ESRI CONFERENCE:GOVERNMENT ADVISER Jim O'Leary will tell a conference today that the euro-zone crisis has revealed "shortcomings in the political leadership of the EU" and "flaws in the architecture of economic and monetary union".
In discussion of Ireland, he will state that “the paramount policy error during the 2000-07 period was a failure to anticipate that the boom-time surge in tax receipts would be reversed when the boom ended”.
The paper was written before Mr O’Leary started work as a senior economic adviser at the Department of Finance under a three-year contract. It will be delivered this morning at the annual Budget Perspectives conference organised by the Economic and Social Research Institute ahead of December’s budget.
The paper assesses how budgetary rules for euro-zone countries have operated since the currency was launched a decade ago. It also evaluates proposals by the European Commission on how those rules should change.
O’Leary will state that, in the cases of Ireland and Spain in the years before 2008, “governments treated the revenue surge as a permanent phenomenon and used it to ramp up recurring spending and, in the Irish case at least, to narrow the tax base”.
In relation to European Commission proposals to reform the Stability and Growth Pact governing budgetary discipline in EU member countries, Mr O’Leary describes as making “perfect sense” the greater exercising of the commission’s preventative powers to reduce the risk of loss of budgetary control. He will say that the argument for “exclusively national control of fiscal policy” has been weakened by the setting up of a bailout fund in May.
As a respected and forceful voice in the economics profession in Ireland, Mr O’Leary is expected to exercise considerable influence over budgetary and wider economic policy in the Department of Finance.
His appointment was made in the context of limited numbers of experienced economists being available in the department. Mr O’Leary has close links with Fine Gael, and has held a range of positions during his career, including as an academic economics lecturer, chief economist at a stockbroking firm and contributor to this newspaper. He also served as a director of AIB.
At the same conference, an economist at University College Dublin, Joe Durkan, will suggest that a single VAT rate should replace the current system. He will note that a standard rate would help insulate tax revenues in the event of a downturn in the wider economy.
He will also cite research which shows that “the case for using differential rates of VAT to help those on lower incomes is weak”. He will go on to say that “zero rating most foods and children’s shoes may not be ideal”.
Mr Durkan will also advocate abolishing the social insurance fund, into which PRSI contributions are paid and contributory benefits funded.
