Tuesday, March 1, 2011

Irish Department of Finance shortcomings highlighted

When Ireland became enveloped in an unprecedented financial crisis in 2008 it became clear that it had failed the test of prudent financial management,, which in turn, can provide a greater capacity to manage unanticipated outcomes.

Budgetary processes lacked coherence and ministerial accountability to the Oireachtas was weak throughout the previous decade. A lack of transparency was characterised by the absence of adequate information and analysis from the Department of Finance for the purpose of public debate and consultation.

An independent Review, published on 1 March, of the effectiveness of the 542-person Department of Finance is highly critical and portrays a Department as buckling under the reckless dominance and feckless political incompetence of Finance Ministers’ McCreevy and Cowen and Bertie Ahern Government. The Review also cites the invasiveness of political agendas including the PD-FF coalition Programmes for Government and the diabolical social partnerships which allowed lobbyists and their chaplain run riot with their unsustainable wage demands.

The Review covers the period this Department was in the charge of Secretaries-General , Hurley (March 2000 to March 2002 who subsequently became Governor of the Central Bank ), Considine (March 2002 to June 2006, now a public interest director of Bank of Ireland) and Doyle (June 2006 to January 2010), who ought to have demonstrated stronger leadership and done more to avoid the collapse of the Irish economy.

The currency devaluation of 1992 and the emergence of the Single European Market enabled Ireland surge ahead economically; experience strong investment and export growth until 2000. Thereafter a property boom took hold powered by low interest rates and cheap credit, much of it sourced outside Ireland. When the property bubble inflated in 2003 in some years more than 80% of annual incremental credit growth went to fund house purchase, construction and property speculation.

The property bubble collapsed in mid 2007 and Government revenue fell by 21% by 2009 but spending on social welfare soared as unemployment grew rapidly. In 2009 the deficit was 14.4% of GDP and last year this rose to 32% of GDP after taking account of emergency assistance to Irish banks.

The Review focused on:

The Department’s advice on the risk of pro-cyclical policy

Their repose to the overheating of the property sector

The nature of the Department’s advice on the vulnerability of the Irish tax system to an economic downturn.

The Review states that the Department of Finance

  • Does not have the critical mass in areas where technical economic skills are required. There are 39 economists in the Department of Finance, less than 10% of the total staff complement. Approximately 60% of the Canadian counterpart to the Department of Finance are economists while 40% of the staff in the core areas of the Dutch counterpart are trained to a Masters, or higher level.
  • Has too many generalists in positions requiring technical economic and other skills
  • It is more number-driven than strategic as evidenced by its failure to set out options to moderate activity in the construction sector, including the introduction of 100% residential mortgages.
  • Does not have sufficient engagement with the wider economic community in Ireland
  • Operates in silos with limited information sharing
  • Is poorly structured in a number of areas, including senior management and there is insufficient attention given to performance management, skill shortages and reporting structures at senior and middle-management levels. The Review comments ‘that as in any organisation there are some who conspicuously underperform causing serious morale issues.
  • Is poor on human resources. Assistant Secretaries do not report to the Secretary-General reporting instead to a Second Secretary General. The review recommends that Second Secretaries-General do not manage large divisions and provide more strategic support.

While officials provided oral advice to the Government on Budgetary Policy in June of each year on the risks of a pro-cyclical fiscal stance the advice was not heeded and spending provisions in the subsequent December Budget in 2001, 2006, 2006 and 2007 was especially higher. This poor budgetary process obscured ministerial and Government accountability to the Oireachtas. Spending marched to the beat of a political drum and the sabre rattling of the so-called social partners.

The review recommends

  1. The creation of a meaningful consultation period seeking broad feedback
  2. Releasing Departmental analysis to the public debate
  3. Providing for third party validation of Department of Finance analysis through an independent Fiscal Council
  4. Greater emphasis on a formal written record rather than oral briefings to Ministers for Finance

The Department of Finance must now remake itself through changes in structure, professional capacity and internal working methods. There has also to be a more outward-looking attitude.

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