Budget oversight first step on road to fiscal responsibility

The political nous of the fiscal council’s chairman will be of critical importance

IN THE past three decades Ireland’s political class has managed to create two entirely separate world-class fiscal crises. No peer country in Europe has a worse record.

Even before Ireland was bailed out by the international community, it had become increasingly apparent that everything possible had to be done to put in place best practices to curb mismanagement of the public finances.

Despite the political parties beginning to show an interest in reforming budgetary institutions as the crisis evolved, the previous government never seriously pushed change.

Reform was expedited when the EU-IMF arrived in November. Among the many conditions of the bailout was the setting up of an independent budgetary watchdog and the setting in stone of national fiscal rules. Tight implementation timelines were set down.

Yesterday saw the first step in the process of reforming Ireland’s fiscal institutions. Although details remain sketchy, and the full picture will not be clear until year’s end when the new rules are revealed, what was set out by the Government was largely positive.

The evidence internationally on sound budgetary management suggests that well designed rules, policed by a strong independent and expert body, help to lessen the number and cost of fiscal policy errors.

The Irish Fiscal Advisory Council unveiled yesterday will be independent because of who is involved. The five people appointed are not only all of high calibre, none is in any way a crony of the Government parties.

If the people look likely to ensure its independence, there are some questions about the new institution’s design. It will report to the Minister for Finance. Given that it is ultimately the Oireachtas which holds the Minister to account, it would have been much better if the council had been mandated to report to the public accounts committee.

Also of some vague concern with regards its independence is the power of the Minister for Finance to ask the council to take on additional work. Given its limited resources, a minister who wanted to overwhelm it, and thus impair its capacity to carry out its core function, could swamp the council with requests for all kinds of reports and studies.

If the appointment of the people involved is to be welcomed on the basis of their independence, even more welcome is their distance from the establishment.

This is crucial given Ireland’s usually serious group-think problem.

Four of the five people have either spent limited periods in the Dublin politics/policy bubble or do not live in Ireland. Its chairman, Prof John McHale of NUI Galway has spent most of his professional life in North America.

Sebastian Barnes is an Englishman at the Paris-based Organisation for Economic Co-operation and Development.

Donal Donovan retired from the International Monetary Fund in 2005 after a three-decade career with the Washington-headquartered international organisation.

Economist Róisín O’Sullivan lives and works in the US.

If the council is to become a trusted, impartial authority on budgetary matters, it will quickly have to develop a high media profile. Effective communication will be central. Its chairman, as its public face, will have the key role.

Given all this, McHale is a good choice to lead the new watchdog. He is one of the country’s highest profile academic economists, despite returning to Ireland only two years ago.

Many who have observed him have liked the cut of his jib from the moment he began to appear in the media. His commentary has been informed and intelligent.

As important as what he says is how he says it. Calm, clear and oozing moderation, he is studiously measured and eschews the more incendiary language of some of his mini-celebrity academic colleagues.

How he projects in the media in his new role will be vital to the success of the council in winning the public’s trust.

But he can expect much more robust treatment as a wielder of authority than he gets as an expert contributor. If an appearance on TV3’s Vincent Brown show in late May is anything to go, he might find the new position difficult. Brown is an interviewer who, if not approached with an air of menace, will rough up or just ignore a guest if the humour takes him. McHale’s performance in the Brown bearpit was well below par.

If difficulties with more challenging interviewers could be remedied by media training, any lack of political nous would be harder to make up for.

Crucial for an independent watchdog is when to pick a fight with the government of day – if a fight needs to be picked. This is a vey fine balancing act.

A fiscal council that is less critical of policy than other independent commentators risks being dismissed as impotent.

A council that goes too far in its criticisms and/or makes the wrong calls will undermine its own authority (and Government politicians will not be behind the door in pointing out its errors). Walking such a fine line will be difficult.

Given McHale’s willingness – almost to a fault – to see all sides of an argument, and his patent moderation, he may instinctively be more willing to pull punches than to take swipes when they are warranted.

FISCAL FIVE: OVERLOOKING GOVERNMENT FINANCIAL POLICY

JOHN McHALE (chairman)

Head of economics at NUI Galway, Prof McHale previously held positions as assistant professor of economics and associate professor of economics at Harvard University in the US. He has also held the roles of associate professor of managerial economics and Toller family research fellow at Queen's University, Ontario, in Canada.

Prof McHale received first-class bachelor's and master's degrees from NUI and also holds a master's degree and a PhD from Harvard. He has acted as consultant to the World Bank.

He is a member of the Pensions Board and of the National Economic and Social Council.

SEBASTIAN BARNES

In a previous role as head of the OECD's Ireland desk, Barnes was co-author of two economic surveys of Ireland, which offered policy recommendations to the government of the day. He has since become head of the OECD's EU desk and is a senior economist at the Paris-based organisation.

Barnes joined the OECD in 2005 from the Bank of England. He holds a bachelor's degree from the University of Oxford, a master's from the College of Europe in Bruges, Belgium and a master's from the London School of Economics. He lives in Paris.

RÓISÍN O'SULLIVAN

As associate professor in the economics department of women's university, Smith College in Massachusetts, Dr O'Sullivan teaches on macroeconomics, money and banking, and central banking. Before becoming a professor, she worked for the Central Bank as an economist in the monetary policy department.

Dr O'Sullivan has published in areas including the impact of inflation-targeting policy on bond market volatility and the role of asset prices in measuring inflation. She holds both bachelor's and master's degrees from NUI Galway and a PhD in economics from Ohio State University in the US.

ALAN BARRETT

On secondment from the Economic and Social Research Institute, Prof Barrett holds the position of research professor at Trinity College Dublin, where he is working on a study on ageing.

He joined the ESRI in 1994, having received a PhD from Michigan State University in the US in the same year. Most of his research has focused on labour economics, population economics and macroeconomics. He spent two years between 2001 and 2003 with the Department of Finance as a senior economist. Between 2005 and 2010, he was lead author of ESRI's Quarterly Economic Commentary. He is also a research fellow with the Institute for the Study of Labour in Bonn, Germany.

DONAL DONOVAN

A former IMF staffer, Dr Donovan is adjunct professor at the University of Limerick and a visiting lecturer at Trinity College Dublin. He worked at the IMF between 1977 and 2005, retiring in the position of deputy director. His IMF role saw him engage with many countries passing through financial difficulties.

More recently, he contributed to the production of two reports into the causes of the Irish banking crisis: one by the governor of the Central Bank and another published by the Nyberg Commission.

Dr Donovan holds a bachelor's degree from Trinity College Dublin and a PhD from the University of British Columbia in Canada.

- UNA McCAFFREY