Posted by Richard Hughes
In the lacuna between the general election in late February and the formulation of the new government earlier this month, Ireland’s Department of Finance (DoF) published the conclusions of an independent review of its performance over the decade leading up to and including the global economic crisis. The review was conducted by three person panel chaired by Rob Wright, former Deputy Ministry of Finance in Canada.
While the report, entitled Strengthening the Capacity of the Department of Finance, complimented the DoF’s management of crisis itself, its account of the DoF’s performance in the run-up serves as a timely reminder of challenges that all finance ministries face in trying to chart a prudent course through the good times. Looking at the DoF’s advice to its ministers, the Cabinet, and Parliament (the Dáil) over the last ten years, the report found that the DoF did provide early and clear warnings about the pro-cyclicality of fiscal policy in Ireland. However, these admonishments went largely unheeded and, from the late 1990s onward, the fiscal stance of the final budget approved by Cabinet in November and the Dáil in December were consistently looser that that recommended by the DoF in June.
While the authors acknowledge that even the most powerful finance ministry would have struggled to the deflate the atmosphere of optimism that pervaded Irish politics at the time, the report does point to a number of weaknesses in budget process and the DoF itself that further diluted the ministry’s influence over fiscal policymaking:
- First, the annual budget was largely pre-empted by two decision-making processes that took place outside the fiscal policy-making cycle. The first was the Programme for Government which set out the policy program of the governing coalition on a biannual basis. These Programmes often included very specific commitments on future levels of tax and spending. The second was the Social Partnership, a corporatist set of social and economic agreements hammered out between employers and unions between 1987 and 2009, which included commitments on pay settlements in both the private and public sectors. The affordability of the various commitments entered into in these documents was not rigorously and systematically quantified or assessed by the DoF before they were made.
- Second, the public phase of the annual budget process was too short to allow for meaningful public or Parliamentary debate of longer-term fiscal challenges. Unlike a growing number of countries on the Continent, Ireland does not present to Parliament an initial economic and fiscal strategy statement in the late spring/early summer to set the framework for the annual budget presented in the autumn.
- Third, the DoF itself was not equipped to fully appreciate or effectively articulate the macroeconomic and fiscal risks that Ireland was accumulating. The DoF did not regularly present alternative macroeconomic scenarios in its budget advice to Cabinet or the public. Nor did the DoF undertake a regular and comprehensive assessment of fiscal risks, especially those arising from the vulnerabilities in the financial sector and the narrowing of the tax base. Finally, the report noted that only 10 percent of the DoF’s staff complement had post-graduate degrees in economic compared with 40 percent in the Dutch MoF and 60 percent in the Canadian MoF.
Wright and his colleagues make a number of recommendations aimed at strengthening the DoF and its role in the budget process going forward, including:
- Requiring the Government to present a pre-budget economic outlook and fiscal strategy to Parliament in the spring and requiring any revenue windfalls that materialize between then and the budget in December to go to debt reduction;
- Establishing an independent Fiscal Council to review the above strategy and the risks around it, including those arising from future Programmes for Government and Social Partnerships. Notably, the report does not recommend that the DoF contract out the economic or fiscal forecasting function to this independent agency as was recently done in the United Kingdom with the creation of the Office of Budget Responsibility;
- Inclusion of alternative macroeconomic scenarios and fiscal risks in budget documentation supported by inter-agency arrangements for oversight of financial sector risks;
- A doubling in the number of economists, with an emphasis on those with expertise in taxation, accounting, and financial markets; and
- The hiving off of the Public Service Management and Development Division of the DoF into a separate agency focused on the management of the civil service to enable the DoF to focus on its core function as and economic and finance ministry (though with retained responsibility for civil service wage policy).
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