Few new criticisms in a report that pulls punches

ANALYSIS:The onus on Irish finance officials to be proactive is greater than in most states, but this was not even taken into account

IN DEVELOPED democracies many actors and institutions contribute to economic success and failure. Governments play a central role, but they are not omnipotent. That does not stop them seeking to take all credit when times are good, even if they are very quick to blame everything under the sun when things go wrong. This always makes identifying the causes of success and failure more difficult.

There are many aspects to the slump afflicting this economy. Causes and culpability for the different crises differ. The banking disaster is primarily the fault of bankers, with the State regulator coming a distant second in that blame game. The Government is much more culpable for the property bust given its tax incentivisation of construction, its failure to introduce normal planning laws, its blindness to risks and its contemptuous dismissal of those who warned of risks – up to and including the advice of the then taoiseach that such people should commit suicide. On blowing the public finances the Government is entirely to blame.

In assessing the role of Government there is the further complication of how much blame should be apportioned to politicians and how much to officials.

Yesterday’s long-awaited report on the performance of the Department of Finance, written by a three-man team (of two foreigners and one retired senior civil servant), went some way to providing an answer. Politically, it exposes as untrue the claim, made repeatedly by senior members of the outgoing administration, that they always acted on the best available advice. The report shows that the Government cut taxes and increased spending by far more than officials advised in every year bar one in the decade after 1999.

Given that Friday’s election saw politicians pay for their recklessness, the main relevance of the report now is whether the Department of Finance is fit for purpose and to what extent civil servants, by their actions and inactions, are culpable for the fate that has befallen the economy.

Yesterday’s report is very strong on recommendations for change that would bolster the capacity of this most powerful of departments to assess risks and evaluate, advise on and implement policy. It also makes many pertinent criticisms. But few of these are new and, more seriously, the report pulls too many punches and ignores serious issues.

Among the most serious charges to be made against officials is that they were asleep at the wheel as the economy hurtled towards the abyss. Although the report does not question the department’s alertness, the evidence it provides does not reflect well on officials.

In early 2007 the property bubble burst. Property-related tax revenues began to slide and by mid-year it was clear that the party was over. Despite all of this, its tax and spend advice on the 2008 budget was identical to the previous two years when the boom was still in full swing.

The technically inept 2009 budget, which was outdated before January 1st, 2009, was included in a group of measures described yesterday as a “marked enhancement in leadership”.

Another omission is the complete absence of discussion of the two most glaringly obvious policy errors of the past decade – benchmarking and decentralisation. It may be that officials strongly opposed both decisions, but the absence of any analysis of these hugely costly errors made by Finance ministers is more than a little curious.

Nor does the report ask to what extent officials drove change to low-profile, non-political functions that would make for more effective management and reduce risks. From pushing for more cost/benefit analyses of spending programmes to addressing its own inadequate understanding of the complexities of financial markets, there is little evidence that officials collectively showed drive and initiative. A curious omission from the report’s long bibliography of external studies is a European Commission report* which found Ireland’s public finances structures to be the worst among 19 EU countries (Greece was second worst). Improvement could have been achieved by officials advocating and implementing many uncontentious changes. There is no evidence from the report that they followed up on the commission’s 2007 study.

The onus on Irish officials to be proactive is greater than elsewhere as the political system produces finance ministers that are all full-time parliamentarians with little or no experience or expertise in finance ministry business – budgeting, economics, regulation and the like. This knowledge gap gives Irish public servants greater power than is normal vis-a-vis ministers. With greater power must come greater responsibility. This is not acknowledged or even hinted at in the report.

Another issue raised relates to the many implications of living with the euro. The report states emphatically that interest rates were too low owing to euro participation. It does not ask whether the department sought ways to minimise these effects or whether it highlighted the need for tighter fiscal policy to offset too-loose monetary policy.

Nor does it raise the issue of how other risks can be mitigated for countries such as Ireland in a big currency union which accounts for less than half of its trade. There is no mention of whether the department was alive to the threats, never mind whether it was looking to what other similar countries, such as Finland, were doing.

More generally, the report rarely raises the department’s lack of comparative analysis, as illustrated by the use of the term “best practice” just three times in 78 pages.

The drafters’ terms of reference included the “development and management of responses to the current crisis”. Despite this, they avoided tackling banking issues. The Department of Finance said yesterday that this was the authors’ choice – they felt it unnecessary as a separate report is being prepared on that subject and bank regulation was carried out by another entity.

Neither of these reasons holds much water, particularly as the department has played the central role in banking policy since the crisis erupted. The decision to allow Anglo Irish Bank’s management to continue running that institution after the bank was revealed as a threat to the entire system was taken on Merrion Street. It is just one key banking question which has never received a satisfactory answer. It was not even addressed in yesterday’s report.

In its assessment of the past, the report disappoints, particularly given the calibre of those who drew it up. In its recommendations for the future it provides much that is valuable. They should be implemented by the new administration.

*The Public Finances in EMU, 2007

Dan O’Brien is economics editor