Tuesday 27 September 2016

Banking inquiry: Enda Kenny lays blame for economic crash firmly on FF coalition

Clodagh Sheehy

Published 23/07/2015 | 09:57

Enda Kenny says a range of measures will be introduced in the budget to help pave the way for reform
Enda Kenny says a range of measures will be introduced in the budget to help pave the way for reform

TAOISEACH Enda Kenny laid the blame for the economic crash firmly on the Fianna Fail government today.

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Mr Kenny said tighter management of public spending would have moderated economic overheating and left the public finances in a much strong position to protect living standards.

“The lion's share of the damage to the Irish economy was the fault of domestic economic and financial mismanagement”, he said.

The Taoiseach was appearing before the Banking Inquiry to answer questions about his time as leader of the opposition during the economic crash.

He said that by 2007 “an uncompetitive, bloated, over-borrowed and distorted Irish economy had been left at the mercy of subsequent international events”.

This had been “without the safeguards, institutions and mindset needed to survive and prosper as a small open economy inside the euro area.”

He accused the then government of “abandoning the competitive, export-oriented, flexible economic model needed to prosper inside Economic and Monetary Union” which had been bequeathed to it by the previous government.

Mr Kenny criticised  the ability of the Minister for Finance to introduce  or extend tax breaks for favoured sectors of the economy, particularly the property and construction sectors.

He also attacked the “excessively close relationship between the Central Bank and the Department of Finance at the time” and the corporate funding of political parties.

Fianna Fail led governments must accept the leading role in the financial crash, Tanaiste Joan Burton insisted, echoing earlier comments from Mr Kenny.

Reckless bank lending fed the property bubble which was inflated by “extraordinary property based tax breaks for the wealthy.

Light touch regulation “facilitated the banks in their reckless behaviour” Ms Burton told the Banking Inquiry.

Like an athlete on steroids is how the Tanaiste described the economy from 2002-2007.

She wanted to “nail the lie of the last Fianna Fail led Government that we were all responsible for the national bailout crisis.

“This is absolutely untrue”.  The Irish people were the victims and “those responsible were the Fianna Fail led Government, the boards of the banks, the Central Bank and the Financial Regulator.

The fatal combination of reckless lending and tax breaks “led inevitably” to the collapse of the economy.

“A series of catastrophic economic policy decisions by the Fianna Fail/Progressive Democrat Government created a huge distortion in the structure of the Irish economy” she said.

It  destroyed our competitiveness and, in the process, inflated the biggest property bubble in any advanced country in modern times.”

The Tanaiste added: “To put it bluntly, I warned time and again against the property –based tax breaks fuelling this bubble”.

The economy became uncompetitive, a high price economy driven by a credit fuelled housing bubble that would eventually crash and burn.

Regulatory policy, she said, had failed to rein in bank lending which was growing throughout the period at several times the growth in incomes.

“The government added fuel to the fire by pumping up the property bubble with a range of property based tax incentives that allowed the rich to shelter their incomes, in some cases paying no tax at all.”

The Tanaiste described the economic crisis as a “tragedy in three Acts”. 

In the first decisions that propagated the crisis were made by Fianna Fail led government, the banks and the Regulator.

Act II was the “denouement of these disastrous decisions with the unravelling of the solvency of the banking system” and the “fateful decision” to guarantee the banks.

Act III was the post 2008/09 period “when the true horror of the crisis in social and economic terms became apparent.”

Former Labour Party leader Pat Rabbitte told the Inquiry that a small number of influential individuals in the Financial Sector had more influence with government than the Dail did in the run up to the crisis.

“But when all is said and done the cause of our downfall was a property bubble fuelled by tax incentives and over- lending for land and property investment and, in the case of commercial property, indeed reckless lending.”

Mr Rabbitte insisted that whoever or whatever was responsible for the economic crisis “it was not the opposition”.

He said the Oireachtas had been ill equipped to scrutinise the banking sector. Nonwithstanding recent improvements Dail Eireann remained ill-equipped.

The Labour Party had consistently pressed for measures that would have helped prevent the property bubble “but mostly these were not taken on board”.

Mr Rabbitte also said that where a government did not change for 14 years “Ministers are more likely to adopt the hedgehog pose and some Civil Servants are more likely to be leveraged onto the side of the political hegemony of the day.”

The fact that there were warning in the system “but that they were benignly filtered before reaching government would appear to bear that out.”

His party experience was that pressurising the government to deal with land speculation “only resulted in the then Taoiseach kicking the issue into the All Party Committee on the Constitution.

“No action was taken although the Committee did in due course report and endorsed our approach” he added.

Mr Rabbitte said it had never occurred to him that the banks might fail and there were no credible economic reports that he knew of suggesting that the banks might be at risk.

“In fact there were national and international reports suggesting that the Irish financial system was sound.

“Even towards the end the public commentary was mainly about a soft landing. “The conviction was that those charged with regulating and supervising the banks were doing their job.”

He hoped the Inquiry would be successful in throwing more lighten why the crisis had happened.

Mr Kenny said there was “no requirement to conduct and publish cost benefit analyses on tax shelters and major infrastructure projects and to subject all major expenditure programmes to regular review”.

There was an absence of clear enforceable rules for jobs that could be taken up in the private sector by former Ministers, advisers and civil servants, no policing of conflicts of interest.

There was also a lack of transparency and rules regarding the lobbying of public officials by special interests, an absence of effective planning regulation and of a structured institutionalised national risk assessment process.

The Taoiseach told the Inquiry that the dreams of hundreds of thousands of families had turned to a nightmare as “stability was replaced by policy recklessness and regulatory failures”.

“We have learnt the hard way that being part of the euro presents not just opportunities, but huge domestic challenges”, he added.

There was a need for more effective regulation of the financial system, for greater budgetary discipline, for more responsible and transparent politics, and for relentless pursuit of cost reductions, innovation and product and labour market flexibility.

“Having failed these challenges in the first fifteen years of our euro membership, our economic and political institutions are now being renewed and reformed so that the euro can once again become a source of stability, prosperity and hope for the lrish people” he concluded.

Richard Bruton who was Fine Gael lFinance spokesman at the time said vulnerabilities had been “unnecessarily created” which left Ireland extremely exposed.

Warning voices from the IMF, EU, OECD, NCC, “did not get much traction” and “criticism was judged to be ‘taking down the economy’”.

He criticised a planning system which conferred huge benefits on developers, the lack of distance of the Central Bank from the Department of Finance and the weaknesses of the Oireachtas in holding government agencies to account.

Mr Bruton said the growth of property lending on cheap Eurozone money exposed a huge weakness in the wider policy framework for a sustainable single currency.

Producer interests, he added, dominated the Social Partnership model and “these comfortable relationships held back reform that should have been more pro-citizen and pro-consumer.

The hard lesson from the crash, stressed Mr Bruton, was the central importance of strong export oriented sectors supported by a suite of public policies.

Many reforms had been adopted and “better institutions are now in place to protect us from a repeat of such errors, but they do not fully insulate us” he said.

We needed now to ensure “constant vigilance, attention and policy discipline” to avoid “any prospect of a repeat of the mistakes that helped create the crisis that we are now emerging strongly from.”

Fianna Fail led governments must accept the leading role in the financial crash, Tanaiste Joan Burton insisted during her evidence this afternoon.

Reckless bank lending fed the property bubble which was inflated by “extraordinary property based tax breaks for the wealthy.

Light touch regulation “facilitated the banks in their reckless behaviour” Ms Burton told the Banking Inquiry.

Like an athlete on steroids is how the Tanaiste described the economy from 2002-2007.

She wanted to “nail the lie of the last Fianna Fail led Government that we were all responsible for the national bailout crisis.

“This is absolutely untrue”.  The Irish people were the victims and “those responsible were the Fianna Fail led Government, the boards of the banks, the Central Bank and the Financial Regulator.

The fatal combination of reckless lending and tax breaks “led inevitably” to the collapse of the economy.

“A series of catastrophic economic policy decisions by the Fianna Fail/Progressive Democrat Government created a huge distortion in the structure of the Irish economy” she said.

It  destroyed our competitiveness and, in the process, inflated the biggest property bubble in any advanced country in modern times.”

The Tanaiste added: “To put it bluntly, I warned time and again against the property –based tax breaks fuelling this bubble”.

The economy became uncompetitive, a high price economy driven by a credit fuelled housing bubble that would eventually crash and burn.

Regulatory policy, she said, had failed to rein in bank lending which was growing throughout the period at several times the growth in incomes.

“The government added fuel to the fire by pumping up the property bubble with a range of property based tax incentives that allowed the rich to shelter their incomes, in some cases paying no tax at all.”

The Tanaiste described the economic crisis as a “tragedy in three Acts”. 

In the first decisions that propagated the crisis were made by Fianna Fail led government, the banks and the Regulator.

Act II was the “denouement of these disastrous decisions with the unravelling of the solvency of the banking system” and the “fateful decision” to guarantee the banks.

Act III was the post 2008/09 period “when the true horror of the crisis in social and economic terms became apparent.”

Former Labour Party leader Pat Rabbitte told the Inquiry that a small number of influential individuals in the Financial Sector had more influence with government than the Dail did in the run up to the crisis.

“But when all is said and done the cause of our downfall was a property bubble fuelled by tax incentives and over- lending for land and property investment and, in the case of commercial property, indeed reckless lending.”

Mr Rabbitte insisted that whoever or whatever was responsible for the economic crisis “it was not the opposition”.

He said the Oireachtas had been ill equipped to scrutinise the banking sector. Nonwithstanding recent improvements Dail Eireann remained ill-equipped.

The Labour Party had consistently pressed for measures that would have helped prevent the property bubble “but mostly these were not taken on board”.

Mr Rabbitte also said that where a government did not change for 14 years “Ministers are more likely to adopt the hedgehog pose and some Civil Servants are more likely to be leveraged onto the side of the political hegemony of the day.”

The fact that there were warning in the system “but that they were benignly filtered before reaching government would appear to bear that out.”

His party experience was that pressurising the government to deal with land speculation “only resulted in the then Taoiseach kicking the issue into the All Party Committee on the Constitution.

“No action was taken although the Committee did in due course report and endorsed our approach” he added.

Mr Rabbitte said it had never occurred to him that the banks might fail and there were no credible economic reports that he knew of suggesting that the banks might be at risk.

“In fact there were national and international reports suggesting that the Irish financial system was sound.

“Even towards the end the public commentary was mainly about a soft landing. “The conviction was that those charged with regulating and supervising the banks were doing their job.”

He hoped the Inquiry would be successful in throwing more lighten why the crisis had happened.

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