The Department of Finance’s estimates have contributed to our economic difficulties
I AM CUT off temporarily from some of my data bank because of a brief stay in hospital, as doctors reconcile treatment of a lung deficiency with my late-onset diabetes. However, this week I wanted to address an aspect of our economic crisis that does not require statistical data – the respective responsibilities of the Civil Service, specifically the Department of Finance and of politicians, in economic policymaking.
The two roles of the Civil Service are to advise on policy and then, after the Government has decided what to do, to implement its decisions. For their part governments are, of course, free to ignore rather than take advice tendered to them.
I strongly suspect that the serious policy mistakes this Government has made since the end of the 1990s, which have left us so vulnerable to the global credit crunch, have been mainly the result of a failure to take much good advice given to it by the department over recent years.
That department may nevertheless also share some responsibility for the course that events have recently taken.
When I was taoiseach there were 17 economists working in the department. When I last checked a few years ago, there were only three, only one of whom was working on macro-economic issues, eg on policy issues related to the performance of the economy.
I had been moved to raise this issue because of some very wide margins of error that had occurred in the department’s revenue forecasts. These had involved substantial underestimations that had tempted then minister for finance Charlie McCreevy to seek popularity by dissipating these apparent surpluses.
Why did the number of qualified economists at the crucially important assistant principal grade in the department fall so low? I suspect because of opposition by the administrative side of the Civil Service to recognition of a professional grade of economist in the public service.
A result of this policy has been that a qualified economist entering the Civil Service is precluded from a normal career in the department.
Because of this, so many qualified economists have left the department that it has been unable to meet its staffing needs in this area. In the 1980s, before the problem posed by this policy was recognised, these staff needs were well provided for.
It has indeed been reported that some years ago, the department was so frustrated by its own policy that it felt it necessary to ask the National Treasury Management Agency, which was free from such staffing constraints, to employ an economist at that agency’s substantially higher pay level and then to lend that economist to the department for a period.
This has been an absurd, ramshackle and dangerous approach to policymaking. The absence of an adequate number of qualified staff on the macro-economic side of the department policy area is indefensible and has contributed significantly to our current economic difficulties.
This complex and highly technical side of its work should, as is the case in the ESRI, be undertaken by an adequate team of qualified economists, specialising in macro-economic analysis. This is a criticism of the department’s organisational arrangements, not of any individual official.
I hope that Brian Lenihan will belatedly tackle this staffing issue, facing down any opposition in the Civil Service.
Incidentally, our media should, I believe, report regularly on issues of this kind in the public service. Perhaps because we are such a small society we seem to have lacked this kind of important specialised media coverage.
It quickly became evident that the October budget data forecasting the trend of the economy and of revenue in the latter months of last year greatly underestimated the continuing fall in national output and in tax revenue.
The department’s estimates at this time seem to have been based on a curious assumption that the decline in output and in revenue that had started at the beginning of the year would effectively cease after September.
I doubt very much that there was any political interference in this process, so on this particular point the responsibility almost certainly lies at some level within the department. And at least some of the Government’s recent problems have derived from the fact that it relied on this defective estimation in preparing its patently inadequate budget measures.
Of course this does not explain or excuse errors in the budget policy decisions, such as the failure from the outset to exclude low incomes from the operation of the levy and all the clumsy handling of the medical card issue for those aged over 70.
Those are purely political issues. It would be unfair to have expected the department to have anticipated the scale of the collapse of our economy and of our revenue system during the past year.
The sheer magnitude and speed of the fall in output and revenue, as distinct from the fact that there was bound to be a recession of some kind, was not foreseen by anyone, myself included.
But a distinction has to be drawn between the unforeseeable scale of collapse and the department’s failure, in the second quarter of the year, to recognise the speed and likely persistence of the downturn that had then been under way for a full nine months. This clearly contributed to the subsequent weakening of the Government’s authority.
PS: I offer a concrete suggestion for reducing spending in the years ahead. The substitution of fixed-price contracts under which construction companies carry all the inflationary risks (which in their bids for contracts they have loaded enthusiastically on to the public authorities, thus increasing construction costs) should now be abandoned in the light of impending reductions in cost levels as we enter a deflationary period.
This policy no longer corresponds to our national interest and deprives the State of a possible tax benefit that could partly redress the damaging revenue consequences of the impending deflation.