Officials at the Department of Finance strongly opposed the new national savings scheme, which comes into effect at the start of May.
The Minister for Finance, Mr McCreevy, went against the advice of his officials when he introduced the scheme last month, according to documents re leased under the Freedom of Information Act.
Senior civil servants spent five months examining the issue before concluding last November they could not recommend the introduction of the scheme as announced by Mr McCreevy.
Under the terms of the scheme, the Government will top up by 25 per cent any money put aside on a monthly basis subject to a maximum of £200 per month. In return, savers must leave the money on deposit for five years.
Mr McCreevy's officials cited several reasons why they were against such schemes. "Given the uncertain effectiveness of tax incentives for savings, the potential cost and possibility of significant dead weight, the provision of tax relief for capital invested in medium-term savings schemes is not recommended," they concluded in a briefing document for Mr McCreevy dated November 14th. "There is little international evidence to suggest that people respond to the tax incentivisation of savings by increasing the amount of their overall savings. Rather the tendency is to move savings out of existing, less attractive, schemes into the new subsidised savings media," said the officials.
Dead weight refers to the cost to the Exchequer of having to give tax relief on "new" savings that were merely switched from existing investments subject to tax.
Concerns were also raised that the scheme would reduce the incentive for people to put money into pension schemes, "which would be a higher priority objective". The original plan considered by Mr McCreevy proposed that individuals would be able to put £500 a month into saving products that came under the scheme. This would have cost the Government up to £733 million a year in top-up payments. The scheme finally agreed was limited to £200 a month with a proportionally lower cost.
Mr McCreevy's officials recommended he should instead extend the limited tax exemption on interest payments enjoyed by credit union members to all deposit-taking institutions.
A spokeswoman for the Minister said: "It should come as no surprise that the Minister regards advice from the Department as advice. He has said on numerous occasions that he takes all advice into consideration and then proceeds with what he considers to be the most appropriate course of action."
