Department staunchly defends its economic advice

 

ANALYSIS:Official material shows willingness to attribute blame for economic failings to other high-profile institutions

OUCH! Who knew senior officials in the Department of Finance were such a sensitive bunch?

Newly released briefing material prepared for the department’s secretary general Kevin Cardiff amounts to a staunch defence of its advice over managing the economy, as well as finger-pointing at the failures of other institutions in failing to forecast the extent of the downturn.

Much of the material is in the form of suggested answers to the kind of robust questions expected from members of the Oireachtas Public Accounts Committee last month.

Some of these anticipated questions include: “How did you get your forecasts so wrong over the past two years?”; “Why are private-sector economists able to forecast taxes more accurately?”; “Why did you consistently underestimate the scale of the shortfall during 2008?”

At the committee meeting last month, Cardiff was in contrite mood. He admitted that his department had failed to forecast the depth of the financial crisis, and accepted that the lack of experts in his department could be a weakness as well as an asset.

Briefing material drawn up by senior civil servants for the meeting, however, strikes a much different tone.

It provides a window into a department which is highly defensive about its record and which seems keen to spread the blame for failures to other high-profile institutions.

The department says it warned for several years that the historically high share of construction as a share of activity left the economy vulnerable to shocks.

While some commentators made similar warnings, it said “none of them predicted the magnitude of the slowdown, the speed of the impact or the impact on banks’ balance sheets”.

On the Central Bank’s performance, it said while it warned that the share of residential investment was too large, its stress tests concluded that “Irish institutions were well-capitalised”.

In the case of the ESRI, the department said while the institute warned that the economy was overdependent on construction, it concluded as recently as May 2008, of “the need for a large number of additional dwellings over the coming 15 years to house the rapidly growing population necessitating continued special investment in housing”.

The private sector fared little better. It said bank and stockbroker economists “repeatedly concluded that residential investment in Ireland was sustainable and prices were justified by fundamentals”.

The department did acknowledge, however, that the OECD and the IMF both warned of a major imbalance in the economy and that a soft landing was unlikely.

In the area of forecasting, the department was also highly defensive.

Its record has been patchy in recent years. While it originally forecast tax growth of 3.5 per cent for 2008, tax revenue ended up falling by an unprecedented -13.7 per cent. The deficit forecast was the same year was €1.5 billion, while the actual deficit was some €13 billion. Its forecasts for 2009 were also overly optimistic.

The department was quick to point out in briefing material that forecasting was a “hazardous activity”, particularly the cases in periods of exceptional volatility such as those witnessed in the past two years.

The material also said: “The department’s forecasts were criticised for being overly cautious in the period leading up to 2007 . . . for instance, as regards 2008, many private sector commentators described our tax revenue growth of 3.5 per cent as conservative”.

There were also selected quotes from high-profile economists in relation to the 2008 budget.

It quoted Robbie Kelleher and Rossa White of Davy Stockbrokers describing the budget as a “timely boost for the property market”; and Austin Hughes of Ulster Bank saying the budget was “safe and/or dull and unlikely to boost or bury sentiment toward the Irish economy”.

In its defence, the department stated that its macroeconomic forecasts from 1997 to 2004 have been “among the most accurate of those published by the major domestic and international economic forecasters”.

In the area of forecasting heading growth, it says the department’s performance has been the best of all major institutions between 1996 and 2009, outperforming the ESRI, the Central Bank and the OECD, among others.

The department also pays tribute to its advice in more recent times on the need to cut spending and increase the tax take. It does some crystal ball gazing, looking at what might have happened if no corrective action was taken by the Government.

It tentatively estimates that without the budgetary adjustments, the Government deficit could have been of the order of -20 per cent of GDP in 2010 instead of -14.3 per cent.