WRIGHT REPORT FINDINGS:THE DEPARTMENT of Finance provided repeated warnings to the Government about the risks involved in running pro-cyclical budgetary policy during the boom years, a report has revealed.
However the report, drafted by a team commissioned to investigate the department’s performance over the past 10 years, criticised it for not altering the tone of its warnings as they were ignored in successive budgets.
The report adds that the department also warned about the dangers of an overheated construction sector.
“The department’s assessments of the risks from the Irish housing bubble were at least as strong as any public analysis over the period.”
However, it did not organise a strategic response to the problem and “lacked coherence across its divisions”, according to the report, citing by way of example its response to 100 per cent mortgages.
The department did not identify the broad risk to the tax system that arose from the very active tax agenda of the Government in the period since 1999.
Tax promises contained in the 2002 Fianna Fáil-Progressive Democrat programme for government were “effective political messages for the electorate but not good tax policy”.
Even though the tax policies were government policy, an analysis of the risks involved “should have been provided and communicated forcefully to the minister for finance and the Government”, it says.
A failure by the department to pay sufficient attention to the broader macroeconomic risks during the period may, in part, have been due to a shortage of highly trained economists and financial market experts, the report states.
The authors of the report analysed the annual June memorandums on budget strategy produced by the department for the Government and found they provided clear warnings of the risks of the pro-cyclical fiscal policies being pursued.
The memos were signed by the minister for finance of the day and submitted to Cabinet.
However, almost without exception, the size of the spending and tax relief introduced by the subsequent budgets was “very substantially above” that advocated by the department.
The report found there were three key reasons for the failure of fiscal policy.
One was the pressures created by economic growth and the fact that Ireland was viewed as a role model.
The Government’s budget process was also “completely overwhelmed” by the programmes for government and the partnership deals agreed during the period.
Lastly, the Department of Finance failed to alter the tone and urgency of its warnings “after a few years of fiscal complacency”, it found.
The report said that little emphasis was placed on public sector reform during the period, but that the Croke Park agreement now in place provided an “extraordinary opportunity” to modernise the capacity of the service.
In his introduction, chairman Rob Wright said he wanted to emphasise how impressed he was by the department’s staff and the broad understanding in the department that it must use current circumstances to improve its capacity to better serve Ireland. It was not the case that the department was not “fit for purpose”, the report said.
It recommended that the budgetary process be changed so that forecasts and risk assessments by the department were published and that it employed more economists and other specialists trained to master’s degree level or higher.
It said the department should have an annual public workshop with private sector and academic interests where its economic and fiscal assessments could be debated.
The report said the Freedom of Information Act was limiting the creation of non-consensual advice in the department.
It recommended that budget advice provided to the minister should be outside the scope of the Act for five years after it was given.
On public sector reform, it recommended the creation of a private sector advisory board and the establishment of a full-time taskforce to oversee the implementation of reforms.
The public service management and development division in the department should be managed as a separate entity, as either a separate department, or reporting directly to the minister of state for public service modernisation, the report said.
The minister and the Department of Finance should retain authority over the overall wage bill.
The report reviewed the international commentaries on the Irish economy during the past decade.
The authors noted that while there were occasional warnings about developments in the property sector over the period, “on the whole both domestic and international commentators took a benign attitude towards the risks that were building up.
“The general view was that housing would experience a soft landing and there was no expectation that problems in the banking sector would have serious implications for the exchequer or the economy generally,” the report said.
