encourage savings. It involved the Exchequer adding £1 to every £4 saved by individuals under the scheme.

Since then, a plethora of special savings incentive accounts (SSIAs) have been introduced by financial institutions in order to encourage households to avail of the unprecedented act of fiscal generosity - Irish taxpayers have never before subsidised Irish savers.

The Minister for Finance, when announcing the incentive, spoke of the Government's keenness to foster the savings culture, and noted that "the habit of savings by individuals has been neglected in recent times".

Yet the evidence available, albeit incomplete, argues that the savings habit is alive and well, and that household savings in the Republic have actually risen in recent years, contrary to popular belief.

The standard approach to the measurement of household savings at the aggregate level is the personal savings ratio, which simply defines savings as that percentage of household disposable income not spent on personal consumption. If my after-tax income is €100 for example, and I spend €90, my savings are €10 and my saving ratio 10 per cent.

This construct allows us to compare savings through time and across economies and, in truth, the ratio varies enormously across the globe.

In the US, for example, the savings ratio is currently around zero (i.e. Americans spend all their income), while in Korea it is more than 20 per cent. Indeed the US ratio was for a time in negative territory, implying that the desire to live for today extended to paying for it out of tomorrow's income.

Definitional inconsistencies may partly account for this huge disparity in saving ratios, but economic analysis does throw up some other reasons why the desire to save varies so much across the globe and why it varies through time in specific countries.

One factor is age: an ageing population will tend to save for retirement and states differ in the generosity of publicly funded pensions. Uncertainty is another: savings would tend to rise in periods of weak growth and rising unemployment, as individuals become less confident about job security and prospects for future income.

Inflation, too, is likely to affect spending and savings, in that individuals will probably save more if inflation is expected to rise, in order to protect the real purchasing power of a nest-egg. Finally, interest rates and the tax treatment of savings will play a part as they affect the reason for abstaining from spending today in order to spend tomorrow.

On that basis, one might have expected the Irish saving ratio to have fallen steadily in recent years. After all, interest rates are very low by historical standards, and are actually negative on many deposit accounts when one adjusts for inflation. Similarly, unemployment fell steadily through the 1990s, which might have encouraged more spending at the expense of thrift.

In fact, the data show the reverse: the saving ratio has risen steadily since 1996, when it measured 8.7 per cent. The ratio rose to 9.7 per cent in 1997, to 9.9 per cent in 1998 and to 10.5 per cent in 1999, the last year for which we have official data. The ratio may well have fallen marginally in 2000 (to 10.3 per cent) but probably rose again last year to around 11 per cent, as personal consumption growth did not appear to keep pace with the rise in disposable income.

Clearly then, there is little here to support the view that individuals of the Republic have abandoned thrift for a hedonistic binge. We may be all Americans now in a cultural sense but, in the savings habit at least, the Republic has retained its identity.

Oddly enough, survey data suggest this increased saving is not finding its way into the SSIAs, at least not yet. A recent Irish Life survey showed that 80 per cent of people had not opened an SSIA, and that 44 per cent had no intention of doing so. It appears, then, that many people are quite willing to save, be it in equities, property or bank accounts, but fewer are willing to commit for five years, especially if it involves a declaration to the Revenue Commissioners.

There may be a late run to avail of the scheme but, to date, the Irish population is unimpressed, much to the relief of the Exchequer one imagines.

If half-a-million people saved £200 (€254) per month, the cost to the taxpayer would be £1.5 billion in five years' time. Perhaps not everyone is cheering the scheme on.

• Dr Dan McLaughlin is chief economist, Bank of Ireland