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Tuesday 12 December 2017

Bowing out quietly

O'Leary is stepping down from his Department of Finance position less than two years after his surprise appointment

This week's announcement from the Department of Finance that Jim O'Leary is stepping down as senior economic adviser to the department comes as tensions grow between the two government parties over budgetary policy.

It came as a surprise to many when it was announced in September 2010 that Jim O'Leary was moving from NUI Maynooth, where he had been an economics lecturer since 2001, to the Department of Finance to become senior economic adviser in its budget, taxation and economic division.

Mr O'Leary, who had previously advised the last Fine Gael Taoiseach John Bruton in the 1990s and was also appointed to the Aer Lingus board in 1995, would not have been seen as an obvious candidate for the position. Mr O'Leary has also worked as a leading economist with Davy Stockbroker.

One of the great strengths of the former Finance Minister, the late Brian Lenihan, was to be able to look beyond narrow party political considerations when making decisions. If he decided that Mr O'Leary was the best candidate for the job, then any perceived Fine Gael links would have represented no obstacle to his appointment.

What is certain is that by late September 2010, the Department of Finance stood in desperate need of new blood.

Not alone had an increasingly concerned Mr Lenihan commissioned former Canadian deputy finance minister Rob Wright to conduct an examination of the department's performance over the previous decade, Ireland had been effectively priced out of the international bond markets, setting in train the series of events that would force us to accept an EU/IMF bailout two months later.

It came as no surprise to anyone outside the Department of Finance when the Wright report, which was eventually published in March 2011, was highly critical of the structure of the department, concluding that it contained too many generalists and too few professional economists within its ranks. It was precisely to help remedy this defect that Mr O'Leary was recruited in September 2010.

He was barely a wet day in the job when the fiscal dam burst. On September 30, 2010, ironically the second anniversary of his disastrous decision to unconditionally guarantee the deposits and bonds of the Irish-owned banks, Mr Lenihan announced that the cost of bailing out the Irish banks had risen to €45bn, €15bn higher than the previous estimates.

The vast bulk of the increase was due to higher-than-expected losses at Anglo and Irish Nationwide, where the total cost to the taxpayer had risen to at least €35bn and, in a worst-case scenario, to as much as €40bn.

The September 30, 2010, announcement destroyed whatever lingering credibility Ireland retained on the bond markets. Irish bond yields soared and we were forced into the arms of the EU/ECB/IMF "Troika" within eight weeks.

This meant that Mr O'Leary enjoyed no honeymoon period at the Department of Finance. Even before the arrival of the troika, Mr Lenihan was forced to concede that the package of tax increases and spending cuts contained in the December 2010 Budget would be €6bn rather than the previously expected €3bn.

The department also drew up a four-year plan, which, in a complete break with previous practice, contained details of the following four Budgets, including likely spending cuts and possible tax increases. Mr O'Leary was centrally involved in drawing up both the four-year plan and the December 2010 Budget.

So why has Mr O'Leary chosen to leave now? Given his previous record, it can hardly be due to any incompatibility between himself and Fine Gael. While Mr O'Leary has stated that he is quitting for unspecified "personal reasons", could it possibly have had anything to do with the tensions between the coalition parties, which reputedly preceded last month's Budget?

What is clear is that the December 2011 Budget represents an unsatisfactory compromise between Fine Gael and Labour. Fine Gael refused to budge on its pre-election promise not to increase income tax rates or reduce bands and credits, while Labour was equally adamant that there would be no cuts in either public-sector pay or headline social welfare rates.

The deadlock was only broken by the decision to raise the standard VAT rate by 2pc to 23pc.

But will the VAT increase do the trick? The full-year exchequer returns, which were published this week, show that VAT revenue fell almost €500m short of target in 2011.

This does not bode well for the Government's hopes of raising an extra €670m in revenue from VAT in 2012, almost two-thirds of its projected €1.1bn revenue increase for 2012.

If the VAT increase fails to deliver the targeted revenue increase, tensions between the two parties are certain to increase as politically difficult decisions become unavoidable.

Mr O'Leary has often been in the headlines before. For example, in 2000, he was appointed by the first Fianna Fail/PD coalition to the benchmarking body which examined public-sector pay.

However, by the time the benchmarking body delivered its report in June 2002, Mr O'Leary was no longer a member, having resigned unexpectedly, shortly before the report was published.

Why did Mr O'Leary resign from the benchmarking body? He was understood to have been opposed to its central recommendation of a 9pc pay increase for public-sector workers, but it's impossible to be certain as he never went public with any objections.

This reluctance to upset the applecart was also in evidence during Mr O'Leary's term as a director of AIB, then Ireland's largest bank, between 2001 and 2008. During this period, AIB grew its loan book from €51bn to €127bn, a 149pc increase in the space of just six years.

After the property bubble burst in 2007, a huge proportion of the AIB loan book, the majority of which was property-related, turned bad. It is the taxpayer who has had to pick up most of the tab for this orgy of irresponsible lending -- about €17bn at the last count.

In July 2010, Mr O'Leary told the McGill Summer School that it was a matter of "profound personal regret" to him that he hadn't spoken out more forcefully during the property boom. While this admission of regret was considerably more than most of his professional colleagues could bring themselves to utter, the truth is that it came desperately late in the day.

Mr O'Leary, in common it must be said with most other Irish economists, has not emerged with his reputation enhanced by the events of the past decade.

The vast majority of Irish economists, including both those employed in academia and in financial services, were content to peddle the conventional wisdom and when, soon after the middle of the last decade, it became blindingly obvious that the property bubble had inflated to ridiculous proportions, stuck to the notion that it would end with a "soft landing", rather than, as actually happened, a catastrophic crash that pulled most of the banking system down with it.

So where does Mr O'Leary go from here? Having been at the centre of national economic debate for more than two decades and still only in his mid-50s, he is unlikely to fade into obscurity any time soon.

Irish Independent

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