Irish
Independent report shows FF/PD governments ignored timid warnings of Ireland's Department of Finance
By Michael Hennigan, Founder and Editor of Finfacts
Mar 1, 2011 - 3:38 PM

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An independent panel's report shows that the Fianna Fáil/ Progressive Democrat (FF/PD) governments headed by Bertie Ahern as taoiseach, ignored the timid warnings of Ireland's Department of Finance over a period of 10 years.

The Irish Times reported on Jan 28, 2011 that former Taoiseach Bertie Ahern regretted that he did not succeed in having “a proper, national infrastructural stadium” while he was in office.

On his last full day in Dáil Éireann, Ahern told RTÉ he wished that “somebody, somewhere” had told him about the developing crisis in the Irish banking system while he was in office.

He said he had lots of regrets about different things. “I still think we didn’t get a proper, national infrastructural stadium, and I think unfortunately when I see little countries like Qatar and Kuwait . . . talking about their 10 stadiums and we never succeeded in getting one national stadium. That’s an achievement I tried hard to do but I didn’t get.”

“I would have loved if somebody, somewhere had of told me what was going on in the banks in this country but nobody ever did. You get wise after the event,” the discredited boom cheerleader said.

In July 2007 in Bundoran, Co. Donegal, with the approval of trade unionists, Ahern rounded on critics of his bubble economy: "Sitting on the sidelines, cribbing and moaning is a lost opportunity. I don't know how people who engage in that don't commit suicide because frankly the only thing that motivates me is being able to actively change something." 

The Minister for Finance, Brian Lenihan TD, today welcomed the report of the Independent Review Panel, chaired by Rob Wright: Strengthening the Capacity of the Department of Finance (pdf). The Minister appointed the Review Panel to assess the Department’s performance over the past 10 years and, based on the lessons drawn from that assessment, to make recommendations for the future development, structure and resourcing of the Department.

In publishing the report, the Minister stated:
“I welcome the Panel’s report. It provides a very fair and thoughtful assessment of the Department’s performance over the past ten years. While a number of recommendations are matters for the new Government and require further consideration, a significant number relate to organisation, skills set and work practices  --  many of which are being implemented without delay. The implementation of these proposals will assist the Department in taking on the complex challenges arising in the coming years. I have no doubt but that the Department will address the issues highlighted in the report with vigour and enthusiasm.”

Rob Wright, the chairman of the group has 35 years of economic policy and management experience in the public service of Canada, over twenty years of which was at the Deputy Minister (Secretary General) level, most recently as Deputy Minister of Finance.

The report says the department did not identify the risks to the tax system that arose from the very active tax agenda of the Government in the period since 1999 and the tax commitments in the 2002 Programme for Government were “effective political messages for the electorate but not good tax policy.” An analysis of the risks involved “should have been provided and communicated forcefully to the Minister for Finance and the Government.”

The authors says a failure by the department to pay sufficient attention to the broader macro-economic risks for Ireland during the period may in part have been due to a shortage of highly-trained economists and financial market experts on the department’s staff.

Given the ignorant short-termism of Fianna Fáil and Progressive Democrat politicians, any decibel level was unlikely to matter.

Besides, Department of Finance staff took the benchmarking payments even though they knew that they were contrary to the recommendations of the body that produced the first report.

It simply paid to go with the flow; nobody did what would have been bizarre in Ireland  - - resign on an issue of principle.

The report makes the following summary points:

Despite predictions to the contrary, the Irish economy continued to grow substantially after 2000. However, the dynamic fundamentally changed. Exports no longer contributed significantly to growth, which was now driven by domestic developments, notably investment in building.

Participation in EMU left interest rates too low for Irish circumstances. This fuelled the property boom as did financial market competition and interbank borrowing from Europe.

Meanwhile, Irish competitiveness had deteriorated very significantly. The property bubble began to collapse from 2007 and the fallout was exacerbated by a significant deterioration in the external environment. The economic and fiscal challenge was, of course, severely aggravated by the failure of the Irish banking system.

Generally speaking, we found that advice prepared by the Department for Cabinet did provide clear warnings on the risks of pro-cyclical fiscal action. These views were signed-off by the Finance Ministers of the day who would submit the Memoranda to Cabinet. The Department’s advice was more direct and comprehensive than concerns expressed by others in Ireland, or by international agencies. With very few exceptions, however the quantum of spending and tax relief outlined in December Budgets was very substantially above that advocated by the Department and Minister in June.

We see three key reasons for this failure of fiscal policy. First, there were extraordinary expectations of Government in Ireland to create spending and tax initiatives to share the fruits of recent economic gains. These pressures were reflected in the political debate of the day where all political parties were eager to meet public expectations for more and better services. As well, the Irish economy was regarded by most as a model. The EU fiscal rules, the Stability and Growth Pact, were respected, debt fell and spending appeared to be well below EU levels. The underlying dangers were either missed or ignored.

Second, the Government’s Budget process was completely overwhelmed by two dominant processes - Programmes for Government and the Social Partnership process. We recommend major changes to the budgetary process that would enhance ministerial accountability to Parliament, expand the release of detailed departmental analysis for consultation well before Budget time and provide oversight by some form of Fiscal Council.

Third, the Department of Finance should have done more to avoid this outcome. It did provide warnings on pro-cyclical fiscal policy and expressed concern about the risks of an overheated construction sector. However, it should have adapted its advice in tone and urgency after a number of years of fiscal complacency. It should have been more sensitive to and provided specific advice on broader macroeconomic risks. And it should have shown more initiative in making these points and in its advice on the construction sector, and tax policy generally.

The Department:

  • does not have critical mass in areas where technical economic skills are required;

  • has too many generalists in positions requiring technical economic and other skills;

  • is more numbers driven, than strategic;

  • does not have sufficient engagement with the broader economic community in Ireland;

  • often operates in silos, with limited information sharing;

  • is poorly structured in a number of areas, including at the senior management level;

and

  • is poor on Human Resources Management.

The Public Service Management and Development Division should be managed as a separate entity, as either a separate Department, or reporting directly to the Minister of State for Public Service Modernisation. The Minister and the Department of Finance should retain authority over the overall wage bill, negotiating mandates for new collective bargaining processes and manage a single window with other Departments to control public spending.

This change should help focus effort on the extraordinary opportunity provided by the Croke Park Agreement to modernise the capacity of the Public Service. We recommend two other processes to help - - a fulltime Task Force from across Government to include individuals from the leading Departments and a Private Sector Advisory Board to help drive the process.


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