THE DEPARTMENT of Finance says it warned the Government from 2005 onwards about the dangers of a property bubble, internal official documents show.
Briefing material prepared for the department’s secretary general Kevin Cardiff last month states that the department warned over several years that the “over-emphasis on construction left the economy vulnerable to macroeconomic shocks”.
It also defends the department’s performance in failing to forecast the extent of the downturn, and points to similar failures by institutions such as the ESRI, Central Bank and the private sector to predict the magnitude of the slowdown.
The material was prepared for the secretary general ahead of his appearance before the Oireachtas Public Accounts Committee just over a month ago.
The contents of the documents have been released under the Freedom of Information Act in the same week Minister for Finance Brian Lenihan announced an external review of the department’s management of the financial crisis.
This review will “evaluate the systems, structures and procedures” used by the department in providing advice to the Minister and the Government.
While the department said that some commentators also warned about a property bubble, the documents state that “none of them predicted the magnitude of the slowdown, the speed of the impact or the impact on banks’ balance sheets”.
In the case of the ESRI, the department said that while the institute warned that the economy was over-dependent on construction, it concluded as recently as May 2008 of “the need for a large number of additional dwellings over the coming 15 years”.
It also points to the Central Bank’s performance, stating that while it warned that the share of residential investment was too large, its stress tests concluded that “Irish institutions were well-capitalised”.
Similarly, the department says that bank and stockbroker economists repeatedly concluded residential investment in Ireland was sustainable and prices were justified by fundamentals.
The department is also defensive about its record in economic forecasting. However, in 2008, for example, it forecast a deficit of €1.5 billion, while the actual deficit was some €13 billion. Its forecasts for 2009 were also overly optimistic.
The material states that economic forecasting is an “inherently uncertain process” and this uncertainty was heightened by the openness of the economy as well as structural changes in recent years.
The documents also state that the department’s forecasts were criticised for being overly cautious in the period leading up to 2007. It lists extracts from individual private sector commentators in NCB, Ulster Bank, AIB and Goodbody who felt its tax forecasts were too cautious.