Free-market Eden was a fool's paradise


MAURICE O’CONNELL was a senior official in the Department of Finance and then governor of the Central Bank. In both capacities, he knew, as he acknowledged to the Dáil’s Public Accounts Committee a decade ago, that the Irish banks were engaged in a massive fraud designed to allow wealthy people to evade tax. As he told the committee, he did little about it because “we had no way of quantifying it”, writes FINTAN O'TOOLE

Mary Walsh also starred in the committee’s inquiry into bogus non-resident bank accounts and the systematic evasion of tax. She was the tax partner at Coopers and Lybrand brought in by Allied Irish Banks to examine the methodology by which its internal auditors had concluded that it had a “contingent liability” of £100 million (€127 million) to the State. She became an important figure in the inquiry when forced to concede that her minutes of a crucial meeting were “incorrect”.

William Slattery went from being a banking regulator (he was deputy head of banking supervision at the Central Bank) to being the chief lobbyist for the financial services industry – an example, perhaps, of the cultural and social affinity between regulators and regulated. He is now managing director of State Street Ireland, a financial services company that boasts of “our leadership in servicing offshore and hedge funds”.

Pat McLaughlin is another scion of the financial services industry, working as chief executive of the Irish Payment Services Organisation. He worked previously as deputy chief executive of the Health Service Executive. He was highly regarded in that role but resigned in December 2005 because the Department of Finance refused to top up his salary of €163,000 a year with a special allowance and to boost his pension.

Donal McNally has been second secretary general of the Department of Finance since 2000, in charge of budgetary and economic policy. Let’s just say that on his watch the management of the public finances has not been a spectacular success.

What have these five fine people got in common? Two things. Firstly, between them they exemplify the nexus of high-flying civil servants, corporate tax advisers, light-touch regulation and financial juggling that has helped to get us where we are. Secondly, they are the members of the McCarthy group on public spending.

This is Colm McCarthy’s team: with their overlapping roles, it is made up of two ex-Central Bankers, one expert at advising corporations how to pay as little tax as possible, one ex-financial services lobbyist and current servicer of hedge funds, one former public service manager who couldn’t live on €163,000 a year and a key figure from the Department of Finance.

Each of these individuals is highly talented and they all gave up their time and skills in a spirit of public service. My point is simply that they come from an extraordinarily narrow range of backgrounds and embody a set of instincts and orthodoxies that are, to put it mildly, problematic.

They are programmed to be hostile to taxation, to believe in high salaries for people like themselves, to support the banking and financial industries and to prefer a small State that lets wealthy people get on with the business of making money. They have, in other words, an ideology – pretty much the ideology that has created the hole we now inhabit.

This is not to say the McCarthy report does not have value. It is absolutely right that everything the public service does should be rigorously scrutinised. Even programmes that started out with decent intentions (special needs assistants in school, for example) can be poorly managed and unfocused. Nor should it take a committee of experts to tell us that we should stop throwing money into the pit that is the National Pension Reserve Fund. If it stimulates some real action on setting priorities for public spending, reforming local government and creating an accountable and efficient public service, the McCarthy group will have done the State some service.

But let’s not pretend that it is some kind of scientific, surgical operation. It is part of a broader political agenda – the pretence that public servants and public spending are the root of the economic crisis. Once you make that assumption, it follows that public spending is the cancer that has to be slashed and burned if the patient is to be restored to health. But the assumption is absurd – the inefficiencies of the public service didn’t cause the crisis, the banks and developers did. The public finances are a function of the real economy – simply shrinking the State and taking more money out of the economy is not going to get us back to health. There is, in any case, no going back – the free-market Eden was a fool’s paradise.

If the McCarthy report is a menu, it’s table d’hôte– a carefully controlled selection of choices. We need to see the a la carteversion that includes corporate welfare as well as social welfare, tax breaks as well as direct spending and sustainable economics as well as grim reaping.

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