TAOISEACH BRIAN Cowen has defended his management of the economy in the years leading up to the property crash but conceded the economic and banking crisis was made worse by internal factors, including mistakes by government.
In a speech at Dublin City University last night Mr Cowen said governments should never again introduce tax breaks which would make a property bubble possible. Property tax incentives in place over the period from the mid-1990s should have been abolished many years prior to his decision to abolish them in December 2005, he said.
“While government shares responsibility for its role in these mistakes, it is noteworthy that many of the strongest critics of the government were silent on these issues prior to the crisis and indeed were proposing measures such as the radical reduction or abolition of stamp duty which would have made the position much worse.”
He said much debate had centred on whether the causes of the crisis in the Irish banking sector were international or self-inflicted. “I know many people will expect me to say that the crisis was exclusively caused by international developments. But that is not my view,” he said.
“We now know grave mistakes were made in the judgment of the capital adequacy of the Irish banks and the assessment of future loan losses. It is, however, important to note that no one in the independent authorities ever advised the Government that the capital adequacy was not sufficient or that higher capital adequacy ratios should be imposed.”
Mr Cowen added that when he was minister for finance he shared in this positive view of the economy’s prospects, which was held by all the main research and international agencies. “But contrary to what some are now trying to suggest, I was concerned about the potential vulnerabilities and risks arising from the rapid escalation in property prices... a recurring theme in risk assessments.”
He said as minister for finance he had enacted measures designed to calm the property bubble. He said four important actions were taken to attempt to minimise the potential vulnerabilities in the banking sector. These were the decision in December 2005 to abolish a wide range of property-based tax incentives; the refusal by the government to abolish or dramatically reduce stamp duty; the decision of the regulator at the start of 2007 to increase the capital requirements on banks for speculative property lending from 100 per cent to 150 per cent; and the decision by the government to allocate 1 per cent of GNP to the National Pension Reserve Fund every year.
“Those who suggest I did nothing to curb the property spiral specifically ignore the fact that in presenting my 2006 budget, I announced the most radical abolition of property-based tax incentives made by any recent minister for finance.”
He also said there was a failure to implement “more intensive compliance regulation” of financial institutions. “I believe auditors, regulators and governments all take responsibility,” he added.
Mr Cowen said the Government now had a responsibility to make sure the banks were working for the SME sector and if further action was required it would be taken.
The role of the Government, the Central Bank and the Financial Regulator will come under scrutiny when two independent reports into the causes of the banking crisis are published. The new Central Bank governor, Dr Patrick Honohan, will complete his report into the banking and regulatory inquiry this month.
Fine Gael finance spokesman Richard Bruton last night said the speech read “like a sad attempt” to pre-empt the findings of the banking inquiry. “The Taoiseach is fooling nobody if he thinks that catastrophic mistakes were not made during his time as minister for finance.
Mr Cowen had contemptuously dismissed those who questioned what the government was doing, he added. “Brian Cowen repeatedly said that Ireland’s property bubble was based on sound economic fundamentals. He built up unaffordable spending programmes on the back of property revenues that could not possibly be sustained and that have spectacularly aggravated the crisis we face,” Mr Bruton said.