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In this chapter the Joint Committee will look at the critically important role of the Government. Together with the Department of Finance, Central Bank and Financial Regulator, it was believed to constitute the final line of defence against either an individual or systemic failure of financial institutions. Essentially, through policy actions, they had the ability to:
We will examine the factors that influenced the key decisions that the Government made in the period up to the crisis, the contribution of those decisions to the crisis, and the level of oversight which was applied to those decisions by the Oireachtas.
The Nyberg Report said the following in relation to responsibility for decision-making:
“People in a position to make decisions are and must be ultimately responsible for them regardless of what advice or suggestions they have received. The higher and more influential their position the greater their responsibility.”1
In his opening statement Brian Cowen, Minister for Finance at the time, used this quote from the Nyberg Report and said:
“In relation to the actions I took, I want to make it clear from the beginning that nothing I have to say here should be interpreted by anyone in any way as an attempt by me to pass the buck to anyone else.”2
He said:
“So regardless of what advice, you can’t, as an exercise of accountability, pass on that responsibility to anyone else, and I … as it says, the higher and more influential their position, the greater their responsibility. I’m prepared to live by that principle on these issues”3 .
He also said:
“…we made those policy decisions in the full knowledge of … and that was a decision for politicians to make, not, however eminent a civil servant might be, you know? So, we …we made policy decisions with our eyes wide open.”4
An underlying issue in the Government’s fiscal policy in the period up to 2008 was the development of an imbalance in the fiscal policy strategy.
A Structural Deficit develops when the amount of Exchequer expenses is higher than the amount of sustainable and stable income,5 where the source of finance for exchequer spending is over-reliant on temporary or transitional income components, for example property related Capital Gains Tax (CGT) or Stamp Duty. These types of taxes are sensitive, in that they will grow quickly in a boom but will reduce rapidly when there is a downturn in the economy.
In contrast, more stable revenue sources include income taxes which are less impacted by a downturn in activity. Taxation policy choices made by the Government contributed to a Structural Deficit developing, which was realised in 2008 when the tax revenue, particularly from temporary sources, reduced dramatically while the expenditure commitments largely remained or continued to increase. Consequently, the large Structural Deficit, which had built up over a number of years, was left exposed.
From 1994 onwards, Irish Exchequer revenue became increasingly dependent on property or construction related income.6 By 2006 - 2008, income from Stamp Duty and CGT collectively accounted for 15% of total revenues. A further 15% of revenues came from corporation taxes, which were strongly boosted by the activities of property development companies.7 These sources were only sustainable in the longer term if property related transactions continued at a similar level.8 However, this was not the case and when demand collapsed, so did the tax revenue that the Government relied upon to meet its commitments.
Tax Base Erosion was an important factor in the creation of the Structural Deficit. The Government made policy decisions which directly contributed to erosion of the Tax Base. These decisions are explored in more detail later in this Chapter.
The evidence given to us by former Taoisigh Bertie Ahern and Brian Cowen confirmed that the Government’s focus was on the requirements of the Stability and Growth Pact and on GDP/GNP related ratios like expenditure/GDP, Debt/GDP and Government balance.9 Bertie Ahern, Brian Cowen and Charlie McCreevy said that they had acted conservatively and balanced resources and demands responsibly during this period.10 In relation to his approach to the budget, Brian Cowen said:
“the IMF came over to this country and did an exercise, which took account of the buoyancy effects that you’re talking about in relation to the construction industry and came back and told us that there was a structural surplus - even when they took out the cyclical effect - that there was a structural surplus in the Irish economy of 2.8%.”11
John McCarthy, Chief Economist at the Department of Finance, said:
“The contraction of the tax base and the ramping up of public expenditure on a permanent basis were clear policy mistakes and ultimately led to a very large structural deficit once the crisis kicked in. That the public finances were in broad compliance with the requirements of the Stability and Growth Pact during most of this period provides no comfort.”12
In this section, we will look at some of the macro-economic factors that impacted on decision making.
Fiscal policy from 1998 until early 2008 was discussed with key witnesses during hearings before the Joint Committee covering key points such as:
GDP is an important measure of economic performance. Governments have historically relied on a measurement of expenditure as a percentage of GDP as a basis to assess what was affordable. GDP growth in Ireland over this period was substantially stronger than in most other EU member states, rising from €53 billion to almost €197 billion, or by 272%.13 In contrast, growth of GDP over the same period was 27% in Germany, 131% in Spain and 129% in the UK.14
While the Debt/GDP ratio had improved dramatically, there was no reduction in the actual debt. Gross government debt remained almost unchanged at €44 billion during this period. It would appear that the strong revenues earned during the boom years were not generally used to reduce debt, but to increase expenditure. This suggested a priority on the short term rather than medium term management of fiscal risk.
This risk was realised when between 2007 and 2010, Ireland’s GDP fell by 19%, which caused a deterioration in the ratio, regardless of any additional debt taken on.
While the headline figures of total Government expenditure/GDP fell from 36.6% in 1997 to 33.3% of GDP in 2004, the actual amount of Government expenditure almost doubled from €26.7 billion to €51.8 billion in that period. By 2008, Government expenditure had tripled.15 The substantial rise in expenditure was obscured by the strong rise of GDP. However the affordability of this increase in expenditure was reliant on a continuing stream of non-cyclical taxes.
There were differences of opinion expressed by witnesses. Charlie McCreevy said: “No matter how these figures are interpreted, it is quite clear that there was no splurge over the period.”16 However, this was not a view shared by all. Bertie Ahern accepted that Current Expenditure was too high by 2007.17
Brian Cowen regretted that current spending growth was not lower in his time as Minister for Finance and said that he should have had a less expansionary approach to his Budget for 2008.18
Agreeing high levels of current expenditure created a further problem, Tom Considine said:
“From a sustainability viewpoint, gross voted current expenditure is particularly important because of the difficulty in reversing welfare, pension and pay increases once granted.”19
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