Memories of the financial crisis risk being obliterated by the force of politics

As the sky once again fills with kites, we seem to have forgotten the lessons of a quarter of a century ago when wild boomtime spending led to economic collapse

In April 1997, then minister for finance Ruairi Quinn wrote to taoiseach John Bruton expressing concern that “we are drifting into a situation in which public expenditure will be out of control”, highlighting the consistent breaching of the 2 per cent limit on real current spending growth set by the Programme for Government. As observed by Ciarán Casey in his book last year, The Irish Department of Finance 1959-1999, the warning emphasised that “rapid economic growth had staved off budgetary crisis, but it was dangerous to expect this to continue, since experience showed that economic reversals could be very rapid”.

The general election in June that year led to a Fianna Fáil/Progressive Democrats Government replacing the Fine Gael-led coalition government. During that election, the Irish Independent memorably editorialised that “for years we have been bled white – now it’s payback time”.

The Department of Finance was conscious of the implications of “payback”. Charlie McCreevy, the new minister for finance, committed to keep nominal current spending growth to 4 per cent annually, and Department of Finance memoranda highlighted the pressures building in a booming economy: accelerating inflation, labour shortages, soaring house prices and credit growth. Finance advised that the Government should be running significant surpluses during an unprecedented boom. What was needed was maintenance of competitiveness to ensure “medium-term sustainable growth”.

The alternative was outlined in a 1998 memorandum entitled Control of Expenditure: “If growth is not kept to a sustainable level, the inevitable outcome would be that we would rapidly see the emergence of adverse economic conditions – inflationary wage demands, accelerated inflation, erosion of competitiveness, declining investment and growth. Such conditions, culminating in serious economic, employment and budgetary difficulties, would lead to a very serious deterioration in the international competitiveness of the economy.”


As Casey observes, “considering what would have happened had the 4 per cent limit been adhered to... is as salutary a lesson in fiscal policy as we are ever likely to get”. In the peak year of 2001, current spending increased by 17 per cent.

In November 2010 during the economic crisis, an Oireachtas committee report with all-party support, Report on Macroeconomic Policy and Effective Fiscal and Economic Governance, recommended significant changes to how fiscal and budgetary policies were formulated and implemented. It stressed the need to avoid “short-termism or capture by political elites”, arguing for the creation of independent bodies of experts who would assess policy and produce annual budgets. Growth periods, the argument went, should see surpluses set aside for rainy day funds; taxes should increase during booms to fund spending during a downturn.

As its first chairman John McHale, was often to comment, the Irish Fiscal Advisory Council existed to ‘institutionalise the memory of the financial crisis’

Commitment to an independent oversight body was also contained in the programme for Government the following year and in the memorandum of understanding between the EU and the International Monetary Fund. When the first Irish Fiscal Advisory Council (Ifac) was established in the summer of 2011, Dan O’Brien in this newspaper suggested its function of assessing whether the overall fiscal stance was appropriate for the economic cycle “is expected to be particularly important in the run-up to elections when governments are tempted to over-stimulate the economy”.

As its first chairman John McHale, was often to comment, the council existed to “institutionalise the memory of the financial crisis”. Memories, however, do not lodge deeply enough in a manner that can withstand contemporary politics; instead, we become wrapped in cycles of warnings and demands; all understandable, but often incompatible. This week, Ifac said the Government faced “a difficult set of choices” between adopting new taxes and spending measures, maintaining existing spending, and staying within its own 5 per cent spending rule, warning it could not do all three. Going beyond the 5 per cent “without offsetting tax increases or spending cuts, risks repeating the mistakes of the 2000s”.

Shadows looming

The shadows of the dilemmas of a quarter of a century ago are looming again. Last Sunday’s Business Post Red C poll showing that 70 per cent of voters want the “hated” Universal Social Charge abolished is hardly surprising, but the poll also revealed an electorate almost evenly divided between those who want windfall corporate taxes saved and those who want tax cuts instead.

The lines being drawn suggest what was clearly warned against at the height of the crisis by all parties – ‘short-termism or capture by political elites’ is still the mainstay of the playbook

The sky will be filled with political kites for the next few months. Taoiseach Leo Varadkar’s kite has already been flown: the “basis for Fine Gael’s participation in Government” is tax cuts. Fianna Fáil did not want to increase the pension age, he argues, despite Ifac’s recommendation that it was the prudent thing to do, so, he implies, we will look after our turf as they will mind theirs.

The lines being drawn suggest what was clearly warned against at the height of the crisis by all parties – “short-termism or capture by political elites” is still the mainstay of the playbook, instead of the necessary focus on sustainable change and investment relating to housing, healthcare, climate change, education and pensions. But one thing that will not change is the speed with which economic reversals can occur.