THE CLEAREST lesson to be learned from Ireland’s financial crisis has been the failure of various watchdogs to bark loudly and at the right time. Former taoiseach Bertie Ahern recently complained that he wished “somebody, somewhere” had warned him while in office of a potential crisis in the banks. Now a report by an independent review panel into the performance of the Department of Finance, appointed by Minister for Finance, Brian Lenihan, has highlighted its inadequacies in some detail, and identified many areas for urgent improvement. The panel’s brief was to assess the department’s performance over the past 10 years, and to recommend necessary reforms and changes.
It found that the department’s advice to ministers – via the annual June Memoranda to Cabinet on Budget Strategy – was largely ignored over the past decade. There the department regularly warned of the risks of pro-cyclical fiscal action. Its warnings, the report notes, were “more direct and comprehensive than concerns expressed by others in Ireland, or by international agencies”. But by December, what was announced on budget day – in the form of tax relief and higher spending – was “substantially above” what the department and its minister had advocated six months earlier. The reason for this change, the panel has suggested, was because the government’s budget process was overwhelmed by a need to meet commitments already made under programmes for government and social partnership.
Nevertheless, the panel is sharply critical of the department for not doing much more to communicate its concern to its political masters about their conduct of fiscal policy. It should have raised its game or, as the report says, “adapted its advice in tone and urgency”. It did not do so. The department’s failure was mirrored by the performance of the Central Bank in its watchdog role. It produced annual financial stability reports that also warned of the risks to stability of a credit-fuelled property boom. And it too advised governments – including those of Mr Ahern – of those dangers in public reports and private meetings. But ministers were not prepared to listen. Both the Central Bank and the Department of Finance could, and should, have done much more to articulate their concerns.
The panel, while it accepts the department is fit for purpose, concludes that it needs to be more effective and must now remake itself. It recommends that the department change its structure, its working methods and its professional capacity – including doubling the number of economists employed. And it favours oversight of both the department and the budgetary process by some form of independent fiscal council.
But there remain some unanswered questions. Why has it taken so long to recognise, and address this issue? And why indeed did Mr Lenihan, who commissioned this review, which was completed in three months, delay its publication for a further three months and then release it days before his government’s departure from office. His explanation for the timing of its publication – “to allow the incoming Government” consider its recommendations – is unconvincing.