Business Irish

Sunday 18 March 2018

Brendan Keenan: A proper Plan A on public finances still doesn't exist

Brendan Keenan

Brendan Keenan

So, there was no Plan B, according to Brian Cowen in his TG4 interview. As you may possibly have noticed, there still isn't.

Mr Cowen's comments on the most momentous events in our lifetime, which were followed up by a chat with reporters, were brief, but illuminating all the same. They helped to confirm the belief that, while there may not have been a Plan B, there was a Plan A of sorts.

That is one interpretation of Mr Cowen's remarks to the effect that his government thought there would be a soft landing and it would be able to deal with the consequences.

The phrase 'soft landing' was indeed much bandied about in the years before the crash, but never quite defined. The fact that it was such a topic of interest, though, is a useful reminder that there was plenty of worry around about how hard a landing it might be.

The notion seems to have taken hold that almost nobody saw anything coming. It is true that only a couple of people, led by Professor Morgan Kelly, articulated the full horror of what was coming, but there was wide debate about the scale of the downturn; not about whether there would be one.

As Mr Cowen indicated, the government also knew that the party would come to an end. But one can see why Fianna Fail might have believed it could handle it. The Soldiers of Destiny had been here before – and more than once.

The party had been lauded for its success in turning the public finances around in 1987. Tough decisions were taken, including hospital closures and a recruitment ban, but a strong international recovery at the right time played a key role.

Then there was 2002. Charlie McCreevy dragged a gaggle of senior Finance officials out of retirement to draw up the cuts (surprise, surprise, they came up with health closures and a ban on recruitment).

His 'Dirty Dozen' welfare cuts provoked outrage including, it is widely reckoned, from his Taoiseach, Bertie Ahern. But Alan Greenspan's 'put', where the markets were rescued from the dotcom crash with Fed dollars came at the right time and played more than a key role in restoring Irish growth. It also sowed the seeds of the global boom and bust, and the Irish meltdown.

This is what Mr Cowen et al did not see coming. It was pretty clear that Plan A was intended as a rerun of 1987 and 2002. As the former Taoiseach said, the expected growth in the economy would complete the job after another round of cuts.

His Budget of 2005 as finance minister was typical. Current spending was to rise by 9pc. Despite tax cuts, revenues would rise by 6pc, fuelled by growth of 8pc. There would be a surplus on day-to-day spending, but it would be smaller than 2004, and there would be a small deficit overall.

This was a dreadfully loose fiscal stance. But the unions – and large chunks of the media – were baying for more spending, and the opposition parties were crying for more tax cuts. What was needed was an angry Central Bank in Dublin and a clever one in Frankfurt. We should have been so lucky.

Plan A did have a few subtleties. The budgetary figures prepared by Finance were conservative, so the targets were usually exceeded. They allowed for a revenue slippage of a few percentage points of GDP before any serious breach of EU rules.

There was also a plan for a 'contingency fund' of €1bn a year from 2006, in addition to the 1pc of GDP which went into the McCreevy pension reserve fund. Clearly, somebody was beginning to get a bit worried.

But not worried enough. History suggested that budgetary corrections of about 5pc of GDP would stabilise the deficit in any likely downturn and hold the line until recovery came. Been there, done that, Fianna Fail could say.

But history was not about to repeat itself. History was about to be made. The combination of the construction collapse and the international economic slowdown produced double-digit deficits almost overnight.

Brian Lenihan's dramatic budgets can be seen as Plan A swinging into action. His unfortunate comment that the worst was over reflected a belief that history would repeat itself. It usually does, but not this time.

But he was obliged to bring in three emergency budgets as the crash overwhelmed the plans. The earlier loose stance was an enormous error. Had the government understood the vulnerability of either the public finances or the banks, disaster at least would have been averted. Misunderstanding both made it inevitable.

The public finances should have been the easier one to get right. The official inquiries have criticised the Department of Finance for not being more vociferous in warning of the dangers.

But we need to know what degree of danger it saw, as well as more detail on why it was not more forceful, and to know precisely whether warnings from staff were ignored, by whom and why.

And then came the banking collapse. That required a Plan B. But not only was there no such plan; unlike the public finances, there appears to have been no realisation that such a plan might be needed.

Mr Cowen said, with considerable justification, that there was no such warning from the OECD, IMF, EU Commission et al.

It is also true, but often ignored, that ministers are limited in the degree to which they can bypass official advice and follow other ideas, or even their own instincts.

The infamous crude blanket guarantee is evidence of the lack of foresight. It contrasts with the complex detailed proposals in Mr Lenihan's budgets, which delivered the bulk of the austerity programme in the course of 12 months.

This raises the troubling thought that, like the man searching under the street light, we are looking in the easy but wrong place for answers to what happened.

There is to be a banking inquiry, based on the popular, but erroneous, belief that the bank guarantee is the main cause of our woe. It would, of course, do no harm to learn more about the failure to recognise the risks to the banks and the particular circumstances which led to the guarantee. Researchers have already uncovered evidence that concerns held by Central Bank analysts were also ignored or suppressed.

But the banks now face a completely different set of risks, whereas the public finances pose the same great challenges as always – sound analysis, long-term planning, reliable forecasting and political responsibility.

A proper inquiry into the failures of Plan A, accompanied by a full account of their political stance from Messrs Ahern and Cowen, might shine a valuable light not just on the past but on the present.

The thickening mess over mortgage relief is evidence that Plan B is no more coherent than on the night of the guarantee, but one fears that, when it comes to the long-term public finances, there may not be much of a Plan A either.

Irish Independent

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