Review of tax incentives in property market ‘came too late’

The 2005 announcement of a review of tax incentives in the property market came after “the horse had bolted”, the Department of Finance’s chief economist has told the banking inquiry.

John McCarthy, joined the Central Bank in 1996 but has spent most of his career on secondment in the department, was asked by Fine Gael TD Kieran O'Donnell how robustly the minister for finance had been challenged ahead of the economic crisis.

Mr McCarthy said a review of various tax incentives in the property market had been announced in 2005. “Quite clearly the horse had bolted at that stage. It was too late,” he said.

Mr O’Donnell also asked Mr McCarthy if officials in the department’s economic and tax divisions had been “working in silos” rather than sharing information. Mr McCarthy said that had been acknowledged.

“It’s quite clear that there was a silo-based culture at the time that no longer exists,” he said.

Mr McCarthy said efforts had been made to break down the “silo approach”. He said the number of economists in the economics division had been “ramped up”, along with the number of banking specialists in the banking division.

“We do interact much more. There is more joined-up thinking,” he said.

‘Cried wolf’

Earlier, Mr McCarthy said the department was viewed as “the boy who cried wolf” ahead of the crisis because its warnings did not materialise before 2007.

When asked by Fianna Fáil Senator Marc MacSharry if dissent was discouraged to the extent that it could hamper a career, Mr McCarthy said that was not really the case.

“There was a kind of departmental view that policy was moving in the right direction. Most people bought into that, some were more vocal than others,” he said.

“There was a consensus within the department that there were problems but we simply weren’t being listened to.”

He said the department was viewed as “the boy who cried wolf” because the risks highlighted did not materialise before 2007.

Asked by Fine Gael Senator Michael Darcy if he thought the department had been strong enough, he said no.

“We should have articulated our views more strongly but at the end of the day we advise, we are not the decision makers.”

Asked earlier by Sinn Féin TD Pearse Doherty if he had offered any contrarian views, Mr McCarthy said he did not have contrarian views.

Profession failed

He said the economics profession had failed. It had been unable to foresee the crisis and to even acknowledge that cataclysmic events were possible in a market economy.

There was a “herd mentality”, he added.

Asked for his assessment of the work of Professor Morgan Kelly, who predicted the crash, Mr McCarthy said: “We didn’t look at it the way he did. It was an innovative approach and a very useful approach.”

Mr McCarthy outlined the resources available to the department in his evidence.

He said he could have counted the number of economists working in the department’s economic division when the crisis hit on one hand.

“When the crisis hit there were very few economists working in the economic division. The number I would consider technical economists I could count on one hand I think it’s fair to say,” he said.

He said the situation had now changed and the “department is in a much better place now”.

Mr McCarthy said the department advised both internally and externally on the loss of competitiveness and over-dependence of the economy on new house-building and construction generally.

However, he said it should have adapted the tone of its warnings as the imbalances were becoming more acute.

Asked by committee chairman Ciarán Lynch if he concurred with the ESRI’s John Fitzgerald’s expression of concern about the over-politicisation of comments coming from the department ahead of the crisis, Mr McCarthy said he would.

He said in his time in the department instructions were given to people that they could not say certain things. He said the department needed people saying “controversial” things.

“I would agree there was some over-politicisation.” He said the instructions were coming from “beyond my pay grade”.

Resumed evidence

The former secretary general of the department of finance Kevin Cardiff has now resumed his evidence to the inquiry. The inquiry will also hear from William Beausang, assistant-secretary at the department, on Wednesday.