Past failures mean officials may now be willing to engage with outsiders rather than rely on groupthink

IRELAND SUFFERED one of the deepest and most protracted crisis in public finances in the 1980s. In its wake, no effort was made to institutionalise the lessons of that disaster by putting in place mechanisms that might have prevented another crisis. Inaction of this kind has long been the norm in the policymaking system here.

But things might be changing. From without, a more rigorous and wider ranging set of fiscal rules will apply to euro area countries in the future. These rules will be overseen by a European Commission equipped with more intrusive powers and a more credible threat of sanction than in the past.

In addition, and one of the upsides (one hopes) of the EU-IMF bailout, domestic institutions and arrangements will be made to change.

Under the terms of the bailout, an independent fiscal council must be set up by next month and new budgetary rules must be drafted by the end of the year.

Mindsets among policymakers may also be changing. Despite being a small sociable state in which there is much personal interaction, the willingness of officials to engage with non-officials is unusually limited compared to peer countries.

Suspicion, disinterest, a (mis)belief that greater openness could result in a loss of control, and concern about having gaps in knowledge exposed may all be contributory factors for bureaucrats’ limited engagement. But a policymaking community that remains very much in shock is now more willing to engage with outsiders. Its past failures are so serious and glaring that change is unavoidable.

In that regard, a seminar on budgetary management organised this week by the Department of Finance and the new Department of Expenditure and Public Sector Reform was a very positive development. Papers* were presented both by officials and others.

Bringing together people from within the system and those with relevant expertise – particularly, but not exclusively, from academia – is what most developed countries do systematically.

Bringing different worlds together allows knowledge and perspectives to be shared. It also works against the groupthink issue that is a particularly severe problem in Ireland.

Officials say it is the intention to hold such seminars on a regular basis in the future.

Another sign of possible change in recent weeks was the appointment of Robert Watt to head the Department of Expenditure and Public Sector Reform.

Watt is young (41), clever, informed, pragmatic, has a very wide range of contacts and is a bit of a bully. The last trait will be necessary professionally if anything of real significance is to be achieved in allocating very scarce resources in a manner that yields the highest returns both economically and socially.

The need for profound change in the way policy making is done can be illustrated in many ways. This column is partial to graphic illustration. In the accompanying chart, the efforts of the Economic and Social Research Institute to measure the degree to which government spending and tax measures affect the wider economy each year are shown.

Their earliest estimates go back to Richie Ryan’s time as finance minister in the mid-1970s. His 1976 budget was the most contractionary ever, according to the ESRI measure – more so than anything yet undertaken since the bubble burst in 2007. The most expansionary stance ever taken came two years later when the post-1977 election splurge was in its maddest and fullest swing.

But what is really striking is the degree to which fiscal policy has been what economists call “pro-cyclical” so consistently. First year economics students are taught that fiscal policy should be exactly the opposite, or “anti-cyclical”. That means that spending and taxes should not be used to stimulate the economy when it is doing well of its own accord.

This, among other things, allows for the squirrelling away of resources so that there is room for manoeuvre in bad times. Then, when those bad times come – as they always will – government is well placed to put a foot on the accelerator so that the private sector gets some stimulation from the public sector.

Since the mid-1970s the economy – as measured by gross national product (GNP) – has contracted on five occasions on an annual basis. In four of those five years the fiscal stance has been contractionary, ie pro-cyclical, according to the ESRI.

Over the same period, GNP growth exceeded 4 per cent (a very healthy rate of expansion for a developed economy) on 17 occasions. In 13 of these 17 years the fiscal stance was expansionary. Fiscal policy was thus almost as frequently pro-cyclical during good times as during bad.

How to counteract the engrained bias towards pro-cyclicality will be the subject of a future column. In the meantime, and for those interested in delving into the subject in greater depth, Simon Wren-Lewis, an Oxford economics professor, has an instructive web page**.

*http://www.finance.gov.ie/viewdoc.asp?DocID=6868

**http://www.economics.ox.ac.uk/members/simon.wren-lewis/fc/fiscal_councils.htm