This year the government will spend €914m on behalf of its citizens through the Irish Aid programme. Much of this funding will go to Irish charities working in developing countries; the vast majority of it, however, will be given to non-Irish, non-governmental organisations (NGOs) and other international bodies such as Unesco.

I think that Irish Aid could be spent more effectively and that the Irish people are best positioned to make spending decisions themselves. But to achieve this we need a radical rethink about how we allocate the funding committed to Irish Aid. Let’s begin with why people give money to charity. Fundamentally, it’s because it makes them feel good about themselves, and there’s nothing wrong with that — it’s the motivational subtext of a lot of advertising by charities.

But charities could go a lot further with this insight and make the case that donating money to charity will make you happy. That’s the conclusion of happiness research at the University of British Columbia, which gave participants a $5 (€3) or $20 bill and asked them to spend the money by 5pm that day. Half the participants were instructed to spend the money on themselves, and half to spend the money on others. Those who spent on others reported feeling happier at the end of the day than those who spent on themselves.

We should apply this to Irish Aid. For starters, if Irish taxpayers are going to fund overseas aid initiatives, then at the very least the funding should go to Irish organisations that lead such initiatives. Which brings me back to research about happiness and giving. Why not let every citizen in the country decide how to spend Ireland’s aid budget? That way we get the benefit of spending that reflects the wishes of the electorate, as well as the buzz from doing good.

This approach to public policy is based on the insights of behavioural economics and has been called “libertarian paternalism”. It is described in detail in a fascinating book called Nudge: Improving Decisions about Health, Wealth & Happiness, by Richard Thaler and Cass Sunstein. The idea is to forge a more direct connection between policy objectives and the private behaviour of individual citizens and taxpayers, and it’s catching on.

In the case of Irish Aid, I see it working like this: at the start of the year each registered voter is given a voucher worth their part of the total Irish Aid budget — about €286 each, given a population of 3.2m aged over 18. Each citizen can “spend” their voucher during the year, by giving it to any one of the Irish NGOs registered with Dochas. The charities can advertise their activities in developing countries (as they already do) in order to attract voucher donations. Citizens should also be able to elect to pay their voucher directly by standing order to a charity of their choice, giving the charities some sense of continuous funding.

Naturally, there would be a few details to work out: what happens if some citizens haven’t donated their vouchers by the end of the year? The government could use any underspend to top up charities’ funding, pro rata to the amounts they receive from citizens. This would allow it to achieve its goal of overseas aid to the value of 0.7% of GNP by 2012.

And what would happen to the civil servants working in Irish Aid? Simple: they would re-focus on championing free trade as the proven formula for making poverty history — like it did for us.

Arguably, the money will also be better spent: money given to charities will mostly get spent on charitable works themselves. Money given to the likes of Unesco will mostly be spent on consultants charged with spending the money on behalf of Unesco et al.

Moreover, I would suggest that Irish charities champion my proposal — or something similar — themselves, because if they don’t, they face the possibility of experiencing the “crowding out” effect. Recent research shows that for every ¤1,000 that charities receive from government, private donations fall by ¤560. This is mainly because charities invest less effort in fundraising, and also because private donors see the state funding and figure their own donations won’t make enough difference.

I think it is a win-win-win proposal: Irish charities get more money, overseas recipients get money spent on their initiatives more effectively, and Irish citizens get a direct role in Ireland’s aid initiative, and become happy as they do.

Gerard O'Neill is chairman of Amarach Research. His personal blog is: www.turbulenceahead.com