Business Irish

Wednesday 13 November 2019

No hostage to fortune

Doyen of the so-called Doheny & Nesbitt School of Economics pulls no punches when it comes to tackling inefficiencies

This week's publication of his controversial report on the sale of state assets reinforces Colm McCarthy's status as the most influential economist of his generation.

When in trouble send for Colm McCarthy seems to be the default position of Irish governments. When Fianna Fail returned to power following the 1987 General Election, during which it warned voters that "health cuts hurt the old, the sick and handicapped", it quickly performed a U-turn.

The new Finance Minister Ray MacSharry commissioned Colm McCarthy, then managing director of economic consultants Davy Kelleher McCarthy, to chair a committee charged with drawing up a list of proposed public spending cuts.

Dubbed 'An Bord Snip', the new committee set about its task with gusto. McCarthy, who even then was well-known for his abhorrence of wasteful public spending, quickly produced a menu of public spending cuts that, when implemented, quickly brought the public finances back under control.

The 1987 public spending cuts, which included thousands of public sector workers being made redundant and deep cuts in health spending, forever established McCarthy's reputation as the go-to economist for finance ministers who were in trouble.

Tiger bubble

Fast forward 21 years and the then Finance Minister Brian Lenihan was deep in the mire. The Celtic Tiger bubble had burst, leading to a collapse in the property market and tax revenues. With the budget deficit soaring, Lenihan badly needed a menu of spending cuts to impose on his reluctant cabinet colleagues.

Who should Lenihan turn to only McCarthy? He was appointed chairman of the grandly titled Special Group on Public Service Numbers and Expenditure Programmes in November 2008. Quickly christened 'An Bord Snip Nua', the group was given the task of identifying where public sector numbers could be reduced and spending cut.

By the time An Bord Snip Nua delivered its report in July 2009 it was clear that McCarthy had lost none of his old zeal for spending cuts, with the group recommending public spending cuts of up to €5.3bn.

These included a 5pc cut in social welfare payments, a 17,300 reduction in public sector numbers and the abolition of the Department of Community, Rural and Gaeltacht Affairs. An Bord Snip Nua neatly sidestepped the fact that public sector pay rates were specifically excluded from its remit by recommending even more savage job cuts instead.

Not surprisingly, ministers and then Taoiseach Brian Cowen were initially reluctant to swallow the strong medicine being prescribed by McCarthy.

Over the following 16 months events gradually caught up with An Bord Snip Nua. By November 2010, with the Irish State effectively bankrupt and locked out of the international bond markets, the Government was forced to unveil a four-year budgetary package featuring €15bn of spending cuts and tax increases over the following four years. Suddenly the July 2009 recommendations looked almost restrained.

Review group chairman

By July 2010, with the fiscal situation continuing to deteriorate and the Exchequer desperate to grab every cent that wasn't nailed down, the Minister for Finance came calling on McCarthy once again. He was appointed chairman of the review group on state assets and liabilities, which published its report this week.

Anyone expecting fireworks similar to those resulting from the publication of the An Bord Snip Nua report almost two years ago is likely to have been disappointed.

Instead of recommending a rapid clearout of the semi-states and other government-owned assets, the review group actually cautioned against an over-hasty firesale and called for a planned programme of disposals instead.

It also called for the merging of the ESB and Bord Gais distribution networks and a clampdown on debt-funded overseas expansion by state companies.

If implemented, this latter recommendation is likely to result in the sale of the Northern Ireland Electricity, which was bought for €1.4bn by the ESB last year, with Dublin Airport Authority's shareholdings in several overseas airports including those at Dusseldorf in Germany and Larnaca in Cyprus, also set for the block.

Most economists and other professionals who are awarded significant assignments by the State can be relied upon to toe the line. At the very least they are expected not to openly criticise government policy.

The normal rules don't apply to McCarthy. Despite having been called upon to chair two major review groups in recent years, he has never been afraid to take the Government to task when he has felt the situation warrants it.

Of course it helps that with a fluent writing style, which gets a weekly public outing in his 'Sunday Independent' column, and his regular TV and radio appearances, he is a born communicator.

While most of his professional colleagues struggle to explain economic concepts to the wider public, the gravelly-voiced McCarthy always has a pithy phrase or expression at the tip of his tongue.

In a September 2009, appearance on Pat Kenny's 'Frontline' TV show, he famously observed that the Government hadn't run out of compassion, it had run out of money. Brilliant!

McCarthy is best-known to the wider Irish public as the doyen of the so-called Doheny & Nesbitt School of Economics.

Named after the eponymous Dublin hostelry, this was a group of free-market economists, who apart from McCarthy himself also included the late Paul Tansey and TCD's Sean Barrett.

Depending on one's point of view, the Doheny & Nesbitt School of Economics either rescued Ireland from the 1980s recession or laid the seeds for the unsustainable policies of the Celtic Tiger years and the subsequent bust.

In truth, the influence of D&NSE was probably exaggerated. It was never more than a loose gathering with a constantly changing composition that reflected events far more than it shaped them.

Most Irish economists spend their entire professional careers either in academia or financial services and economic consultancy. McCarthy is unusual in that his career has straddled both sides of the professional divide.

After graduating from UCD with a commerce degree and an MA in economics, he successfully studied for a master's degree in economic science from the University of Essex.

Upon returning to Ireland, he spent more than a decade with the Central Bank and the ESRI before founding the economic consultancy Davy Kelleher McCarthy in 1981.

He was managing director of DKM, which was a subsidiary of Davy Stockbrokers, from 1981 until 2005. During that time it grew to become one of the country's leading economic consulting firms.

Then in 2005, much to the surprise of most of his professional colleagues, he quit DKM.

He took a significant pay cut and joined the UCD economics department as a lecturer, thus fulfilling a long-held ambition to teach and write before retiring.

Consultancy's loss was UCD students' gain.

Most academic economists tend to specialise in one narrow field. However, after almost quarter of a century as an economic consultant, McCarthy has probed just about every sector of the Irish economy.

This gives him a breadth of knowledge which is very rare among modern academic economists, something which is reflected in his broad brief at UCD, where he lectures students on energy, transport and economic statistics.

A natural performer, it is normally standing room only at his lectures.

With the Irish economic crisis continuing to worsen, his students would be well-advised to enjoy McCarthy's lectures while they still can. Don't be too surprised if an increasing proportion of his time is spent on government projects over the next few years.

Irish Independent

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