Dept of Finance warned government of dangerous policies

From the Sunday Business Post yesterday

[broken link removed]

Report: Dept of Finance warned government of dangerous policies
30 January 2011 By Cliff Taylor

Bertie Ahern’s Fianna Fáil-led governments ignored clear warnings from the Department of Finance about the risks of cutting taxes and increasing spending as the economy boomed, according to a confidential report prepared for the government.

...

The Wright report finds that, in general, the department provided clear warnings for nearly a decade in the annual June memorandum on budget strategy, signed off by the ministers for finance and sent to the cabinet, led for most of the 2000-2010 period by former taoiseach Bertie Ahern, and from May 2008 by Brian Cowen.

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It seems I've been unfairly maligning our civil service in relation to them failing to do their job advising the government on the economic implications of government fiscal policy.

Happy to set the record straight.

ONQ.

That is bombshell stuff ONQ, and hardly a suprise. I wonder if Ahern or Cowan, or now Martin was approached for a response & explanation from Cliff Taylor? This is surely a critical issue in the election but it seems to have gotten little airtime so far? I did hear an item on Newstalk with Eamon Dunphy on Sunday. Not sure if it related to this report, but one of the commentators (McWilliams?) suggested that the Dept of Finance was fighting a "rearguard" action to exhonarate themselves in advance of a new gov.t & motivated solely by self-preservation. But given that this is an independent report, it seems hard to justify this respecting this particular report. Given that directors can be held accountable for reckless trading, surely politicians should be held accountable for wreckless governing?

bombshell stuff

hi,
for me, this is one of the key points if not the key point in the whole election,.
ff are saying that fg and labour were also promoting low tax high spend during the celtic bubble.
does anyone know if the department of finance advice re budgetary policy during the celtic bubble would have been available to the opposition or was it for government eyes only?

thanks,
rusty

David McWilliams has some cheek.

Check out

In McWilliams own words:

The officials in the Department were (by then) also advocating a guarantee of people's deposits but only to a certain level. However, I argued because the Irish banks' funding had become so unstable, if we didn't guarantee the funding as well as the deposits, the banks would come crashing down and you would have had to come up with the money immediately for people's deposits. The whole point of a guarantee is that you want to avoid paying out right away.
...
but he[Brian Lenihan] still wasn't convinced and, from what I could gather, his officials in the department were dead set against a full guarantee

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So the civil servants were dead set against the McWilliams Blanket Guarantee of the bondholders as well as the depositors. But Brian Lenihan acted on the advice of McWilliams.

We slag off the public service very easily. They are not really in a position to defend themselves publicly. They can't come out and say "We advised the Minister not to do x but he rejected our advice".

Brian Lenihan and the government were faced with a horrible choice. He took the advice of McWilliams against the advice of his own civil servants and we are all paying for that now.

But McWilliams has the solution again now. Let's have a referendum and refuse to pay out debts.

Brendan Burgess said:

David McWilliams has some cheek.

Check out

In McWilliams own words:

So the civil servants were dead set against the McWilliams Blanket Guarantee of the bondholders as well as the depositors. But Brian Lenihan acted on the advice of McWilliams.

We slag off the public service very easily. They are not really in a position to defend themselves publicly. They can't come out and say "We advised the Minister not to do x but he rejected our advice".

Brian Lenihan and the government were faced with a horrible choice. He took the advice of McWilliams against the advice of his own civil servants and we are all paying for that now.

But McWilliams has the solution again now. Let's have a referendum and refuse to pay out debts.

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wow.. did not know that mcwilliams was the brains behind the bank guarantee as enacted by lenihan. he has been advocating for some time to "haircut/burn the bondholders/convert bonds into equity" so i wonder was he advocating a short term guarantee until such time that the bondholders could be brought around the table and forced to take a haircut?
and now, the ecb are preventing this as they are worried about contagion?

Its very strange how this has not been brought up yet. Your OP Onq was written on Feb 1st yet I haven't seen any of this even mentioned on RTE or TV3. Maybe they're keeping it for this week but surely its a little late for that now for the election as I presume most people have made up their minds.
As to whether FG or Lab knew about it, the OP specifies it was a confidential govt report so presume they didn't.

Wright's report has just been published

An independent review of the Department of Finance over the past ten years has found that it did warn about Government budgetary polices and the property boom, but that any warnings were 'overwhelmed' by political and other pressures.


The review, commissioned by Finance Minister Brian Lenihan, was headed by Rob Wright. He was most recently Canada's deputy minister of finance
It found that the amount of spending and tax relief outlined in Budgets of the period was usually well above that advocated by the Department of Finance when setting out its Budget strategy earlier in the year.


It also said that the department's advice was 'more direct and comprehensive' than concerns expressed by others in Ireland or international agencies.

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So pretty much confirms that social partnership was simply bought.

Sunny said:

So pretty much confirms that social partnership was simply bought.

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What it shows to me is that Civil Servants in the department were doing their job and doing it correctly, but were blocked at all times by Government who had their own mandate and listened to interest groups instead and the social partners were possibly involved but I would imagine the construction industry were the closest to the Cabinet table.

...The dogma that no one told them, is looking a bit thin now...

RonanC said:

What it shows to me is that Civil Servants in the department were doing their job and doing it correctly, but were blocked at all times by Government who had their own mandate and listened to interest groups instead and the social partners were possibly involved but I would imagine the construction industry were the closest to the Cabinet table.

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+ 1. And the civil servants were fed to the media as the bad boys by politicians who told us they always followed "the best advice". This was a disgrace. I certainly felt led to believe that it was the Dept of Finance who cocked up so spectacularly.

RonanC said:

What it shows to me is that Civil Servants in the department were doing their job and doing it correctly, but were blocked at all times by Government who had their own mandate and listened to interest groups instead and the social partners were possibly involved but I would imagine the construction industry were the closest to the Cabinet table.

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I never said the civil servants weren't doing their jobs. The report specifically said that the budgety process was overwhelmed by social partnership and government programmes to increase spending and cut taxes. Blaming big bad developers is nice and populist but the construction industry werent the ones calling for huge increases in things like social welfare. The construction industry was part of social partnership as was IBEC and these bodies are just as guilty as politicians and trade unions for short sighted leadership.

Sunny said:

I never said the civil servants weren't doing their jobs. The report specifically said that the budgety process was overwhelmed by social partnership and government programmes to increase spending and cut taxes. Blaming big bad developers is nice and populist but the construction industry werent the ones calling for huge increases in things like social welfare. The construction industry was part of social partnership as was IBEC and these bodies are just as guilty as politicians and trade unions for short sighted leadership.

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Sorry I misquoted you on that, I didnt mean to say you never said the civil servants weren't doing their jobs. I was saying thats how I read the report, that the civil servants were in fact doing their jobs, but ignored at all times.

I do agree about the social partners involved in regards to pay rises, social welfare increases and so on, but I stand firm over the construction industry. They lobied and lobied for tax exemptions here there and everywhere and the economy was allowed to be built on very shaky foundations. Who was in the Galway Tent? Who was taking back handers for re-zoning of lands? Who was giving massive tax breaks for developers?

Also, the increases in public spending were facilitated by the taxes the construction industry generated, which in itself should have set warning lights flashing in every Government Buildings.

3.2.3 The Panel reviewed in detail the annual June Memoranda to Cabinet on Budget
Strategy. Generally speaking, we found that advice prepared by the Department for Cabinet
did provide clear warnings on the risks of pro-cyclical fiscal action. These views were
signed-off by the Finance Ministers of the day who would submit the Memoranda to
Cabinet. Department officials do not, of course, participate in Cabinet discussion. This
advice was more direct and comprehensive than concerns expressed by others in Ireland, or
by international agencies.​

21

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This extract from the report should be a bombshell - turns out that the Department was giving the best advice.

Interestingly the report goes on to say that there are not enough economists in the Department - a lot of the economic work is being done by generalist civil servants. Given that the Department outperformed the best Irish and International economists, it makes you wonder whether there is any value to hiring economists and/or seeking their advice. If the Departments predictions are the best available, dont upset it by introducing economists.

csirl said:

This extract from the report should be a bombshell - turns out that the Department was giving the best advice.

Interestingly the report goes on to say that there are not enough economists in the Department - a lot of the economic work is being done by generalist civil servants. Given that the Department outperformed the best Irish and International economists, it makes you wonder whether there is any value to hiring economists and/or seeking their advice. If the Departments predictions are the best available, dont upset it by introducing economists.

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I think this perfectly highlights the problem with government hired economists and their "advice". As an economist hired by government you are hardly going to say that what the organisation paying your bills is doing is wrong or detrimental. Just look at how the government treated economists that were highlighting the impending economic collapse and weren't on the government books; ridicule and contempt were thrown at them.

I haven't read the full report, but it does not surprise me that people with no economic background now look like better economists than the Keynesian ilk that are still being entertained to this day.

csirl said:

Given that the Department outperformed the best Irish and International economists, it makes you wonder whether there is any value to hiring economists and/or seeking their advice. If the Departments predictions are the best available, dont upset it by introducing economists.

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That had occurred to me as well. I am always astonished by the confidence which economists have in their forecasts and their solutions when their general record has been so poor.

Brendan

Brendan Burgess said:

That had occurred to me as well. I am always astonished by the confidence which economists have in their forecasts and their solutions when their general record has been so poor.

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I think it is important to distinguish economists by their economic school of thoughts. Economists of the Austrian School have been incredibly accurate in their predictions, especially in the incredibly large busts of the last 15 years.

Chris said:

... it does not surprise me that people with no economic background now look like better economists than the Keynesian ilk that are still being entertained to this day.

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It might be overstating it to say that the DoF comprises people with no economic background. There are people there with qualifications in economics, although I don't know how many. In addition, many of the generalists are quite bright people who might not have formal credentials in economics, but have the intellectual capacity and the motivation to become well-versed in economics.

On the other side of the equation, many of those who are seen, and taken seriously, as informed commentators are not formally qualified in economics. The same goes for our politicians. Most of those who have held economic ministries are not formally qualified in economics. Offhand, I can think of only one Minister for Finance who was a qualified economist (Alan Dukes).

Wife is an economist but not working in that area.

She always tells me that economists have predicted 5 out of the last 2 recessions.

Chris said:

I think it is important to distinguish economists by their economic school of thoughts. Economists of the Austrian School have been incredibly accurate in their predictions, especially in the incredibly large busts of the last 15 years.

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Hi Chris, Do you have any links to this? I'd be interested in learning more.. Thanks, F.