Economy

Department of Finance’s split personality relies on personal relations

Splitting the finance function of Government into two departments runs the risk of discordant budgetary policy

Minister for Finance Michael McGrath and Minister for Public Expenditure, National Development Plan Delivery and Reform, Paschal Donohoe have worked well together. Photograph: Gareth Chaney/ Collins

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John FitzGerald
Fri Dec 22 2023 - 05:00

As I spent a decade in the Department of Finance, my first job after leaving college, I have continued to follow its work in managing the economy with keen interest.

The role of Finance since the foundation of the State has been well documented in successive histories of the department from Ronan Fanning and, more recently, Ciarán Casey.

Closely modelled on the UK treasury, the department has twice had its role split in two. In 1977, the incoming Fianna Fáil government set up a new department of economic planning and development focused on medium-term issues, leaving the department of finance to deal with the day-to-day management of the economy.

From the start, the relationship between those two departments was tetchy. In particular, the department of economic planning, by ministerial direction and without any basis in actual evidence, assumed that the economy would grow at between 6 per cent and 7 per cent a year in the medium term. By contrast, the department of finance was much more realistic, warning that the government’s exceptionally expansionary fiscal policy was dangerous, and that much slower growth was inevitable.

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In 1979, assistant secretary in finance, Maurice Doyle, warned the department of energy that plans for the new Moneypoint electricity generating station should not be based on the official, wildly optimistic growth projections from the department of economic planning. That warning was ignored, and Moneypoint was built at huge cost for boom growth rates that didn’t materialise.

The result was that Irish consumers had to pay unnecessarily high electricity prices in the 1980s and 1990s for an over-specified electricity plant.

When Charles Haughey became taoiseach in 1979, he abolished the economic planning department and merged it back into finance. But the legacy of the government’s disastrous economic policies continued. It was not until the end of the 1980s that order was restored to the national finances, and the economy returned to significant growth.

Hearing in 2011 that the incoming government was, once again, going to split the department of finance in two, I feared the worst. However, things have turned out rather better than I thought.

The split between revenue functions (remaining in finance) and expenditure control and managing the public service (to the new department of public expenditure and reform) reflected the pre-existing departmental structures, simplifying the new arrangements. However, that did not guarantee that it would work. As in the 1970s, there remained the danger of departmental rivalries getting in the way and, even more important, differing economic policy objectives being pursued by two ministers from different political parties.

In the event, by the end of 2011 it was clear that the two departments and, just as important, the two ministers, Fine Gael’s Michael Noonan and Brendan Howlin of Labour, were working very well together.

Noonan was a veteran of governing in the difficult 1980s economy. While there were, no doubt, significant differences in policy priorities between the two parties, the ministers resolved these issues between themselves, providing a united front to the rest of the government and the wider public. This was hugely important, given the massive challenges faced in the aftermath of the economic crash.

In 2012, I attended an informal meeting between minister Howlin and a group of senior French civil servants who had come to Ireland to see how this split of functions was performing. Howlin explained how the arrangement worked – basically he got on very well with Michael Noonan. I could see the look of disbelief on the faces of the French visitors.

The idea that two senior politicians from different parties could handle their differences without going public was unthinkable in a French context. No doubt they reported back to Paris that the Irish solution to economic policy co-ordination would not work in France.

While the rapport between Noonan and Howlin was obvious, there was no certainty that this arrangement would work with different personalities.

In the current Government, Paschal Donohoe of Fine Gael and Fianna Fáil’s Michael McGrath have also worked exceptionally well together, and this has survived their swap in ministerial roles. This relationship has helped ensure that the fundamentals of economic policy have not led to any interparty wrangling in our current Coalition.

Good relations between the twin departments have contributed to Ireland’s economic success over the last dozen years, and been a key source of stability in successive Coalition administrations. However, it remains to be seen whether, with different parties and personalities in future governments, this spirit of goodwill and co-operation between these two heavyweight departments will continue to prevail.

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