Wednesday 18 October 2017

Revealed: secret files warning of the crash

Exclusive: Coalition kept spending despite advice on how things were deteriorating

Brian Lenihan and Brian Cowen in 2010.
Brian Lenihan and Brian Cowen in 2010.

Daniel McConnell Group Political Correspondent

TOP SECRET government memorandums reveal how Brian Cowen's coalition kept spending and failed to heed dire warnings as the economy fell off a cliff.

The internal Cabinet documents, which would normally remain unpublished for 30 years but have been obtained by the Sunday Independent under new Freedom of Information rules, reveal for the first time the full extent of how the then Fianna Fail-led Cabinet mismanaged the economy in the summer of 2008.

The memos show the late Minister for Finance, Brian Lenihan, was made aware of how quickly the budgetary situation was deteriorating in June 2008, "particularly in terms of tax revenue".

This was brought to his attention by then Secretary General of his department, David Doyle, who urged him to discuss the matter with then Taoiseach and the rest of the Cabinet "as soon as possible".

When Mr Lenihan went to Cabinet he warned that the substantial increase in public spending in the immediately preceding years was unsustainable.

However, despite the dire warnings, Mr Lenihan still proposed €500m of additional social welfare payments, a 2.5pc pay increase for 300,000 public servants under the Social Partnership and €365m of tax breaks, the memos reveal.

Former Taoiseach Brian Cowen pictured in 2010
Former Taoiseach Brian Cowen pictured in 2010

The series of documents show how the scale of the financial crisis caught them completely off-guard.

Read more: Cowen went golfing and officials dithered as country burned in 2008

Just two weeks after his appointment as Finance Minister in June 2008, Mr Lenihan presented a 'top secret' memo for Cabinet, prepared at the behest of Mr Doyle.

Because of the slowing economy, he estimated a €3bn shortfall in tax revenue was emerging.

The memo states: "Conditions in the Irish economy have deteriorated sharply in the last six months... The budgetary position has deteriorated considerably particularly in terms of tax revenue yield."

In a handwritten request to Mr Lenihan, Mr Doyle says: "Minister, I recommend this memo be circulated to Cabinet at first possible opportunity. You will need to discuss this with Taoiseach if possible."

But despite their own belated concerns, the memo contained proposals to extend social welfare benefits by €500m, but also to continue pay increases of 2.5pc per annum under the Social Partnership. Mr Lenihan and his officials were still forecasting positive growth of 1pc in 2008 and almost 3pc for 2009. Ultimately, the economy in 2009 shrank by 9pc.

After imposing €440m of spending cuts in July 2008, the Cabinet went on a six-week break.

It was not until the Cabinet returned from the break that Mr Lenihan, on September 3, brought a new "secret" memo to Cabinet which warned the economic slowdown had not just continued, but had "become more pronounced over the summer".

He said, at that stage, a €5bn shortfall in tax revenues was now likely.

Just two weeks later, on September 17, it was clear the economy had spiralled out of control. Mr Lenihan was forced to bring another memo to Cabinet, informing his colleagues that the projected shortfall was now €6.5bn, with the deficit set to be 5.5pc of GDP. For the first time, Mr Lenihan raised the prospect of "recession", the memo stated.

On foot of the mounting crisis, at the September 3 meeting Mr Lenihan asked all ministers to provide options to realise a 2.5pc cut in their budgets.

However, a later memo stated that a number of departments either failed to deliver the necessary targets or indicated they would breach the targets.

The Health Service Executive (HSE) said they would "miss the target by €1bn while the Department of Social Welfare missed the target by €2.215bn".

The memo states: "The public finances have weakened considerably as the year has progressed and the prospects for the next three years are extremely serious."

In a sign of the panic engulfing the embattled government, Mr Lenihan decided to bring the Budget forward to October 14.

Then, on September 28, the Cabinet held an emergency meeting. Mr Lenihan told his colleagues that tax revenues at €41.5bn were likely to be a full €12.5bn below what the State expected to spend in 2008 and €6.5bn behind where they were forecast to be.

Having previously forecast growth for 2008 overall, Mr Lenihan conceded the economy would now shrink by at least 1.5pc.

But Mr Lenihan also ruled out any suggestion of a fiscal stimulus in order to offset the crisis, saying the public finances were "out of control".

"The option of adding a fiscal stimulus into the economy at this stage is simply not tenable. The fiscal position cannot be allowed deteriorate further. The position must be brought under control," the memo stated.

Then on the morning of October 14, Mr Lenihan brought his Budget Day memo to the Cabinet. The pace of the banking and economic crisis left many of them stunned.

In that secret memo, Mr Lenihan warned: "Ireland's deficit level is very high and not sustainable over medium term."

Later that day, Mr Lenihan announced the "most austere Budget" for a generation, with €2bn in tax increases, but described it as no more than a "call to patriotic action".

As the crisis deepened throughout 2009 and 2010, major differences emerged between Mr Cowen and Mr Lenihan over what action was required.

Mr Cowen, right up until he left office, said he accepted responsibility for the actions and decisions taken by his Government.

Sunday Independent

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