As we have a quorum, the Committee of Inquiry into the Banking Crisis is now in public session, and can I ask members and those in the public Gallery to ensure that their mobile devices are switched off? We begin today's session 1 of public hearings with Ms Ann Nolan, second secretary general of the Department of Finance. In doing so, we'd like to welcome everyone to the public hearing of the Joint Committee of Inquiry into the Banking Crisis. This morning we will continue our hearings with senior officials from the Department of Finance who had key roles during the crisis period. At this morning's session we will hear from Ms Ann Nolan, second secretary general at the Department. Ann Nolan has worked for the Department of Finance since 1985; she has been second secretary general in the financial services division of the Department since 2010 and prior to this she was assistant secretary in financial services division and in public expenditure division at the Department. Ms Nolan, you're very welcome before the committee this morning.
Nexus Phase
Department of Finance - Ms Ann Nolan
Ms Ann Nolan
Thank you.
Before I hear from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry and therefore, the utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right and members of the public and journalists are reminded these documents are to be confidential and should not be published ... and should not publish any of the documents so displayed. The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets and core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to Ms Nolan please.
So good morning to you again and welcome, Ms Nolan, and when you're ready if I can invite you to make your opening remarks to the committee, please.
Ms Ann Nolan
Okay. Thank you, Mr. Chairman, and thank you for having me here today, and I will do my best to help the committee in its difficult task. You have my statement and I won't read it all out but will summarise a few important aspects of crisis management and the new legislative framework.
When I started on the banking side at the beginning of November 2008, the task at hand was the assessment of the size of the problem and the possible tools to handle it. The liquidity aspects were well measured at that time and fairly stable. The Irish economy had been contracting all that year and by the autumn of 2008, following the Lehman Brothers collapse, the property market had collapsed, with activity ceasing and prices falling. The solvency of the Irish financial institutions depended on the performance of the economy overall and the value of the property assets against which the institutions had lent money. Therefore, it was clear, as the property market continued to decline, that future losses on the property would be greater than had been previously expected and future profitability would be less than previously anticipated. This meant that the capital position of the banks had to be addressed. The PwC analysis showed clearly that there was a serious problem with land and development loans, both because of the total volume of such loans across the system and because of the small number of developers who had huge debts across the system. The Department immediately began discussions with the bankers on the need to bolster their capital position. The policy parameters within which the Department approached the recapitalisations throughout the period were as follows: banks should take action, where possible, to reduce the capital need by making changes to their balance sheets; assets should be sold; subordinated debt holders should be bailed in as far as possible; money should be raised on the markets, if available; the risk to the guarantee should always be considered; the systemic risk, that is, the risk of contagion, if capital were not provided, should also be considered; State support should only be considered as a last resort.
The initial recapitalisations of Bank of Ireland and AIB, consisting of €3.5 billion in preference shares, was agreed and implemented between December '08 and May '09, with detailed discussions on the amount and the terms and conditions in these capital injections. AIB also agreed at that time to sell their US and Polish subsidiaries.
The chairman and chief executive of Anglo Irish Bank left in December '08 and Donal O'Connor was appointed executive chairman on a temporary basis until a new CEO could be recruited. In view of what we knew about it and had discovered, once the announcement of our intention to recapitalise the banks was made on 21 December '08, we prioritised legal due diligence of Anglo. Arthur Cox carried out the due diligence and their first report was with us on 15 January '09. The options which we had at that point were to continue with the original recapitalisation, either by preference shares or ordinary shares, to nationalise or to try and disengage. The latter was not realistic in view of the guarantee, the expectation that European governments would stand behind their banks and the extreme likely contagion effect across the Irish system. In the event, it was decided to nationalise and replace the board and management.
The problem of land and development loans was dealt with, following a study by Peter Bacon, by setting up NAMA. An asset management agency was necessary because this loan book was so big and dysfunctional that it would have been very difficult for the banks to deal with these loans while continuing to provide banking services to the rest of the economy. NAMA has proved efficient in dealing with these loans. However, the slow, detailed method of valuing them individually and moving them over in tranches, which was developed to meet the requirements of the European competition ... European Commission, the competition directorate, increased the pressure on Irish banks and on the Irish State throughout 2010. The effect of this should not be exaggerated. The size of the losses was the major issue and overvaluing NAMA loans in 2010 would have resulted in losses materialising for the State later. Nonetheless, the transfer of loans based on discounted ... a discount calculated on a broadly stratified sample of loans for each bank would have been a better methodology and would probably have left ... given us the same result.
Another major issue was the haircuts for loans was significantly higher than we had estimated. This was mainly because of lack of equity in the developments. In addition to this, the continued recession meant that other loans, including both mortgages and loans to SMEs, were registering an increase in arrears. The first PCAR stress test run in March 2010 by the Financial Regulator found that the banks had very significant capital needs. Bank of Ireland met this need through a combination of raising capital on the market and a conversion of €1.7 billion of their Government preference shares. AIB sold their overseas assets, with the balance of capital - €3.7 billion - being provided by the Government.
Following our entry into the EU-IMF programme, the second PCAR stress test in March 2011 resulted in further capital demands for the banks.
Once again, Bank of lreland was able to raise money from the private sector, but the other banks, AlB, PTSB, EBS relied mainly on the State.
Given how much the State had to invest in the banking system, the policy throughout the period was to burden-share where appropriate. All of the original shareholders in the covered institutions saw their share value diluted to nothing, or almost nothing. At peak in 2007, the total share value of the institutions was €53.7 billion. In addition, €15.5 billion capital was raised through burden-sharing with subordinated debt holders. Much of this was done through liability management exercises where debt holders were asked to voluntarily sell their debt back to the banks at a reduced price. We also passed legislation to allow the Minister get a special liability order, SLO, from the courts to change the terms of the bonds. This forced the bondholders to sell into the liability management exercise, or have their bonds extended for a long period and interest suspended. The SLO was only used in AlB, but, undoubtedly, the existence of the legislation contributed to the success in burden-sharing with the sub debt holders in the other institutions.
The question of extending burden sharing to senior bondholders was considered seriously twice that I remember - first, in October and November 2010 when the guarantee had lapsed and the programme of assistance was being put in place. A number of lMF officials were strongly in favour of burning any unguaranteed and unsecured bonds in Anglo. This was opposed by the EU and ECB officials. In the event, the matter was considered at a more senior level in the IMF and, as a result of a US Treasury veto, the IMF also came down against any such action. It would not have been possible for the lrish Government to act without troika consent. The question was considered again in March 2011, but it was ruled out this time, as I understand, by the ECB.
The financial crisis ... to look at the regulatory supervision and government issues. The financial crisis lead to a reassessment of the legislative framework for the financial services, both domestically and internationally. I will give a brief summary of the changes made. I will divide my comments into domestic and EU, though obviously the two programmes were developed in tandem and the Department worked to ensure they were consistent to the greatest extent possible.
On the domestic side, the first action was to amalgamate the Central Bank with the lrish Financial Services Regulatory Authority. Separating the supervisory and financial stability functions, albeit with a requirement to cooperate, had undermined the importance of the macro prudential aspects of the role of both organisations. The amalgamation was effected through the Central Bank Reform Act 2010. This was followed by an extensive renewal of the supervision and enforcement powers of the Central Bank through the Central Bank (Supervision and Enforcement) Act 2013. This latter legislation streamlined, enhanced and modernised the powers of the Central Bank. Again, while this was a necessary and welcome improvement in the legislative framework, the Central Bank had significant powers before it was enacted and, indeed, used them extensively in the crisis management period, 2008 to 2013, prior to the new legislation.
The third major strand of legislation was providing for resolution powers. This was done initially through the Credit Institutions (Stabilisation) Act 2010, which gave extensive temporary resolution powers to the Minister for Finance to deal with the six covered institutions, as necessary, during the crisis. Subsequently, the Central Bank and Credit institutions (Resolution) Act 2011 was passed. This provides for the orderly resolution of a financial institution in financial difficulties. The Central Bank is the resolution authority.
A final major piece of domestic legislation in the Credit Reporting Act 2013. This is to enable credit institutions check what loans potential borrowers have from other institutions and organisations. This should prevent a reoccurrence of a situation where a small number of people can have large loans from many different institutions and pose a systemic risk. The credit register is currently being set up by the Central Bank.
On the EU front, the crisis lead to significant changes to the international regulatory framework also. The 2009 de Larosiére report recommended the establishment of a new European systemic risk board and three new supervisory authorities, the European Banking Authority, the European lnsurance and Occupational Pensions Authority, and the European Securities and Markets Authorities. These bodies set technical standards, resolve disputes between supervisors and assist in developing consistent interpretation of European law. Major legislative directives were also put in place for all the financial services areas, including the capital requirements directive, CRD lV dealing with bank capital, solvency ll dealing with insurance, and MIFID ll dealing with markets. This was followed by the banking union proposal which centralised banking supervision and resolution for euro area countries, with a possible opt-in for non-euro countries. The Single Supervisory Mechanism, SSM, was set up as a new branch of the ECB with responsibility for supervising the top 130 banks in Europe. The bank restructuring and resolution directive, BRRD, was also agreed to provide for a single resolution mechanism to resolve financial institutions in difficulties.
Thank you very much for your opening statement, Ms Nolan, and if I can now invite Deputy Joe Higgins to commence questions this morning. Deputy, you've 25 minutes.
Morning, Ms Nolan. Ms Nolan, the banking and financial services division at the Department of Finance have, as a principal directive, it's on your website, and I'll just quote: "On the one hand, to contribute to the maintenance of financial and economic stability and identify and manage potential risks to that stability...". And then, on the other hand, a little bit later, "...to continue the development of Ireland as a centre for international financial services". As you well know, in the 2003 Central Bank and Financial Services Authority Act, responsibility was given to the Central Bank and the regulator in the Act "to promote the development within the State of the financial services industry". And that was removed, then, in the Central Bank Reform Act 2010.
Can I ask you if continuing to give this mandate to the Department of Finance to develop the financial services industry on the one hand, and then to have ... identify and manage potential risks, can this impact on making appropriate decisions regarding policy and legislation in regard to the regulation of the financial sector?
Ms Ann Nolan
It is a function of government to develop the economy and a major priority of the current Government and, I think, of previous Governments is employment development, and there are in the funds industry alone, 35,000 people working in the funds industry in Ireland. So, you know, it is a major source of jobs for Ireland and a major and important area. However, for us to develop that, we need a strong regulatory system. I don't see the two as being in contradiction. I think if our regulatory system isn't robust, then that industry isn't secure, and the jobs in that industry is not secure. So, although I think for the regulator to have a job of promotion is inappropriate, I don't think it's inappropriate for the Department of Finance to have that job, and I don't think it influences our regulatory decisions because I think for us, we would see as a major policy issue to have a robust regulatory system, and that that robust regulatory system is necessary to develop the international financial services industry. I don't think they can develop against a background of light regulation in the modern world.
Yes. With respect, Ms Nolan, the paper, Regulating Better, from the Department of the Taoiseach in January 2004 made exactly those points, that regulation was to develop in a responsible way the sector. But we know what happened in the meantime with the bubble and the disastrous crash. Now, several witnesses in front of this inquiry have suggested that giving the Central Bank and the regulator at that time the mandate to regulate and control at the same time as promoting the industry gave rise to a conflict. And the Governor of the Central Bank listed it as one of the difficulties that arose with tougher regulation and allowing so-called light-touch regulation. What's different now, one would have to ask?
Ms Ann Nolan
Well, what's a major difference is the Central Bank no longer has that requirement. I mean, I think you have to differentiate significantly in the role of the Department and the role of the Central Bank. The role of the Central Bank is to regulate, and it is absolutely not the role of the Central Bank to promote the development of the industry. We provide the legislative framework for that regulation, and the legislative framework is separate, even within the Department, to the promotion of the IFSC, which is in a different section of the Department. But all Departments have the economic development of the country as part of their mandate.
Yes. I'm just trying to explore whether this is a conflict that still can have detrimental effects because it was suggested by witnesses that one reason for so-called light-touch regulation was that there was a reluctance to be tough on Irish banks, for example, in relation to the extent of property lending, over-lending, etc., because that would make then the Irish Financial Services Centre and the foreign banks that were there look like an offshore account. Isn't there still that contradiction there then?
Ms Ann Nolan
Absolutely not, in the sense that first of all, the Central Bank no longer has that requirement but far more importantly, the regulation across Europe for all financial services has become far more strict and far more uniform, so the regulatory system to which the IFSC organisations are now subject is not lighter than the regulatory system in other countries. It is not a light-touch regulatory system and nor should it be. It is subject to the EU directives which are implemented in Ireland by the Irish Central Bank but implemented in other countries by their central banks.
I want to quote from you ... for you, something from the Irish funds industry marketing brochure from March 2015-----
Can you cite that Deputy, if it is part of the documents?
No, but it's quite simple to-----
All right, fair enough.
So the Irish funds industry organisation says: "We represent the fund promoters/managers, administrators, custodians, transfer agents and professional advisory firms involved in the international funds industry in Ireland, with more than 13,000 funds and net assets of more that €3.8 trillion." Then it goes on to say, "Through its work with governmental and industry committees and working groups, Irish Funds contributes to and influences the development of Ireland’s regulatory and legislative framework." Is that worrying, that a powerful lobby can say, in effect, on one reading, that they are writing the regulation for their own industry?
Ms Ann Nolan
Well, they most certainly are not. I mean, I'm not responsible for what they say. They are free ... they're ... if you want to find out what they say you'll have to ask them, I can't answer for that but they most certainly are not writing their own regulation. The regulations for the fund industry are almost entirely EU regulations and are developed by the European Commission in conjunction with the European Parliament. We would consult with the funds industry as we would consult with any other group on those regulations as how they would affect them ... interest group. Most of our consultations nowadays are done on the web in ... by means of public consultations. But they do not write the legislation, it just simply isn't true.
Okay, can I just move on then Ms Nolan, thank you ... and if you could comment please on the decision to nationalise Anglo Irish Bank. Why that was not taken the night of the guarantee rather than a few months later and what advice the Government received at the time in this regard? And if you could comment if, in your opinion, nationalising Anglo earlier would have sped up a resolution of the crisis?
Ms Ann Nolan
Okay, just on the night of the guarantee, at that time I was not working on the banking side and was not involved and I can't comment on what happened that night at all. I was working on the emergency budget which, if you remember happened on 15 October and was working all that weekend all right but it was on a different topic. So I wouldn't be aware as to what ... why decisions were taken in that. I know Kevin Cardiff has already spoken on this and is in a far better place, and probably William Beausang as well, to give you commentary on that. On whether it would have made any difference, I honestly do not believe it would have made any difference but I can't prove that. You can only run life one way and you only get to see it once but I personally don't believe it would have made any difference on the speeding up of resolution.
I appreciate you weren't there on the night, Ms Nolan, but you are a very senior official in finance-----
Ms Ann Nolan
Yes, and I did answer the second part of your question as to whether I thought in my opinion it would make any difference, and my opinion is-----
Okay, just to ask you if you might think it's curious that ... I refer to core documents Department of Finance Vol. 2, pages 116 and 119, but I'll quote, it's not necessary to follow it.
This is the advice from Merrill Lynch to the National Treasury Management Agency and the Department on 28 September, which is one day before the guarantee. And it is obviously in favour of what it calls "state protective custody" of Anglo Irish Bank and INBS, and it says on paragraph (b) there, page 116, "This could occur over a very short period of time ... within days, but the point at which it occurs it will not be of surprise to debt or equity investors as knowledge of the institution's financial position will be obvious and they should expect such intervention in the absence of a private-sector solution." And then, on page 119, under "Guarantee for six Primary Regulated Banks", it says, "This would almost certainly negatively impact the State's sovereign credit rating, and raise issues as to its credibility." That was the advice of the, one of these groups that the Government retained quite a bit. Does it surprise you, in view of that and in view of the fact that their prognosis about the sovereign being affected came true very strongly, that the comprehensive guarantee was still given - and, again, to reflect on the effect of that - as opposed to nationalising Anglo and INBS on the night?
Ms Ann Nolan
Well, I suppose the one thing I will say is that nationalising Anglo, when it did happen in the following January, did not stop the outflow of funds in Anglo. So, the suggestion which seems to be in this document, that merely nationalising would stop all the outflow of funds from the system, our experience ... subsequent experience was not that that was the effect of nationalisation. So, you know, apart from that, that's really all I can say-----
Okay. Just to move on to a different but related area, then, Ms. Nolan, on page 5 of your statement, yes, you said, "There was a great reluctance at European level...". We have moved forward to the October-November period of 2010, and approaching the crunch period and the so-called bailout, and you said, "There was a great reluctance at European level to allow the burning of senior bondholders." And that has featured here, but what is your understanding, why was there such reluctance, where did it come from and how was it conveyed to your Department?
Ms Ann Nolan
Well, we were in discussions, detailed discussions with the Commission, the ECB, and the IMF, so it would be conveyed to us through the various officials ... to us, at official level, through the various officials of those organisations. It may also have been conveyed to the Minister separately, at Eurogroup meetings and so on. The reluctance was because of the contagion effect. They were very concerned that it would encourage or create difficulties in other states, for example, Portugal, Spain, Italy, where it might be seen that they were likely to burn bondholders less, and that you could create a run across Europe from the peripheral states into the centre ... in bondholders.
Ms Nolan, I'd be curious to see how ... how the information ... how it went back and forth between you yourselves and the European Commission and the ECB or whichever of your organisations. So this would be going on at the same time as Mr. Trichet was writing to the Minister for Finance and, you know, demanding certain courses of action. Would that then have been replicated in frequent phone calls or how ... between senior people in the Department of Finance and the European institutions?
Ms Ann Nolan
Yes, I think there were ... at that time there were a lot of different meetings, okay. There was the discussions on the imminent bailout, EU-IMF programme, and I think Kevin Cardiff, in his long statement, probably far better than I remember, gives details of the various meetings that occurred, so I would have taken part in some of those meetings. But also, my colleague at the time who was in charge, our EFC member, would have been going to very frequent EFC meetings ... meeting his European counterparts at the European working group and so on. So there would have been a lot of interaction ... in fact, there is always a fair amount of interaction.
Yes.
Ms Ann Nolan
And this would have been an issue, not so much a major issue of discussion and the agenda but a side issue that was discussed ... both at ... it was discussed at our meetings but it was very ... like ... you asked a question if we had-----
Which of the European institutions was constantly in the ear of your colleagues or, indeed, maybe yourself, in relation to this?
Ms Ann Nolan
Well, it wasn't constantly in the ear. I mean, we had some discussion on it and they just made their position very clear. It's not a question of that they wanted ... you know, their position was really clear. They didn't want this to happen. The ECB, the European Commission which would have been DG ECOFIN, probably at that time, who would have been very reluctant because they were afraid of the contagion across Europe.
Thank you and then on page 4 ... page 5 in your opening statement again, I'll just quote very briefly. It says:
Firstly in October and November 2010 when the guarantee had lapsed and the programme of assistance was being put in place. A number of [the] IMF officials were strongly in favour of burning any unguaranteed and unsecured bonds in Anglo.
What do you know about this? What level at the IMF was this-----
Ms Ann Nolan
I think the two people in question have actually said it publicly and they were Ajai Chopra and Ashoka Mody.
So, would this have been seen as a very high level within the IMF? Were you aware of this at the time?
Ms Ann Nolan
Oh yes, I was talking to both of them.
Yes, and what authority did they carry within the-----
Ms Ann Nolan
Well, they were negotiating the programme here and they were fairly senior people. I couldn't give you their exact grade or anything. I'm sure the committee could look it up.
How did your Department react to this suggestion?
Ms Ann Nolan
Well, certainly burning the senior bondholders in Anglo seemed, at that point, like something that we would be in favour of because it was very clear that Anglo's losses were irreparable and the State was basically on the hook for them. But we couldn't do it without actual backing from the IMF and the Commission and the ECB. I think if we-----
What period are we talking specifically about here, Ms Nolan? That this discussion was taking place?
Ms Ann Nolan
As I understand, we're talking about October 2010 but that's the-----
Yes, October-November.
Ms Ann Nolan
Yes, October-November 2010.
Yes. And can you throw any light then on further on what Mr. Cardiff said in testimony here, Ms Nolan, when he's speaking about pressures from certain quarters that no bondholders would be burned and he said that there was a real damage being done essentially by people operating behind the scenes:
[H]idden 'sources' were using leaks of inaccurate information to bounce Ireland into a bailout [...] then the people concerned were not just undemocratic, but anti-democratic - they ought to be asked to explain their actions, but they would first have to admit them. Who was in Korea, pretending to announce that the Irish Government had decided to seek a bailout? Who, in Korea or elsewhere, [and that's in relation to a G7 meeting, I think, that was happening] was taking these false rumours and putting them into the hands of press and financial commentators?
Can you throw any further light on this?
Ms Ann Nolan
I have no additional knowledge to add to what Kevin has said about that.
Ms Ann Nolan
I don't know what happened in Korea. I've never been to Korea.
Okay, thank you. Now, just then on ... in relation to the veto on burning bondholders, can I ask you, Ms Nolan, it's core document Ann Nolan, Vol. 2 and it's page 19. This is a letter from Mr. John Corrigan, the chief executive of the National Treasury Management Agency, to Brian Lenihan, TD, Minister for Finance, dated 28 November 2010. And in the second paragraph, Mr. Corrigan writes:
I learnt during the course of the discussion [and that was a discussion at a meeting of the Government the night before which he attended] that the external authorities and the European Central Bank (at board or equivalent level) had taken the view that burden sharing with unguaranteed bank senior bondholders was "not on the table". It is unfortunate that, notwithstanding the fast moving pace of recent events, I was not made aware of this outcome.
Ms Nolan, is that an extraordinary revelation that the NTMA was again outside the loop which seemed to have happened the night of the bank guarantee as well?
Ms Ann Nolan
It is unfortunate. The NTMA weren't outside the loop; they were at many of the meetings we were at. In that period 27-28 November, we had meetings night and day, I mean, literally 'til two, three in the morning. The NTMA were at some meetings. There were at some times five or six. I remember one of the Saturday nights there were five or six different meetings taking place at a technical level throughout the building. It was very unfortunate that John was not made aware of that but I rather think it was entirely accidental that people believed he had been told and that he wasn't told, rather than that anyone decided not to tell him.
Yes, but could this potentially have changed something if the NTMA had been aware that they may have taken a different approach and convinced the Minster of a different course of action?
Ms Ann Nolan
Absolutely not. I mean, I think the issue ... the NTMA and ourselves were ad idem to what we wanted, which would have been the burning of the bondholders and the question was that the European Central Bank that ... had taken a very strong line. The word came back to us at the last minute before the Government meeting and as far as I remember and it is a long time ago ... but it was unfortunate that John wasn't told but I don't think you can read anything else into it.
Ms. Nolan, you deal in your statement with the recapitalisation of the banks and the dealing between the banks and the Department. Now, at one stage Bank of Ireland told you that it needed €2 billion. It finished up getting multiples of that. Allied Irish Bank said it didn't need as much support as both Anglo and Bank of Ireland and it finished up getting €21 billion. Were the banks straight with the Department or were they covering up or were they even lying some of them?
Ms Ann Nolan
I think there's a few things you have to think about in this and it's something I've thought about quite a bit over the period since. I ... it's not a question of whether they were lying or not. First of all, the question is whether they knew themselves what their position was at the time. There is a question of what their position was at one point in time and the fact that the things deteriorated. I mean the drop in GDP in Ireland in 2009 was phenomenal. I don't think anyone at the end of 2008, which is the point where this is taking part, had any idea the extent to which the recession would be so deep as it was, particularly in 2009-2010. So, therefore, I think the capital needs grew over that period and so even if they were right in 2008 as to what they needed at that point, that point was not even allowing for what was envisaged as so-called stress tests wasn't sufficient when the actual stress was so much bigger than they were testing for. So I don't think there was a question of they told ... you know, in 2008 if somebody had walked into this committee and said, ''By the way, AIB need €20 billion'', everyone would just simply have said, ''You're mad; you can't possibly think AIB needs €20 billion'", you know, because there was no ... there was no facts on which to base such an idea. So I don't think it's a question that they lied, that they knew they needed the €20 billion and lied to us. I think it's a question that they didn't think they needed and, at that time, they didn't really need it. It was later they needed it.
But, on the other hand, Ms. Nolan, from evidence we have here in front of the inquiry, we have shown and put it to witnesses that, on the night of the guarantee, particularly in the case of Irish Nationwide, it was insolvent in view of the figures that both Merrill Lynch and Goldman Sachs had presented.
Ms Ann Nolan
You - the first question you asked me was about AIB and Bank of Ireland. Irish Nationwide, I think, is a slightly different case. I think, Irish Nationwide, there was greater evidence that they were in difficulty. But ironically, it took longer for it to manifest, partly because their deposit base was more sound and, therefore, they weren't as hit by the market walking away from them as some of the other banks.
Well, as a senior official and looking back at the evidence now, do you think that a different view should have been taken of INBS clearly from the figures we had, but also Anglo in relation to their state of solvency on the night of the guarantee?
Ms Ann Nolan
I think technically, from an accounting point of view, they were probably solvent on the night of the guarantee, they just simply weren't able for the ... for the property collapse which, certainly by mid-November, was very obvious that year and had started well before that. So technically, being solvent wasn't sufficient.
Right. Thank you.
Thank you very much. Deputy Kieran O'Donnell. Actually just before you ... just to clear up one thing with you, Ms. Nolan. You were saying to Deputy Higgins about the Central Bank and the relationship with regard to promotional services in the IFSC and how that now is separated and that conflict doesn't actually exist. Can I ask you to share an opinion or your own views as to, in the previous manifestation, as to whether that was a good operation or a good way to approach the promotion of the IFSC centre?
Ms Ann Nolan
I think, in retrospect, it was probably a mistake to have it there but I wouldn't want to suggest that that was the reason that they didn't regulate the banks in the way that might have been appropriate because I don't think that. I think it's very easy to pick something like that and say that's the reason the problem existed, and I don't think that's true.
And how did the mistake manifest itself then? What were you ... what were the day-to-day occurrences that demonstrated that it was a mistake?
Ms Ann Nolan
I think ... it's not so much ... it's almost a philosophical mistake that the regulator would be promoting the thing it's regulating. It's, kind of, what Deputy Higgins was referring to earlier. I don't think the regulator should be ... have a promotional role as a matter of policy.
Okay, thank you. Deputy Kieran O'Donnell.
Welcome, Ms. Nolan. In January 2009 a meeting with the Department of Finance, the Central Bank and Financial Regulator and the NTMA took place to discuss the nationalisation of Anglo. And this is coming from Vol. 1, page 37 to 52, and Vol. 1, page 55 to 57.
Ms Ann Nolan
Vol. 1 of the Department of Finance or my own?
No, your own.
Ms Ann Nolan
My own, okay. Vol. 1-----
Ms. Nolan, yes.
Ms Ann Nolan
-----page 37.
Fifty-two, and then following on to 55 to ... 37 to 52, about the recapitalisation of Anglo. At 55 to 57, about the nationalisation of Anglo.
Ms Ann Nolan
Oh yes.
So please comment on what occurred between 8 January 2009, which is page 37 to 52, when the Government ... Irish Government formally notified the European Commission that they would be recapitalising Anglo to ... on 15 January, just over a week later, when you announced ... when the Government announced they would be nationalising Anglo instead. What led to the change of decision and what other options were considered and what advice was advised the Minister and the Government in this regard? So it's that critical week between 8 January 2009 and 15 January 2009, where you went from recapitalising Anglo to the tune of €1.5 billion to nationalising Anglo.
Ms Ann Nolan
Okay, I have to be careful what I'm saying on this issue but, just to put in context, the chairman and chief executive of Anglo resigned on, I think it was 18 December the previous year. On the 21st we announced that ... we had previously announced that there was capital available, on the 21st we announced that it would be divvied up by, I think at that time, €2 billion each for Bank of Ireland and AIB and €1.5 billion for Anglo - any that were most in need of the capital ... of the three of them ... most immediate need. We had deep concerns about recapitalising Anglo without nationalising it, simply because of the issues that had led to the chairman's resigning. So we prioritised the due diligence of Anglo. We sent Arthur Cox in to do a legal due diligence to see were there any other issues which might have to be dealt with.
What date was that?
Ms Ann Nolan
That was, I think, probably 22 December. Because ... and possible even the 21st, the day we announced it. Once we decided, we sent them straight in.
To do due diligence on Anglo.
Ms Ann Nolan
To do due diligence on Anglo.
Okay.
Ms Ann Nolan
In the meantime, we had to ready to do the recapitalisation if the due diligence came back and said, "Everything's wonderful, you can go ahead." So it was like we had two work streams, one looking at nationalisation, one looking at recapitalising. The recapitalising notion ... this paper that you ... on page 37 was on the work stream that was looking at the recapitalisation because we had to have that ready. Otherwise, you would be presenting the Government, when the due diligence came back, with a false choice.
What date would that have gone to the European Commission, Ms. Nolan?
Ms Ann Nolan
I think it's dated-----
14 January.
Ms Ann Nolan
-----14 January, yes.
So, therefore, this-----
Ms Ann Nolan
The decision was taken ... we got the due diligence back on 15 January.
But you had a letter going to the European Commission-----
Ms Ann Nolan
Yes.
-----on 14 January-----
Ms Ann Nolan
Yes.
-----so why didn't you hold off until 15 January to write to the European Commission? It's only a day later. Why do we have a situation where you were recapitalising on the 14th and a day later you were nationalising?
Ms Ann Nolan
As I remember it, and I ... you know, it's ... it's a long time ago, and it's hard to remember the exact details, but, as I remember it-----
You would have been in charge at the time, would have been ... you would have been over that section, yes.
Ms Ann Nolan
It would have been my area, yes, and I would have known it very well at the time, it's just memory can sometimes ... but, as I remember it, there was comeback dates for when the capital had to come in, how long it took the Commission to do their thing, and the 14th was the latest we could send it in. If we didn't send it in then, then the Government didn't have that ... you know, we'd be sending something to a decision ... for a decision for Government, where the Government didn't have the options.
Why didn't ye-----?
Ms Ann Nolan
So, it was a technical issue.
Why didn't ye get onto Arthur Cox and say we needed due diligence back before the 14th? It's only a day of a difference.
Ms Ann Nolan
Well, honestly, I think it wasn't ready and they weren't willing to sign off on it.
So a day-----
Ms Ann Nolan
As far as I remember, I mean, you know, that's the way I remember it, that the ... they were ... we were at them to bring it back and bring it back and bring it back, and the 15th was the earliest they could bring it back.
But ... so you were required to file with the European Commission on the 14th?
Ms Ann Nolan
Yes.
And the due diligence from Arthur Cox came back a day later?
Ms Ann Nolan
Yes, but filing with the European Commission didn't commit us to anything. I mean, the Government didn't make the final decision to put in the money at that point.
Yes, but the perception was out there that, effectively, you were going to recapitalise Anglo rather than-----
Ms Ann Nolan
Oh, we had announced it the previous-----
-----rather than nationalise Anglo.
Ms Ann Nolan
Yes. We had announced it the previous ... on 21 December.
And, would you have had any discussions ... interim discussions with Arthur Cox. Effectively, you're paying the fee to Arthur Cox, correct?
Ms Ann Nolan
Yes.
Who were they appointed by - the Central Bank, the Financial Regulator, or the Department of Finance?
Ms Ann Nolan
I honestly can't remember, Deputy. I-----
But, ultimately, Government.
Ms Ann Nolan
It was us, anyway; they were working for us.
Okay. Was there no discussions with them ... like, they were appointed on the 22nd. Was there no discussions with them, like ... I suppose-----
Ms Ann Nolan
No, they had been working for us. They were working for us before that.
For someone looking in, would say that it does seem a bit unusual that you had Arthur Cox doing due diligence on Anglo, you put ... you've decided to recapitalise Anglo on 8 January; you wrote to this European Commission on 14 January; and then, the day later, you nationalised Anglo. So, it does ... why wasn't ... weren't you able to get to a point where, by the 14th, that you would have known from discussions with Arthur Cox that you were going to be nationalising Anglo anyway?
Ms Ann Nolan
Well, the decision to nationalise Anglo was a decision of the Government, so we couldn't just decide. Even if we had informal discussions from Arthur Cox and were considering nationalising, as, indeed, we were because we were ready to nationalise, we couldn't just decide ... I think it was probably the 19th before they were actually nationalised. I ... we couldn't just decide that, and decide to put aside the other part of the work stream, I mean, if you're giving Government the decision, you have to be able to implement both options.
The decisions you took on the decision to nationalise Anglo on the ... page 55, 15 January, "The advice was given because a number of serious corporate governance concerns at Anglo, and because of Anglo's progressively deteriorating liquidity position." The governance issues-----
----- the page for me there ... please.
Page 55 and 56. The governance issues, Ms Nolan, were there since December, since the former chairman had resigned.
Ms Ann Nolan
Have you-----
I'm just being mindful of other matters taking place outside now and I'd advise Ms Nolan in that way.
Well, sorry ... the corporate governance issues clearly were there. Would you agree or not agree that they were there?
Ms Ann Nolan
Oh, absolutely, I mean, that's what I said ... prioritising due diligence.
So, nationalising wasn't around the corporate governance issue; it was to resolve-----
Ms Ann Nolan
It was.
Well, it was there already in December.
Ms Ann Nolan
I suppose our question in December: was this a once-off or was there more than one thing? I mean, an organisation can have a once-off corporate governance issue, and, if people resign, then you have sorted it.
Well, then the final-----
Ms Ann Nolan
I ... sorry, I really am uncomfortable-----
The final question on this. Do you believe that, when Arthur Cox were appointed ... did you believe that, at that point, that Anglo would end up being nationalised?
Ms Ann Nolan
I thought, on the balance of probabilities, it probably would.
Okay. Thank you. Can I go on to ... The evidence presented by NAMA to the inquiry referred to the interest roll-up of €9 billion on acquired loans, lending backed by paper collateral only, no equity, substantial issues relating to varying degrees of due diligence, and debtors' borrowing across the institutions. Can you please comment on the circumstance that resulted in recapitalising the banks without a full analysis of the banks' true loan books? Really, what, I suppose, that I'm saying-----
Ms Ann Nolan
I'm not sure what you're-----
No, the question I'm saying ... you wanna let me ... let me put it the way I'd like to put it. The ... when it came around and the ... the PCAR test was done in NAMA in March 2010.
That gave rise ... in the follow-up, that gave rise to significant haircuts.
Ms Ann Nolan
Yes.
What due diligence, proper due diligence was done on the loans in the various institutions prior to that date to back up putting in State funding of the order you put it in, prior to the PCAR test in 2010? You put in €3.5 billion-----
Ms Ann Nolan
The €3.5 million in preference shares?
----- in the two institutions, money was put into Anglo at various times so why was it literally well over a year after the guarantee, in March 2010, when you got some recognition and, in fact, it was a second PCAR test in March 2011 that showed the true position? How were you able to stand over putting taxpayers' money into banks, based on what type of due diligence was carried out?
Ms Ann Nolan
Okay. There was due diligence, some due diligence carried out and I suppose the PwC reports was the initial due diligence that we did and it did not go into explicit detail. I think, I suppose when you look at the position we were in, in crisis management in this area, the banking system in October 2008, which was guaranteed, was basically far too big for the Government, for the country. The banks were, you know, credit had grown far too much.
Let me put it another way in the limited time. Why wasn't proper or more detailed due diligence done significantly in advance of the guarantee being put in place?
Ms Ann Nolan
Well, in advance of the guarantee, I wasn't there so... but in any case, I think Kevin and William have answered those questions.
But say, post the guarantee.
Ms Ann Nolan
Post the guarantee? The reality is we did look, you know, the crisis was ongoing and we couldn't allow the ... we couldn't give ourselves the luxury of taking six months to look at every single loan because the banks might have collapsed in that time, which would have left every small business in Ireland without a proper banking system. So the first recapitalisation was done on the basis of relatively little due diligence in that sense, relative to whatever happened afterwards. But also, the position kept getting worse so even if we had looked at everything, a lot of the loans were perfectly okay at the beginning of 2009, they were very bad by 2010 or 2011. Things got worse over the period.
In hindsight, Professor Honohan is on record here as saying that he believes that the first real analysis of the state of loans was when BlackRock were appointed, in the PCAR test 2011.
Ms Ann Nolan
Well, you know, hindsight is a great thing, if you have it but, unfortunately, you usually only have it about the past, not the future. In hindsight, it is easy say things could have been done differently but it wasn't possible at the time. I think, you know, the Central Bank itself had in 2008, the end of 2008, told me all the banks were solvent but, in reality, I don't think they had that much detailed knowledge of what was going on in the banks or, indeed, all the expertise they needed to do that. Throughout 2009, they revamped their system as well. By 2010, they were capable of doing a proper PCAR. I don't think they could have done the same PCAR in 2009. I don't think they had the expertise. So I think there is an element of that in what happened.
So was it a lack of expertise in the Central Bank and the Financial Regulator?
Ms Ann Nolan
It was a factor but you always have to remember that the situation kept getting worse so had we measured accurately earlier, we wouldn't have got as big a number.
In your comment on page 1 where you say - this was at the time of the guarantee - "However, the liquidity problem was caused by the markets looking at future solvency."
Ms Ann Nolan
Yes.
So you might just expand on that and can one infer from that statement that you believe on the night of the guarantee the banks were insolvent?
Ms Ann Nolan
Oh no, they were solvent. I am talking about future. I mean the issue ... to be honest almost better than looking at all the loans, if you wanted to know in November 2008 what the real problem was, you just had to drive around Dublin and look at all the half-built office blocks and housing developments that had just stopped building.
That would not be sufficient now for due diligence, Ms Nolan.
Ms Ann Nolan
I know it is not sufficient but it was actually a good indicator of where the real problem lay. The due diligence told you what those loans were and what the banks owed in them and so on. Even then, had they had the 25% equity they promised us they had in those loans, things wouldn't have been as bad. If you look at the haircuts for bank-----
This is what the banks were informing ye at the time.
Ms Ann Nolan
At the time, yes.
And that proved when the-----
Deputy, don't make a judgment.
Yes. When did it arise, where you realised that wasn't the case?
Ms Ann Nolan
When NAMA did their actual loan-by-loan due ... analysis, and it was a detailed analysis-----
And why-----
Ms Ann Nolan
-----before it got to that.
And, Ms Nolan, why wasn't that spotted with the various due diligence that were done by PwC and others prior to that date?
Ms Ann Nolan
Because they didn't have the timeframe. I mean, when NAMA did its loan-by-loan analysis, they got into every single detail of that loan, including the legal documentation, the loan agreements and so on.
But surely ... surely equity-----
... sure.
But surely equity. Sorry, would it not as a normal form of due diligence, would an equity stake in a loan not be a normal question to ask as part of due diligence?
Ms Ann Nolan
Well, they did ask and the banks were ... said they had equity. I know I spoke to the banks-----
So then-----
Ms Ann Nolan
-----and they told me they had equity in those loans.
So, can we take it from that the banks were not telling the truth?
Don't be conclusionary now. Ask the question.
Ms Ann Nolan
Or they didn't know.
Or they didn't know, okay. Can I ask, the issue in terms of the ... the discussions around, we'll say, with burden-sharing with the ECB and so forth, and I want to draw attention, Chairman, to Vol. 2, page 49, which is effectively a report that was commissioned by ... completed by the National Treasury Management Agency in March 2011, basically on burden-sharing for senior and subordinated. Now, in that report, they stated, "[D]epending on the eventual level of haircut applied to the senior unsecured guaranteed debt (senior debt) and subordinated debt, could give rise to a capital saving to the State of approximately €14.9 billion." So, I suppose the question I want to ask is can you tell me the various ... this was March 2011, the various discussions that would have taken place with the IMF, the European Commission over the period since '08 as to where this issue would have come up? Do you believe that if the US had not issued ... exercised their veto within the IMF in late 2010, do you believe that burden-sharing in terms of senior bondholders and subordinated debt holders would have arisen at that time?
Ms Ann Nolan
Okay, in terms of burden-sharing, I certainly think, if there had been no veto, burden-sharing in Anglo would have happened. I think this document-----
And how much would that have saved the State, the taxpayer?
Ms Ann Nolan
I honestly cannot remember. That's a good question.
But you-----
Ms Ann Nolan
The Anglo-INBS figure is there actually ... it's there on page 53.
Sorry, it's here, yes, apologies.
Ms Ann Nolan
Page 53.
Yes, it's-----
Ms Ann Nolan
Yes, I think that's €3.6 billion-----
€3.6 billion.
Ms Ann Nolan
-----would have been-----
So, in late 2010, if the IMF-----
Ms Ann Nolan
Yes.
-----had not exercised their veto, you believe burden sharing, tax saving of just short of €4 billion would have arisen in Anglo?
Ms Ann Nolan
I think that ... well, we mightn't have got it all, because you know the way this burden sharing works, but I think that certainly we might have got €3 billion out of the €3.6 billion.
Okay. And in terms of ... and in that particular case. Just going back to the issue in terms of the loans, do you think in hindsight, and looking back, that you could have got to grips with the level of potential losses in ... or, sorry, the level of losses that were building up in terms of the loan book in the banks, earlier than you did? And how would you have gone about that?
Ms Ann Nolan
It's very difficult to ... I mean, I suppose the problem with the banking system is that it needed to downsize very significantly and that downsizing, no matter what you do, takes time. If you look at the trajectory, you know, it was €400 million loans outstanding in '08 across the six institutions; and, 2010, there was €280 billion loans outstanding; and now it's down to, oh, about €172 billion and we're now at a loan-to-deposit ratio of about 112%. So we're probably around a sustainable level now across the three banks that are left. But that downsizing, could it have been done quicker? It might have cost the State a lot more if we did it quicker is the real problem because there's always a trade-off. If you sell everything very quickly, you get a less good price, so, you know, it isn't a given that doing it quicker would have things better. It might have made things worse.
And what would be your estimate, Ms Nolan, of what the cost of the guarantee, in terms of the recapitalisation of the banks, will be to the Irish taxpayer eventually?
Ms Ann Nolan
Well, I think the long-term cost is the Anglo cost and we'll get our money back from everyone else but ... we might even make a small profit here and there, you know, €1 billion on NAMA, €1 billion on maybe AIB ... Bank of Ireland's shares. We might make a bit of profit eventually on AIB, I don't know, it depends on how we sell them and ... and how the timing goes and all kinds of other things in the economy. I think we'll get our money back from the living banks. I don't think we'll get anything back ... we won't get anything back from Anglo. That's just sunk money.
You don't see that arising?
Ms Ann Nolan
Unfortunately.
And can I ask you, the ... just going back to the ... I suppose the issue in terms of ... are you familiar with IAS 39, the accounting standard in terms of-----
Ms Ann Nolan
I wouldn't ... I'm not an accountant, I wouldn't have any detailed-----
The question really, I suppose, is that, based on that accounting standard, there would be a view that it allowed the delay of losses from 2005 onwards. At the time, when you were looking at due diligence, did you receive any professional advice regarding ... that, from '05 onwards, that there was a change in the way losses were assessed in terms of audits of banks?
Ms Ann Nolan
Yes, I think we got some advice, accounting advice, on the way audits were done but I wouldn't remember the detail of it now.
You wouldn't remember the detail, no, okay. Thank you, Chairman.
Thank you very much. Deputy Michael McGrath.
Thank you very much, Chair. You're very welcome, Ms Nolan. Can I start by asking you, from 1998 to 2003, you were principal officer dealing with the IFSC, as I understand it?
Ms Ann Nolan
That's correct.
Can you outline your responsibilities and duties in that role, please?
Ms Ann Nolan
Okay. I suppose the two ... the major things that were involved there was I was involved in the assigning of licences to IFSC companies which ... the last number of licences were done by competition, so I ran the competitions for companies that wished to get licences in the last two or three rounds of licences for the IFSC. And the other major piece of work I did in there was to integrate the tax system between the IFSC and the non-IFSC tax system because the IFSC had had a 10% rate, it was moving up to a 12.5% rate, and the rest of the tax system was moving down to a 12.5% rate, but there were a number of other aspects where the IFSC ... of the taxation where the IFSC was treated differently to the parts that were outside, so my role was to develop plans to integrate those two.
Sure, okay. You said in response to Deputy O'Donnell just a moment ago that the overall net cost of the banking crisis will effectively be the money put into Anglo Irish Bank. Can I just ask you your view on some of the work that was done in Project Atlas by PwC? I mean, for example, in February 2009, they produced a summary report of three previous reports that they had conducted into Anglo Irish Bank and they projected what the capital position of the bank would be on the various loss scenarios and they reached a conclusion, for example: "Under the PwC highest stress scenario, Anglo's core equity and tier 1 ratios are projected to exceed regulatory minima, (Tier 1 - 4%) at [end of] September 2010 after taking account of operating profits and stressed impairments." Now, when it actually came to September 2010, the losses in Anglo were almost €30 billion, so how can you rationalise that conclusion in early 2009 with the outcome of a loss and a bill for the taxpayer of almost €30 billion in September 2010?
Ms Ann Nolan
I mean, Anglo surprised on the downside every time you looked at it for the entire period I've been dealing with it, I think I could say, and that's just looking at the losses. I think there were two aspects where they were wrong in ... not necessarily that they should have been right but, in retrospect. The first one was the issue we've dealt with earlier, the question of whether there was any equity at all in the loans and I think, if you were to ask me, Bank of Ireland did have equity, AIB had some and Anglo, as far as I could see, just topped up all the loans to 100%, or were lending to the borrowers in a different hat ... with a different hat on, so the loans effectively had almost no equity.
The second aspect, I think, where there's the biggest difference between the original PwC work and what actually happened is the assumption that the bank had a model that would continue to generate income. And the other banks, and the living banks, and the reason they're still living banks, had other business where they were generating income, whereas Anglo, this was all they did. Their model was broken and, therefore, there was no income to compensate, or to make up extra ... and no prospect of income to make up extra capital.
But looking back now, how would you characterise that report which, you know, essentially formed the basis of------
Ms Ann Nolan
The original.
-----decisions that Government were making and it was projecting-----
Ms Ann Nolan
It was-----
-----that Anglo would, even in the most stressed scenario, would have achieved the minimum capital requirement by September 2010 and the outturn was a €30 billion bill?
Ms Ann Nolan
Yes, extremely disappointing. I suppose there are two aspects to that question, Deputy. Obviously the question is could PwC have known better, and I'm not sure whether they could or not. Obviously it was wrong, and I remember at the time, if you look at the ... the first time I saw those reports, summary report, I think it was a bit earlier than the beginning of 2009, some time in 2008, so it was the banks' own projections and the PwC's projections which were stress 1, stress 2, and I remember looking and thinking, "Wouldn't it be wonderful if what happens is the banks' own projections?" Because you don't know the future at any given time, but thinking not very realistic. And then thinking that actually there was a real chance that things were worse than the PwC stress 2 because the economy, you know, with the other side of our hat we were looking at the economy, looking at having done a budget in October, which I was involved in, October 2008, which was out of date already by January '09. So you, kind of, looked at that and thought, you know, "It might be worse than they're saying."
In September 2010 the Government made a decision on the strategic future of Anglo to separate it between a funding bank to hold deposits and an asset recovery bank. What other options were being considered at that time, because we know the management of the bank, for example, were putting forward an alternative model which would have seen a surviving bank emerge, as such, from the carcass of Anglo, so what options were the Government considering in the autumn of 2010 for the future of Anglo?
Ms Ann Nolan
I think by the autumn of 2010, we realised in 2009 when, as we went through the year as the losses in Anglo accumulated, that there was a very serious long-term problem with the operating model of Anglo. The new management team had tried to get a business plan for an ongoing bank which would work, and we looked at those, I think in August 2010, as best I remember it, in conjunction with the Central Bank. In the meantime, their funding model was, you know, they were just ELA almost entirely, and as every piece of their funding rolled off it was replaced by ELA, so they had a huge funding problem. And the new bank just wasn't to my mind - that they were proposing - wasn't to my mind - and we did look at it seriously, but it wasn't actually fund-able in terms of ... it didn't have a business plan that you could convince the ECB or the markets was a funding model going forward. So, that option was looked at and decided against. The twin-track approach was on the basis that we were under the impression, which turned out to be a misapprehension, that the ECB was willing to fund the funding bank, so-----
Ms Ann Nolan
-----the decision, actually, was never implemented because the ECB didn't ... or say they hadn't agreed that. I think there was a misunderstanding.
Okay. And then if I take you to January of 2011, and it's in core booklet Vol. 1 of your own booklet, and this is a note on the sale of Anglo and INBS deposit books.
Ms Ann Nolan
Sorry, what page? Sorry.
Sorry, 123, page 123 of Vol. 1. So it's a note for the Minister on 28 January 2011, and this is when the sale of the deposit book for Anglo and INBS was being examined and there seemed to be an amount of pressure from the troika to press ahead with-----
Ms Ann Nolan
Yes.
-----the disposal of the deposit books as well. Even though, on the top of page 124, it says, "As yet we do not know how to remain in combined entity is to be funded", and yet there seemed to be pressure to proceed on that basis. But, subsequently, on page 126, it says, "Anglo has requested us to consider an "orderly" sale process rather than the more immediate sale process currently envisaged." Is that a reference to the deposit book or to the overall wind-up of the bank?
Ms Ann Nolan
That's just the deposit book.
Okay. So they were disagreeing with the approach of-----
Ms Ann Nolan
They took-----
-----the Government to sell the deposit book, which actually happened subsequently in February 2011.
Ms Ann Nolan
Yes.
The deposit book of Anglo and INBS was transferred-----
Ms Ann Nolan
Yes.
-----to AIB and Irish Life and Permanent.
Ms Ann Nolan
Yes.
Okay. And what was their logic in opposing that strategy?
Ms Ann Nolan
It's hard to tell and maybe you can ask them when you have them in.
Okay, we will.
Ms Ann Nolan
My own view would be that they felt, once the deposits were gone, there was no possibility of resurrecting the bank.
Right. So even at that stage they were still holding out the hope of resurrecting a surviving bank from Anglo?
Ms Ann Nolan
That would ... I mean ... that's what I would have thought, but I mean I'm ... I'm only supposing.
Okay. We heard from Governor Honohan last week that by November 2010 the total amount of ECB support for the Irish banks normal liquidity and ELA was €131 billion, of which ELA was €45 billion. He said that the ELA was effectively State guaranteed, that it was underpinned by some form of a letter of assurance-----
Ms Ann Nolan
Yes.
-----from the Minister. Is that the case?
Ms Ann Nolan
That's true, yes.
So, there was an effective State guarantee in place of €45 billion of ELA to the ECB-----
Ms Ann Nolan
In effect, yes.
-----in the autumn of 2010.
Ms Ann Nolan
Yes.
Okay. And what was your view of the first letter received from Mr. Trichet then in the middle of October 2010 where, effectively, he's saying, "Look, you can take this extraordinary level of ELA support for granted." And he's quite explicit, and of course we know where all of that let to eventually. But what was the view within the Department of the ELA being highlighted in that manner and the way in which it was put by the ECB?
Ms Ann Nolan
The letter was unhelpful. I mean ... and probably unnecessary. I mean I think, it was designed to push towards getting into a programme, which probably was necessary at that point anyway, and I don't think we needed to be pushed. I think it was more to do with negotiating tactics than anything else.
Thank you.
Can I stay with that for a moment, if you don't mind, Ms Nolan, and put the question to you because from our understanding you would have been very much involved with the kind of day-to-day financial situation as we move from the guarantee towards the bailout, and you would have very intimate knowledge as to what was happening in Government and Finance at that time. So could I put the question to you, and it follows up with what Deputy McGrath was saying, is that the structure, or design of the bank guarantee along with its period of duration, have any bearing on the Irish State entering a bailout programme two years and two months after the guarantee?
Ms Ann Nolan
It was one of the factors, yes.
In what way?
Ms Ann Nolan
There was a funding cliff because the structure of the guarantee was for two years, there was a funding cliff, and on top of that when we looked for extension of the guarantee - I think it was that June from the Commission - they were late in giving it to us, and that in itself reinforced the funding cliff. So there were ... it wasn't just the guarantee itself, there was other things which contributed to that, but certainly that was a factor. It was a factor in the ELA being as big as the Deputy just pointed out.
And in regard to Mr. Trichet's letter that Deputy McGrath referred to, prior to that - or in or around the same period as Minister Lenihan's letter of 21 November 2010 - when that letter was written, were Irish banks that were covered by the guarantee still solvent and, therefore, qualifying for ELA funding at the time of that letter, in your opinion?
Ms Ann Nolan
Oh, they were solvent, but they were solvent ... like, Anglo was solvent because the Department ... because the Irish State was standing behind it, so they were solvent, yes.
Okay. And if the Irish State was not solvent were the banks still solvent?
Ms Ann Nolan
I think the Irish State was solvent.
At that time?
Ms Ann Nolan
At that time.
Okay. So, just coming back then finally to Mr. Trichet's engagement with the inquiry where he talks about this period, and Mr. Cardiff in his witness statement referring to the Jean-Claude Trichet letter, says in many ways the letter the entirely superfluous since it was already clear by the time of the letter that the Government was going to opt into a bailout programme. Would you be of the same view that the Government was preparing to opt into a bailout programme at that time?
Ms Ann Nolan
Sorry, which ... which of the letters are you talking about now? The second letter?
This is Mr. Trichet's letter. Mr. Cardiff in his testimony to this inquiry-----
Ms Ann Nolan
Yes, no, there were two letters from Mr. Trichet, certainly-----
19 November.
Ms Ann Nolan
Oh yes. At that point I think it was inevitable; we were in the middle of negotiations, and I think the letter was superfluous, yes.
Okay.
Ms Ann Nolan
But annoying at the time for the Government.
Okay. When Mr. Trichet was, as I say, at the IIEA event in which the inquiry engaged with him, speaking on the same issue, he says:
[As] you know, we could [have almost] continued on our side ... having gone up to 100% of ... GDP ... to 200% of ... GDP [this was with regard to the ELA funding that was coming into the country], and why not 300% of ... GDP? [That would] Then what would ... the commission [of] inquiry [be] asking for? [Talking about this inquiry, as to what would be our purpose] You would say, "Were you totally crazy at the ECB to continue, when you were going to the wall at 100 mph, to continue to provide liquidity and liquidity and liquidity?"
So could I ask you, Ms Nolan, was Mr. Trichet right? If this action hadn't happened and entry into the programme had been delayed, would the cost of the bailout have even been bigger for Ireland?
Ms Ann Nolan
Well, of course, you know, you can't do things ... you only get to do things once. You don't get to try them out for several days.
Yes, and we learn from what we do wrong.
Ms Ann Nolan
But just ... just to answer the question, I think ... I mean, to an extent, I thought some of what Mr. Trichet said in his evidence or non-evidence, to the inquiry was a little disingenuous. I mean-----
Okay.
Ms Ann Nolan
-----I think, when you look at monetary policy by the ECB-----
I can get into all of that with you later on and-----
Ms Ann Nolan
Yes, okay.
-----you'll have plenty of time in the wrap-up-----
Ms Ann Nolan
But do I think it would have cost more? I've no idea whether ... you know, I mean, the reality is we were moving towards a bailout before he wrote that letter.
Okay. Can I just come back to an earlier ... it was relating to Deputy O'Donnell, and that is on the issue of Anglo, and Deputy O'Donnell was taking a line of questioning with regard to the whole due diligence issue. Kevin Cardiff, when he was here, suggested that nationalising Anglo would be difficult due to the legality of the bondholders. So how, all of a sudden then, was this not a problem once the due diligence was actually completed, by your own engagement this morning?
Ms Ann Nolan
Sorry, Kevin said what?
Mr. Cardiff was saying that the nationalising of Anglo was difficult due to the legality of the bondholders, that there was constitutional issues and so forth, but taking your own testimony this morning, you were saying once the due diligence was completed, this didn't seem to be a problem anymore. How did due diligence take this off the agenda?
Ms Ann Nolan
Well, there were ... there two aspects ... legal aspects. I mean, the legislation was ready, I think, and could be made ready very quickly in terms of ... that was ready, I think, at the time of the guarantee, in that nationalisation, and that legislation was ready to go. Part of the due diligence we did in Anglo before we nationalised it was looking at all the bond agreements to make sure there were no clauses ... there were some of the clauses that had to be bought out just before the nationalisation, you know, in terms of swaps and these kind of things, technical stuff, and that ... you know, you need to do that stuff before you nationalise, and we did do it before we nationalised.
All right. I just want to just pursue a different line of questioning with you for a moment, Ms Nolan, and then we'll return to the question list. It's the ... and I'm bringing it up on the screen here. It's an economic management paper, 10 October 2012, which would, I'd imagine, have been a very top drawer, top secret document at the time in the-----
Ms Ann Nolan
It was, yes. What book is it, do you know?
It's coming up on your screen in front of you. It's from ... it's witness book Ann Nolan, Vol. 2, pages 85-87. Okay. Now, if I can just scroll down this a moment, and while it's being done, maybe to a page ... it's the third page of it, it's the last footnotes of it here. But in doing so, as I'm pulling that up, by March 2012, it was becoming clear within the Department of Finance that a longer term restructuring solution was needed to the promissory notes which had been provided to IBRC. The paper was produced in October 2012 for the EMC. This proposed replacement of promissory notes with longer terms bonds over maybe a 30 to 40-year spread, however the view was that this would require liquidation of IBRC to allow this to be acceptable to the ECB. Now, what I'm trying to do here is to get an understanding as to who was responsible for the strategic planning of the balance sheet impact of the banking crisis and also to establish with you the level of assistance and co-operation the Department of Finance received from the European Central Bank and Central Bank of Ireland during the crisis plan and implementation of putting in a solution. So, in this regard, who originated this idea and what level of co-operation was evident from the Central Bank of Ireland and the ECB to investigate, discuss and cost alternatives and can you also describe the interaction and level of co-operation between the Central Bank of Ireland, the EMC and the European Central Bank and your Department to work through this proposal?
Ms Ann Nolan
Okay. This proposal ... I suppose, it goes back to what we were talking about earlier about moving all the deposits out of Anglo and INBS and then the following summer we amalgamated the two of them. Now, we then had, effectively, a run-off vehicle with very big European funding which was rolling on a two-week basis, which was very unsatisfactory. At the time of the guarantee ... at the time of the bailout, which would have been November 2010, there was some discussion about how the long-term funding of Anglo ... but no conclusion was reached at that time. So we had various options after we had amalgamated the two of them in summer of 2011. Various options were discussed, many of which didn't make very much sense but, from our own point of view, those discussions with the troika were very important because we knew we needed to get some resolution which would give long-term, not two-week funding, that we couldn't have a vehicle there ... you know, effectively for us, a priority was fixing it up or having a long-term solution before we left the programme. While you were in the programme, you had a kind of certain protection from the markets but you wouldn't have that when you left the programme so it was quite important to look at that. So it was, I think ... I genuinely do not remember who first suggested it, but I think it was at some meetings at the very beginning of September 2011, no, 2012, when the liquidation of Anglo was first discussed and suddenly it became possible because, because it's kind of almost legal theology that the ECB had, this was a more attractive solution to them than the other solutions we'd been putting forward. And it was ... had huge attractions to us as well, in that it would, effectively, remove Anglo or IBRC from the landscape, which was causing so much trouble for everyone. So we entered into discussions fairly intensively starting at the very beginning of September 2012, ourselves, the Central Bank and the ECB.
And maybe you could just paint a picture as to what the difficulties were, if I can maybe draw your attention there to the very bottom of the page, where it says:
[The] Net book value of customer loan book per IBRC 30 June 2012 accounts [one, they had] €15.6 billion. Total ELA funding at the end of September ... (as advised by [the Central Bank]: €40.6 billion. The Promissory Notes and NAMA Bonds are pledged against €24.4 billion of this €40.6 billion of funding. Additionally, €3.7 billion of funding has been provided [in] certain loans (nominal value [of] €5.4 billion). The balance of ELA funding (€12.5 billion) is made up by the Ministerial Guarantee.
Ms Ann Nolan
Yes.
Is that a summary of the type of sums that you were dealing with and what you were trying to unravel?
Ms Ann Nolan
Yes.
Okay.
Ms Ann Nolan
We were trying to get this ... all these various elements. We needed to make sure the Central Bank was whole, because you couldn't leave the Central Bank with a deficit in it. We'd only have to make that up ourselves. We needed to make sure that the ELA was gone out of the system because that was the objective of the ECB in getting involved in this. We needed to make sure that the promissory note payments were put on a much better position ... a better schedule for the Irish Government so that when we were going back into the market, we wouldn't have this huge borrowing requirement for the promissory note, which would damage our capacity to do business in the market. So they were our ... you know, the solution we got met most of those objectives.
Okay. And if I can just go back to the very first page of that document there, Ms Nolan. It's point B at the end of the page and it says, "However, replacement of the Promissory Note with shorter-dated Government bonds would negate the benefit [of] the State and create a 'funding cliff'"-----
Ms Ann Nolan
Yes.
-----"in the near term, thereby severely hampering the State's ability to re-access debt markets, as the Irish market lacks capacity to absorb additional shorter[-term] dated issues."
Ms Ann Nolan
Yes.
What was the thinking in terms of the co-operation that was going to come from the ECB and other agencies in getting over what was probably this ... summarised as the hurdle that had to be cleared?
Ms Ann Nolan
Well, I suppose, you know, you had ... we were ... you see it in the next paragraph, we were looking for a single 40-year bond which would be perfect, but, obviously, it wasn't a realistic ... it was our negotiating position. Their negotiating position was shorter dated ... very short-dated Government bonds. The negotiation went on for a period. We ended up with, I think, a reasonably ... one that was certainly a lot closer to what we were looking for than what they were looking for. We ended up with a position which we were all happy with.
Okay. And just moving onto the next page-----
Ms Ann Nolan
Or maybe, in fairness-----
Sorry.
Ms Ann Nolan
-----was unanimously noted by the ECB.
I think that they would never say that they're happy.
Okay, but what level of entertainment were they giving the 40-year proposal?
Ms Ann Nolan
Well we did get some 40-year bonds, so, that's how ... yes it was a good deal.
Okay. And just moving on to point 9, and this will be my final question on this issue, it says, "If [the fair value of NAMA pays for the assets sorry, if] the fair value that NAMA pays for the assets is at a significant discount to the net value of to the assets at IBRC [this is the relationship now of NAMA and the loan book of what was formerly the Anglo Irish Bank], this may create a capital shortfall for the [Central Bank of Ireland] arising from the sale, [from] which the State would ultimately be liable as a result of the Ministerial guarantee." Can you explain to us what that actually means there?
Ms Ann Nolan
Okay ... well, when we liquidated we didn't know we could sell all the assets. So, if the assets sold or ... the assets would be transferred to NAMA ... What happened was, the flow ... the Central Bank had a floating charge on the assets; the floating charge was sold to NAMA in return for NAMA bonds, so then the Central Bank had NAMA bonds. So the Central Bank was okay from day one, it had NAMA bonds and they were Government-guaranteed NAMA bonds. The floating charge then went to NAMA. All the assets were then valued, the valuation, the NAMA valuation set a floor. They couldn't be sold for less than that. If the sales process had bids for less than that, they go to NAMA at the NAMA valuation. In the event they were all sold for more than the NAMA valuation so it never arose. But in the ... had it been that the NAMA valuation added together for all the assets and none of them had sold to the private sector and the NAMA valuation was less than the floating note charge, we could have been left with a ... with a bill, and that's what that is referring to. But that did not happen.
Okay. So just to come back to maybe to summarise my very, very first question to you, all of these details very, very big numbers, very big sums, very difficult detailed, complexed issues to be unravelled to try and create another type of solution or another type of approach. Who originated the idea, and if you could maybe summarise again as to what level of co-operation was evident coming from the Central Bank and the European Central Bank to discuss and cost these alternatives?
Ms Ann Nolan
Okay, well, as I say, I can't quite remember who suggested the idea but most of the work for it was done in the Department. We seconded ... corporate bankers from AIB, who weren't very busy at the time ... a team of corporate bankers into the Department, and had them working directly on my team there, to look at all of these very complex details. And they did the planning for us in co-operation with the Central Bank of Ireland who co-operated very strongly and in negotiation ... technically, the ECB weren't negotiating with us; technically, this was a deal between us and the Central Bank of Ireland, but, of course, there were technical discussions between my team and the ECB on several occasions. The ECB, I think, blew hot and cold on it. There were people within the ECB who felt it was a good deal and should be done; there were people within the ECB who felt it was, you know, not such a good deal and maybe shouldn't be done. But the ones who wanted to do it were the ones whose view prevailed in the end, thank God.
All right, thank you. Senator Susan O'Keeffe.
Thank you, Chair ... sorry, Ms Nolan. From 2009 to May 2010, what was the Department of Finance doing to ascertain the true state of the banks?
Ms Ann Nolan
From 2009 to May 2010?
Ms Ann Nolan
Okay ... first of all we were dealing with the various issues which arose around setting up NAMA. We were dealing with the aftermath of the PwC report, which was putting in the preference shares into Bank of Ireland and AIB. We were not doing due diligence on the banks themselves, we felt that was for the ... Financial Regulator's job to do-----
Even, even though, even though, arguably, the Financial Regulator's due diligence had not been, if you like, as complete as it might have been, that was clear already in 2008, so why would you still have taken that position in 2009?
Ms Ann Nolan
Well, the ... to be fair to the Financial Regulator, they were, they were gearing up their system to do the PCAR. Like the PCAR 2010, they were recruiting people and so on and ... you know, for us to do a parallel recruiting system, because, you know, we are not the regulator, we wouldn't have the expertise to go in and actually look ourselves at the regulation-----
But does due diligence in that sense in the state that we were then in ... does due diligence fall under regulation at that point when in fact what you want is information and knowledge so that you can make further decisions?
Ms Ann Nolan
Well, establishing the capital needs of the banks falls under regulation, yes.
Okay. So, so the regulator was doing that, so what else were you then doing in the Department?
Ms Ann Nolan
Well, the biggest single job was the legislation on NAMA in 2009, which was a huge piece of work, and the parallel agreement with the European Commission on how the NAMA loans would be valued and the setting up of NAMA as an organisation. So it was ready to go and had it's first piece done by the beginning of 2010, that was a huge piece of work which the Department did in the period and which I was ... spent a lot of my time on.
Would you agree with Professor Honohan's evidence when he was here last week, its on page 29 of his evidence. He says:
when I came in 2009, I realised that nobody was particularly concerned about Ireland [and I'm editing slightly] there was a sense that we were okay. ... But it was really the change in attitude in August of 2010 ... and, in September [that] we were absolutely in the centre of attention.
Do you think that that's how you recall it or is that just his view?
Ms Ann Nolan
Well, obviously, it's his view.
Of course.
Ms Ann Nolan
I'm not sure who he means by nobody.
He's talking here in the European context-----
Ms Ann Nolan
Well, in the European context, yes.
-----that, if you like, in Europe, that nobody was really looking at Ireland. They weren't worried.
Ms Ann Nolan
I think that's possibly true. I mean, I think, in 2009, if you look across Europe, there was a fall in the growth level in every single country and people were looking at themselves and trying to deal with their own problems, the fallout from the crash in autumn '08 was being dealt with throughout the system, and it probably is a fair comment that it was 2010 that pressures built up again across the system. I think the Greek problems ... probably not best ... in early 2010 started people looking at other countries in the periphery.
In Vol. 1 of your book, its on page 28, "The PwC report ...look[s] at the trends in these capital ratios for the next two years, starting with forecasts provided by the institutions, and show that the institutions are currently forecasting operating profits well in excess of loan impairment levels."
Ms Ann Nolan
Yes.
That was dated November 2008. So, was that a valid observation there? Operating profits well in excess?
Ms Ann Nolan
Well, that's what they were forecasting. I mean, it's not what happened but it's what they were forecasting, I'm sure that's true.
So what does that tell us, about, I mean this is in-----
Ms Ann Nolan
It tells us like ... it tells us that in the autumn of 2008, nobody knew how bad it was going to be. I mean, the fall in the GDP throughout Europe in 2009 was one of the most deepest recessions that ever happened, you know, I mean, once you have a deep recession, banks do not make profits.
But, but if you looked at the, at the forecasts for ... even for tax revenues in Ireland between June 2008 and October 2008, that was just going one way, it was going from €3 billion to €5 billion to €6 billion. That's true isn't it, I mean we have the documentation that shows that?
Ms Ann Nolan
I think you mean the deficit in tax revenues, if tax revenues were going that way we'd have been fine ... but, yes, I agree they were.
Yes, so that was going one way and unlikely to suddenly start recovering-----
Ms Ann Nolan
Well, it might have stayed like that, rather than kept going down-----
Did anybody really think it would? Given the state of the banks, given the state of the world economy-----
Ms Ann Nolan
I mean, I think the ... if you look at the forecasts done in the autumn of 2008, I don't necessarily have them with me, from the various people, they all were predicting 2009 to be bad, I don't think any of them to were predicting it to be as bad as it was. I mean, you know, I'm not trying to justify what the banks were forecasting for themselves in autumn 2008. Obviously, it turned out to be wrong. I'm merely saying that it was their forecast at the time.
Yes, but-----
Ms Ann Nolan
I mean, that's what the document says.
Yes, and the question is, how, you know, how can we ... how could those have been relied on to the extent that they appear to have been relied upon, when all around us, you know ... we're losing our heads, so to speak, everything was going one way-----
Ms Ann Nolan
But, but they weren't relied on-----
-----and yet one could look at these and say-----
Ms Ann Nolan
If we believed them, we wouldn't have given them any capital and we gave them €3.5 billion in preference shares. I mean the reality is we didn't believe-----
Well, this is the letter to the Minister, confidential and commercially sensitive, written by ... the Central Bank. Why on ... I mean, if it's not to be believed, then why were we ... why was Mr. Lenihan receiving it as a confidential document-----
Ms Ann Nolan
Well, I think, if you look on page 30-----
Ms Ann Nolan
You'll see in the summary at the end ... what John Hurley and Jim Farrell were actually saying is:
The above scenarios are predicated on a number of capital assumptions outlined in Section 2 above and the caveats set out in the report. While the assumptions used by PwC are challenging, they must be seen in the context of considerable uncertainty about the prospects for the economy; and indeed an even more pessimistic economic outturn cannot be ruled out.
So, I don't think, you know, at that time anyone was suggesting that this was the bottom and the worst-case scenario.
You referred earlier on to that expression "the living banks". So, when did Anglo die?
Ms Ann Nolan
I think the decision to wind it down was taken in August 2010.
No, but when did it really die?
Ms Ann Nolan
Well, I suppose, technically, it really died when we liquidated it in February 2012.
Right.
2013.
Ms Ann Nolan
2013. Sorry ... that's bad. Thank you, Deputy.
At the night ... during the time of the bailout, when Patrick Honohan went on "Morning Ireland" on the morning of 18 November, what was the reaction among officials like yourself to that interview?
Ms Ann Nolan
It was very Patrick. I ... you know, in some ways it made no difference because he was pre-empting the Government's decision. I think it probably was unhelpful to the Government but I don't think it really changed anything. It was probably unhelpful to our negotiation position, which was probably our immediate reaction, if I was being really honest about it, because for us at that point, down in the trenches, we were more interested in the small print of what was being agreed. You know, what are we committing to, is it things we don't want to take off it? You didn't want someone coming along pre-empting that. But, even in that, I'm not sure if it really made any difference. It's more an emotional reaction when you're very involved.
You were obviously involved, as you said, very close up from the beginning ... from 2008 right through. How early on did you believe Ireland would need a bailout? Because Patrick Honohan suggested he had a conversation - albeit a small conversation - with Minister Lenihan in April of that year, suggesting that there might be. Did you have a view yourself?
Ms Ann Nolan
I think ... I mean, I would've been aware that somebody had mentioned it and ... probably by May anyway, that year. And I don't think I remember having a conversation with Patrick about it particularly. I think we were looking at how it could or couldn't be avoided and whether it should or shouldn't be avoided because there's two aspects to that. At a certain point of stress, you might be better off in a programme, you know, provided you could control what the programme was forcing you to do. In other words ... and certainly by that August we were working in the Department very much on the national recovery plan, the four-year plan, because we wanted to make sure that if we entered into negotiations, that we had a version up front, ourselves, of what we wanted out of them. In other words, that we weren't in a position where the IMF was coming in and making it up ab initio.
And finally, if I may, Chair, when you came into the job in early November 2008, how - if you look back - how would you describe what you found ... if it was, sort of, in between chaos and a lack of information at the very one end and extremely organised and loads of information at the other end? Where was it when you arrived? And what did that mean, then, for you?
Ms Ann Nolan
It certainly wasn't chaos, okay. There was some information but probably not as much as we needed and it was coming in fairly slowly. So I think that's-----
All right, thank you.
Have you got one more, have you?
Sorry, I thought that Ms Nolan was going to continue speaking there.
She can if she wishes.
Ms Ann Nolan
I'm fine.
Okay, thank you very much. Deputy John Paul Phelan.
Thank you, Chairman. Good morning, Ms Nolan. Firstly, actually, did you see the evidence of Mr. Cardiff on his two-----
Ms Ann Nolan
I saw bits of it and not all of it. It was quite a long ... several sessions.
It was. Can I ask, were you aware ... he outlined to the committee that a number of people and individuals and institutions had come to him and others making suggestions about the need for either a political guarantee or a guarantee months in advance of the actual night that the guarantee decision was made. Were you aware of that at the time or was-----
Ms Ann Nolan
No, I wasn't aware of it at the time.
He also indicated that at a similar time in 2008, far in advance of the actual bailout, which came at the end of 2010, that he and a group within the Department were involved in examining, shall we say, the possibility of a bailout. Again, were you party to it or were you aware-----
Ms Ann Nolan
Is this the Johnny Logan group?
Well, there was two groups. I'm not sure if this was the Johnny Logan group or the other ... there was two groups that he mentioned. But were you aware of it or were you party to it?
Ms Ann Nolan
Yes. I would have been involved in any groups that existed.
You were in the Johnny Logan group?
Ms Ann Nolan
Yes. I attended a few meetings, anyway, of the Johnny Logan group. I'm not sure there were ever ... if it was ever formally-----
Christened?
Ms Ann Nolan
Christened. It was informally called that.
And was that group actually active at the time of the ... when did it become active-----
Ms Ann Nolan
Of the bailout? I think it was ... it was beforehand and I genuinely can't remember when the meetings were. But it was looking at ... you know, one of the things we had going for us at the time - and, in the end, it may not have mattered that much - we had a fair bit of cash in hand with the NTMA, which certainly helped our negotiating position. And we also ... you know, what we were looking at is were there other places where you could get cash. But we were never ... in the event we had the bailout agreed before we were in a position where we were actually looking for cash in any desperate way. And I think, in retrospect, that was right. We should have ... it's much better to negotiate from a position where you're not desperate.
Okay. Can I ask you now again ... and I don't want to re-cover ground that's been already covered but there's a question that I must ask you in relation to the analysis and due diligence that was carried out on .... to identify the amount of €3.5 billion in capital for AIB and Bank of Ireland in February 2009. Why did the Government proceed with this amount for AIB given that it was clearly outlined that this amount was insufficient to meet their capital needs, with AIB ultimately requiring in excess of €20 billion?
Ms Ann Nolan
Well, at the time our assessment was that AIB needed about €5 billion or €5.5 billion ... somewhere between €5 billion and €5.5 billion. And we gave them €3.5 billion on the understanding that they would sell their Polish and US subsidiaries to make up the difference.
Okay. Now I want to turn to the issue of capitalisation ... recapitalisation in general. And I've referred already ... you actually said in your opening statement that it became clear that the banks' managements had differing views on the need for capital in their institutions. Can you briefly outline what those differing views-----
Ms Ann Nolan
This is at the initial position?
Ms Ann Nolan
Yes. I think Bank of Ireland were the most realistic. I mean, I think very early on they told us that even if, technically, they could do a projection that showed they wouldn't need capital, they felt for the markets to really have faith in them, they needed probably €2 billion extra capital. And AIB told us they were the alpha male that didn't need any capital. And ... sorry that's a bad expression ... they were, you know, well able to cope. And Anglo told us that the private sector would give them capital. The first time I met them I was stunned at the amount of capital the private sector was going to put into them. But, of course, it never materialised. I mean, you knew it was-----
Okay. I was just going to turn to the Bank of Ireland question because we have minutes - and I've referred to them in evidence - from Mr. Cardiff from 13 and 17 October 2008, where they were discussing at board level that ... the need for a taxpayer injection - actually, not just a recapitalisation but a taxpayer funded one - and on 17 October, one of their minutes said "it would be inappropriate to push the Government at [this] time, as the Exchequer budget was due to be announced the following day." Would you have been aware, and when did you become aware - because I think you indicated that you were - that, internally, Bank of Ireland were acknowledging the need for taxpayer capital?
Ms Ann Nolan
I think it wasn't ... certainly not at that point because in October I was working on that budget, on the spending side, so I was not aware of what Bank of Ireland were or weren't doing internally. But-----
They didn't, like, in their initial discussions with you say that-----
Ms Ann Nolan
I'm trying to remember-----
-----or flag it.
Ms Ann Nolan
-----it's very difficult. I think it was probably the beginning of December that it was flagged by Bank of Ireland to us. And they were looking for preference shares of some sort.
I now want to turn, actually, briefly - because my time is getting brief - to your previous role in relation to the IFSC from 2000 ... or 1998 to 2003, I think, you were involved-----
Ms Ann Nolan
Yes, that's right.
-----in that function.
There's an oft-quoted article by my colleague Deputy Higgins, which he didn't refer to today, from The New York Times in April 2005 - which admittedly was just after you would have left the role; it would have been referencing the time that you were there - when they described the IFSC as "the Wild West" of finance. Was that a fair description of what you saw in your time when you were with the IFSC?
Ms Ann Nolan
Absolutely not.
Where do you think that they, I suppose, drew that from exactly?
Ms Ann Nolan
No, I think it's to do with the 12.5% tax rate. I really don't know; you'd have to ask them. I haven't even ... I probably saw it at the time, I don't remember the article-----
Was there a reaction in the Department of Finance to that comment from-----
Ms Ann Nolan
Probably, but I genuinely don't remember. An awful lot has happened since.
Okay, that's fair enough. I now want to turn actually briefly to Mr. Moran. Mr. John Moran, the previous Secretary General we've had in giving evidence already. He in many respects was one of the first outsiders, maybe the first one, to become Secretary General of the Department of Finance. How would you define his period as Secretary General? And did the Department operate in a different manner while he was in the role? Was there a notable change, I suppose, from his predecessors and if there were, can you just briefly outline them?
Ms Ann Nolan
Okay, well, I think it's fair to say that the Department has implemented a huge change of management programme from, basically, 2009-2010 to date because we could see that there were shortfallings ... shortcomings in the way we were organised. And John, in his unique, inimitable way, contributed very positively to that change but it had started before he arrived - the Wright report, it indicated quite a lot of changes - and has continued after he's left, but he certainly brought some very positive things to that and contributed very positively to that.
Finally, I want to refer to e-mails which were covered in the Irish Independent on 9 June 2015 from Patrick Honohan, where he wrote to you to make sure that subordinated bondholders in IBRC would not receive payment after the liquidation. That was the tenor of what was covered in those reports. You held a different view, it seems, or can you-----
Ms Ann Nolan
No, I absolutely ... I ... if there's any way I can avoid paying subordinated bondholders in Anglo any money, I will do it.
Okay-----
Ms Ann Nolan
But I'm not guaranteeing that there is ... I mean there mightn't be any money to pay them in the first place but-----
Do you believe that there will be sufficient funds from the-----
Ms Ann Nolan
I think there'll be sufficient funds to pay the ordinary debt holders; the credit unions, the State, the other people who are owed money but whether there'll be any for the subordinated debt holders ... first of all, there mightn't be and, secondly, we will do, if there is, everything in our power to avoid giving it to them. But I don't think a moral argument will get me very far. I think that's the tenor of my-----
Okay. I have almost a minute left and I'll ask briefly, because I note from your CV, the brief CV that we've gotten, that you were previously a member of the board of ACC.
Ms Ann Nolan
That's right, a long time ago in the mid-90s.
Yes, I'd just like to ask you, that it's ... do you believe that its corporate governance structure differed in any significant way, I suppose, from the other Irish financial institutions, the principal banks that we're discussing at this inquiry?
Ms Ann Nolan
I mean, at the time I was on the board of the ACC Bank its structures were very different. It was still largely an agricultural bank, lending to farmers. It was doing a small bit of property lending. I didn't like the structures of the property lending but I was told I was a conservative civil servant. In retrospect, maybe I should have brought my conservatism to all of the other banks as well. I wasn't keen on it but it was a small portion; it wasn't a huge risk at the time because it was a relatively small proportion of their book, so it was different.
Okay, and we'll move to towards wrapping things up so and if I can invite Deputy Joe Higgins to commence the wrap-up and then I'll finish with Deputy O' Donnell.
Ms Nolan, on page 4 of your opening statement, you say:: "The State received shareholdings in the banks in return for its capital and for the continuing banks this investment can be recovered over time by selling the shareholdings." And you go on to say that the long-term losses essentially arise from INBS and Anglo. Can I query and interrogate that somewhat with you for a minute or two? In regard to Allied Irish Banks, the general figure that is put out there is that €21 billion of State funds went in. I would say that has to be added to by the following: NAMA witnesses said to the inquiry that the banks were overpaid for loans transferred to NAMA from them by €10 billion. That was the evidence from NAMA chief executive and chair. If we allocate the Allied Irish Bank proportion of that, it would be €2.8 billion, so I say if you add that to the €21 billion, you get €23.8 billion. the merger with the EBS gives a further €777 million in a, kind of, a hidden recapitalisation to AIB and then there's a further transfer, in February 2011, of €1.6 billion or €1.7 billion of Anglo NAMA bonds and deposits. Now that brings the cost, arguably, to €26 billion. Can I ask you how do you see such costs, between €21 billion and €26 billion, being recovered for the taxpayer, as you suggest?
Ms Ann Nolan
Okay, first of all there's double counting there because the €20 billion includes the EBS money. You know, the money that we ... the capital we put into EBS is counted as part of the €20 billion, I think.
No, it's .... I don't think so. Well, let's not query about-----
Ms Ann Nolan
And similarly the NAMA piece ... I mean, I think NAMA will sell the loans for what they spent so there's no extra loss there; that extra loss doesn't exist. So I couldn't agree with that piece being extra. I can't remember what the third thing you said was added to it. So I mean it's the €20 billion, I think, we'll get back. We've already got fees of about €5 billion and we have our CoCos due back next year of €1.6 billion, which I expect them to pay us back. And I expect that over time we can get the rest back. I mean, it's my expectation and, you know, it's pretty for the future-----
But it's a hope rather than-----
Ms Ann Nolan
No, I think it's based on the position the bank is currently in and the, kind of, profits it's currently making.
And what about the extra €2.8 billion that, according to NAMA-----
Ms Ann Nolan
That €2.8 billion is coming back to NAMA from the cost of the funds; that isn't an extra €2.8 billion. I just don't agree that there's a loss there. That would imply that there's a loss to the State from NAMA of €2.8 billion, which there is not.
Well, NAMA suggested that they overpaid the banks by €10 billion-----
Ms Ann Nolan
No, they overpaid-----
-----by contrast with what the market would pay at the time.
Ms Ann Nolan
Yes, but NAMA's going to ... they did that with the view to getting that money back over time, which they will. The money is coming back to NAMA. I don't expect NAMA to have a €10 billion loss at the end of the day.
So what timescale are you working on in relation to Allied Irish Banks? And you're suggesting that it would be re-privatised to make back the-----
Ms Ann Nolan
Yes, to make back the money, you'd have to sell it, or, I suppose, if you held it long term you could get the money over a very long timeframe by taking the profits but the question of the sale of AIB, it's a political question for the Government of the day.
Yes. And, Ms Nolan, in view of the disaster that befell our people as a result of the banking crisis related to the drive for profit maximisation and competition-----
Final question now, Deputy.
-----what would your view be of, instead of giving it back to private interests again seeking profit maximisation, of maintaining a publicly owned banking services devoted to social good, social investment, rather than private profit maximisation?
Ms Ann Nolan
That is an entirely political question and the Government of the day has a choice, and I'll do whatever they say.
Thank you.
Thank you very much. Deputy Kieran O'Donnell, just to wrap up.
At the time when Anglo was nationalised on 18 January '09, was Anglo insolvent at the time?
Ms Ann Nolan
Technically, no, because I think the-----
In substance?
Ms Ann Nolan
I think the real problem with Anglo at the time, okay ... and I'm ... I mean, I'm not an accountant so ... an accountant would have to tell you whether they were solvent or not.
The real problem was that - and I didn't know this at the time but I know it now - their model was broken. They were lending effectively into the building industry. The bulk of their lending, directly or indirectly, was into the building industry. And that method of financing developments can't be done any more, you know, banks will never again give more than 60% into development loaning ... lending - 60% of any given development. So, the problem wasn't so much ... there were several problems but the big thing was that there was no capacity to regenerate profits, which the other banks had.
And, on NAMA, in your statement you referenced that ... the transfer of loans based on a discount on a broad stratified sample of loans for each bank, which I'm assuming is linking in to what was the original business plan, which is a 30% discount.
Ms Ann Nolan
Well, it doesn't ... it would have ... it probably could be the same discount, it probably would have been the same discount. All I'm talking about there is the method of doing it. What we did was we looked at every single loan. So in tranche 1, they went through every single loan in every single bank. Probably if they'd done 20% of the loans for every bank, in the different tranches, and done them all together, you'd have got more or less the same answer.
What would have been the benefit of that?
Ms Ann Nolan
Quicker.
Okay. Would you have liked to have seen Anglo - or IBRC - liquidated before it was?
Ms Ann Nolan
I'd like to have seen it liquidated earlier, probably, and to have seen it liquidated while it still had some of its senior bonds in it that we could liquidate but, in practice, that really wasn't an option. There was never a point at which I could do that.
And was there a point that you could have done it prior to the first repayment having to be made on the promissory note?
Ms Ann Nolan
It just simply wasn't an option at that point.
It wasn't an option.
Ms Ann Nolan
No.
And, I suppose, finally, if NAMA hadn't been established ... hadn't been set up or the haircuts were much lower, could we have avoided a bailout?
Ms Ann Nolan
If NAMA hadn't been established, we would have had a different problem; we would have had zombie banks. And while we may or may not have ... I don't think we would have avoided a bailout but I think we may have had a far worse problem in terms of the SME loans and the capacity of the banks to get back to looking at their SME loan books, which might have had a much worse impact on the real economy. Because, after all, you know, the banking ... and this inquiry is, obviously, looking at banking, but banking is there to service the economy and getting employment growing and unemployment falling was the most important political desire by both of the Governments in the last seven years.
And, I suppose, in summary, as you're here, what would be your overall, I suppose, summation of your dealings with the banks from November 2008 onwards to now, both in terms of how it came to pass that €64 billion of taxpayers' money gross went into the banks?
Ms Ann Nolan
Well, I mean, it's been a very difficult time, I'd say, certainly for the Department and probably for the banks and certainly for the country. In dealings with the banks, the vast bulk of the bankers that I have dealt with have worked as best they could for their organisations and, indirectly, to minimise what the State was giving them. I wouldn't say all, but the vast bulk.
Okay. And, just, I suppose, a final point ... a very final point. When you were doing the due diligence with Arthur Cox and Anglo Irish Bank, would they have looked at the model in terms of the type of interest rates that would have been charged to customers and the cost of funds for the bank itself?
Ms Ann Nolan
The particular due diligence I referred to earlier was looking at corporate governance issues. In particular, it may have looked at other things and I was looking at the legal ramifications.
So Arthur Cox did not look at the loan book?
Ms Ann Nolan
At that time in January, no. There wouldn't have been time in the three weeks that were there.
So, therefore, are you saying to me that you made your decision on nationalisation of Anglo based on corporate issues as distinct from financial issues?
Ms Ann Nolan
Yes, financial issues ...we were based ... but the information on financial issues were as per the PwC reports and the ... Anglo's own annual reports.
Okay.
Thank you very much, Deputy. Thank you very much Ms. Nolan. I'm going to bring proceedings to a conclusion. I ... if you want to add anything by means of your own final comments, the inquiry, as you mentioned earlier yourself, is not just for looking at the past, it's also about measurements going into the future, and if you have any particular observations, recommendations, you'd like to make in that regard, we'd be most welcome to actually hear them. So if I can ask you maybe to make your closing remarks now, Ms. Nolan.
Ms Ann Nolan
Okay. Well, listen, I really would like to thank you very much and wish you well. It's a very difficult thing and I know that ... having to come here has made me think very carefully about everything I've done for the last seven years and it's been quite a challenge. So I really do wish you well in trying to put together everyone's views of it ... into a coherent narrative that will allow us have very positive, hopefully, recommendations for going into the future.
Thank you very much, Ms. Nolan. With that said, I'd like to thank you for your participation today and for your engagement with the inquiry, to now formally excuse you and, in doing so, to propose to suspend the meeting until 11.50 a.m. Is that agreed? Agreed. Thank you.
Department of Finance - Mr. Donal McNally
Thank you very much. Okay, with that said, I now bring the meeting the meeting back into public session, is that agreed? For session 2 of today ... which is a public hearing and discussion with Mr. Donal McNally, former second secretary general of the Department of Finance. The Committee of Inquiry into the Banking Crisis is now resuming in public session. Can I ask members and those in public Gallery to ensure that their mobile devices are switched off? This morning we continue our hearings with the senior officials from Department of Finance who had key roles during and after the crisis period. At our next session we will hear from Mr. Donal McNally, former second secretary general at the Department.
Mr. McNally joined the Civil Service in 1969, and joined the Department of Finance in 1986. He has worked in the Department at various levels in banking policy, health spending, tax policy, budget and economic division, and finally public expenditure division. He was appointed second secretary general in 2000, and headed the budget and economic division until 2008, and the public expenditure division until his retirement in 2012. So, Mr. McNally, you're very welcome before-----
Mr. Donal McNally
Thank you.
-----the committee today. Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry and, therefore, the utmost caution should be taken not to prejudice those proceedings.
Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and should not publish any of the documents so displayed.
The witness has been directed to attend the meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to Mr. McNally please.
Once again, Mr. McNally, welcome before the committee today, and if I can invite you now to make your opening remarks to the committee please.
Mr. Donal McNally
Thank you, Mr. Chairman. My opening remarks are quite brief. First of all, I'd like to thank you and the members for the opportunity to make this brief opening statement today. The task of inquiring into the banking crisis and the events surrounding it will, I hope, reveal lessons for the future guidance of policy makers which will help reduce the risks of a recurrence of these events to a remote one. I don't think we could have another such unaffordable crisis.
I would like at the outset to express my regret at how matters turned out for the people of Ireland and for the period of austerity that affected so many, and for the increased burden of debt that we now carry. As set out in my written statement, my connection in this was as a senior civil servant providing economic and fiscal policy advice to Ministers and Government, who then decided on the policy actions to pursue.
I believe that, as confirmed by the Wright report, that the policy advice was appropriate, although not always followed. The advice was to run a fiscal policy close to balance or a surplus, and to avoid adding unnecessarily to demand in the economy, to improve supply and to guard our competitiveness. I did not provide advice on monetary or credit issues, that being the preserve of the Central Bank, or on credit growth, seeing that is a matter for the Central Bank to handle. While giving advice I also took advice, notably that the likely growth scenario was one of a soft landing, i.e. that the housing market would return to more normal levels in a manageable way. This was the view of economic advisers in the Department as well as outside, official and private sector commentators.
I did not foresee events as they happened. Others didn't do so either. I was aware of only limited contrarian advice at the time. It is difficult, as I said in my written statement, for cautionary or contrarian views to be got across when the economic news is so positive and when the country has been widely complimented on its economic performance.
The rise in asset prices was a factor of accommodating monetary policy and fiscal policy, strong domestic demand and certain property tax incentives. These incentives were introduced at various times since the 1980s. The motivation for these reliefs was to develop, restore, renew certain areas, and to stimulate employment and job creation. Some of these were more successful than others, and all were generally supported at political level. A number of these were terminated after 1997, some limited in extent, and some new ones introduced. The case for such reliefs was much diminished in the strong property market, but it took time to eliminate these from the tax system.
I accept that there was a deficiency in economic advice resources, which it also took time to address effectively. The situation was improved, but the problem is not just recruiting but retaining staff. The current Government economic and evaluation service model seeks to address these issues in a constructive way. Fiscal policy decisions take place in a different context to monetary policy action. That context is a democratic one. Government must marshal support for policy actions, and justify and defend these to parliament and the electorate. It is not easy to garner support for restraint when resources appear plentiful. A key challenge for the future, I believe, will be the need to communicate the wisdom of restraint to the public, even when resources allow, and the desirability of using surplus funds to reduce debt now to lessen the burden for the future. It also seems that the EU believes that closer monitoring of member states, more constraints on our freedom of action, and firmer rules on budgetary policies will bring about greater fiscal responsibility. Hopefully this will not be at the expense of democratic responsibility. In short, there are important lessons to be learned and there are important issues to be reflected on in the remit of the inquiry on which I hope I can help in that regard. Thank you, Mr. Chairman.
Thank you very much, Mr. McNally, for your opening comments. If I can now invite Senator Michael D'Arcy to commence questioning. Senator, you've 25 minutes.
Thank you, Chairman. Mr. McNally, you're very welcome.
Mr. Donal McNally
Thank you.
I'm going to start, Mr. McNally, with a quotation from the former Taoiseach, Garret FitzGerald, who said in 1984 that the Government is going to keep its hand out of the till from now on. In terms of expenditure in your period, in the senior role in expenditure, did the Governments, successive Governments, keep their hand out of the public expenditure till or not?
Mr. Donal McNally
Well, my role in public expenditure was after the ... after the crisis started, and in that case there was significant cutbacks in spending. As regards the period from 2000, I think the picture varied. There was some years in which there was quite strong expenditure growth, and I think in 2003 and 2004 that fell to 7% or 6%. And then, after that, it returned to a level of 10%. So there was very strong expenditure growth. I mean, it was a time of plentiful resources. There were also Government commitments and social partnership commitments, so that these added to the pressures for public spending.
Mr. McNally, the level of expenditure from 1998 by the State was €20.5 billion. Ten years later it was €62.5 billion. That's a trebling of expenditure on behalf of the State in a relatively short period. Did the Department do any international peer reviews with trading partners or anything of that nature to see ... to gauge the expenditure by the Irish State with other states?
Mr. Donal McNally
I don't think so. I think the metric we used was as a percentage of GDP. And, you know, it remained around the 32%, 33%, 34%, which was far less than in neighbouring countries, maybe with the exception of the UK, and on the same level as the US. So that is the ... that's the main metric we used. I mean, different countries had different traditions. The Scandinavian countries have high expenditure, high taxes. We were trying to run high expenditure and low taxes, which the growth and the economic resources allowed, for a time.
Mr. John Moran, in his evidence before us, I'm not sure if you had the opportunity to hear what he said in relation to the deficit from your period '08 to when you left, or to date, that the deficit for that period was in the region of €100 billion. And that on the basis of that €100 billion, that that is part of the national debt. Could I ask your analysis of the €100 billion and how, in the future, the future generations will be obliged to pay that back?
Mr. Donal McNally
Well, I'm not quite sure of the figures, but I take it-----
Mr. Donal McNally
-----what's said. I mean, we had this problem before in the '80s when we had debt, GDP, or GNP ratios of over 100%, that you got up to 130%, or close to it at one stage. And the interest rate regime, I think, payments were taking up a lot of the income tax receipts were going on paying the national debt.
Unless there's some debt forgiveness, then the only way we can fund that is by growing and reducing the burden in that way, so that we have more capacity to pay the interest. We did it before. It took some time to do but that's the main way. Now, obviously, before there were high interest rates we weren't part of the euro. So, you know, to the extent that the monetary policy in the euro works, and fiscal policy ... the debt burden in terms of interest rates will be a bit more manageable than it was before.
Mr. McNally, can I ask you, in relation to the narrowing of the tax base over that period, and the reliance ... the over-reliance on the transactional taxes that were attached to the construction sector, was there comment within the Department that there was a prospect that if those taxes were not as buoyant as they were, that the State could be exposed, potentially, to a shock?
Mr. Donal McNally
Well, there are various figures given for the reliance on these taxes. There's a figure mentioned of 30%. That includes corporation tax, and corporation tax is paid mainly by the multinational sector and is more related to foreign GDP than it is to domestic. And, in the case of stamp duties, the fact is that there's no stamp duty on new houses, it's ... stamp duty is on second-hand houses; it's VAT that's on the new houses. So, there was a concern that if the economy turned down sharply we could be exposed, but the general opinion was that there would be a soft landing, in which case there would be less tax, but there would be some facility either to raise tax in other ways or to let the deficit ... incur a deficit, which is allowable if ... to a certain extent, if growth reduces.
Okay. The ... can I ask, Mr. McNally, is it possible for a civil servant, even a very senior, experienced civil servant to say, "No, you can't do that, Minister, it's too far, it's beyond the pale", that it's irresponsible to implement a specific type of policy?
Mr. Donal McNally
Well, I suppose it is. It depends on the context. But if you put the arguments to the Minister, and put them in the budget strategy and memorandum, then there is a matter for political decision what the level of public spending should be and what the tax to fund that should be. So, I'd say, yes, you could say ... you could argue against it but if the Minister decides, or the Government decides, generally, as a civil servant, you do what the Government decides.
Can ... can I ask ... you were involved in ... during the period of ... two high-profile policy decisions. The SSIAs: can I ask what was your view about the SSIAs? They were €15 billion with the State contributing a portion of that.
Mr. Donal McNally
Well, the advice that was presented to the Minister was not to introduce such a system, or, that tax on savings ... it was difficult to know if it increased net savings or not. I think there was some OECD evidence to suggest that it just moved the savings around. I don't know whether that was the case or not, but the Minister was strongly of the view that, given the - this is what he expressed to us - given the prosperity, given the level of consumption, that people had forgotten how to save, and that this was a way of encouraging people to think of the future and put some money aside. So, my advice was against the SSIAs, as was the Department. I didn't have an SSIA myself because I believed that if I'd argued against it, I would have been, I won't say dishonest, but I just thought I shouldn't invest in something that I had argued against myself.
And, the extent in which you can argue against the Minister, how far can you go? How far can you take it?
Mr. Donal McNally
Well, generally, what ... in making tax submissions, what we did was marshal the arguments on both sides, and the Minister made a decision on that basis. But, I mean, you can argue ... you're free to argue with the Minister and put the point of view, but if he decides, then that's the policy.
And, can I ask you in relation to the budget 2003 decentralisation programme that was announced ... can I ask your view in relation to that?
Mr. Donal McNally
Well, I'll-----
It was a cost to the Exchequer for the decentralisation.
Mr. Donal McNally
Well, there was a cost. I'm not quite sure what the cost was, but it was also felt that there was a benefit in terms of spreading around some of the prosperity throughout the country, and in helping some areas. I wasn't involved in the decentralisation It was kept a fairly closely guarded secret until it was announced, and there was a small team working on it. I mean, there are pros and cons in favour of it. I must say I had a neutral viewpoint on it.
Okay. If I could just go back to the SSIAs, Mr. McNally, could you give me ... could you outline the reasons why you opposed the Minister's savings programme?
Mr. Donal McNally
Well, I ... we marshalled arguments. We looked at various different incentives, incentives on the principal amount, incentives on the interest, but the main reason would have been possible cost and the fact that we weren't sure that this would incentivise savings. I mean, it may have; I don't know if it did or not. We tried to build in factors to stop the SSIAs being used to finance consumption. So, they were the two main reasons - the cost and whether it would be effective in stimulating saving.
And were you just opposed to all SSIAs? The idea that people that are very wealthy getting a 20% top-up from the State - did that occur that that was unfair and unreasonable?
Mr. Donal McNally
Well, all I can remember at the time was the lady who spoke ... who was, I think it was the Joe ... what's the thing at 2 o'clock? Joe Duffy.
Talk to Joe.
Mr. Donal McNally
I think she was complaining about the fact that ACC had closed some current accounts, and she explained that she used to put the children's allowance money into the SSIA, so I said to myself, that's tax-free money being put into a tax-free account. So, you know, I ... I'm not too sure ... I didn't favour SSIAs, and I favoured it even less when I heard that.
I just want to move on to the ... to your core booklet, Mr. McNally, page 101, in relation to the report. Sorry now, it's not 101, it is page 105 onwards about economic and fiscal implications of a reduction in housing output, where it says that for every 10,000 units, private units ... would reduce that there would be a fiscal deterioration of €1.8 billion. It's 105 onwards.
Mr. Donal McNally
Yes, I have the reference there. I think the €1.8 billion was that ... a question was asked, if private housing output decreased by 10,000 and you built 10,000 local authority housing, what would be the cost? And the €1.8 billion refers to that, as far as I can see from the documentation. The actual cost in terms of the 10,000 decline, for each 10,000 decline it was €570 million. The 1,800 was made up by the increased capital expenditure on the local authority houses.
And were ... was that a major concern for the public expenditure side of the Department, in terms of the reduced revenue that would be coming in every ... because there was a ... analysis concluded that there would be tens of thousands of units that would not be built in that period, going forward.
Mr. Donal McNally
Well, as I recall it, the analysis suggested a soft landing, which would have meant that housing output would decline. I think there was a figure of 6,000 or 8,000 per annum, in which case there would be lower income taxes and VAT, and higher live register payments.
If it proceeded at that rate, it was possible, I mean, it could be possible to raise money in some other ways to try and offset that or to run a small deficit. We were in surplus or in balance for most of the period.
Okay. As early as 2001, a paper presented to the MAC meeting on 26 April shows the Department were facing a specific skills challenge and had a broad spectrum of skills requirements among others in economic modelling. Can you give us your view if efforts were made by the Department, if they were sufficient after 2001 to improve the skills shortage?
Mr. Donal McNally
My main area was the economic side. I don't know about the other side but the financial side, there would have been also IT skills but I do admit there was a problem in terms of resourcing on the economic side. I found this out early on when the economic forecaster, who I think was Robert Watt, who is now the Secretary General of PER, I think he was the short-term economic forecaster. I was seeking somebody to replace him and I had some difficulty because there was a reluctance to go on to the economic side, because people thought that their career prospects were better if they had a more broader experience and they weren't identified as being too technical or working too long in one particular area. I said to the person that "look you will only be there for a couple of years, you will be replaced" as a way of trying to get him to agree. As a result of that, I spoke to the Secretary General, John Hurley, who became Governor of the Central Bank, and he arranged for the Central Bank to second an economist, John McCarthy, who has since gone on to be the chief economist. That was sort of a stop-gap measure to an extent.
When Derek Moran, the current Secretary General, came in, he conducted an analysis of the leads of the section and proposed a plan to recruit economists directly, which was done, and to bring in some other people from other parts of the Department, from the NDP - the national development plan side - who were, that was running down their engagement there. We also took on another economist in 2006 from the Central Bank. So something, things were done. I don't think there was any lack of quality, it was more an issue of quantity. The Wright report did say that the analysis presented by the economic side was as good as any else and there were no complaints that I heard from any of the international bodies they dealt with to that extent. While they might have had a small economic side, it did work with the ESRI and the Central Bank and the Commission so to an extent they were able to use their resources as well in their activities and the Commission would have had regular meetings to discuss the economic methodology and the economic forecast.
Could you explain to me, Mr. McNally, then if, as you say, the Wright report said that there was nothing wrong with the quality of the analysis, how did the downturn ... how did the recession sneak up on the Department of Finance to the extent that it did and how was it so bad if the forecasting was of quality?
Mr. Donal McNally
I looked at the figures for 2008 and we were predicting growth of, I think, 4.5% or so. So was the IMF and the OECD and the Commission. So it wasn't just us that were taken by surprise. We just got it wrong and I can't explain it in any more detail than that. We relied on ... perhaps we placed too much trust in a soft landing, not allowing for the fact that these things could go wrong.
Was the Department of Finance aware of the level of bank balance sheet growth that was occurring for the previous years?
Mr. Donal McNally
I knew there was a credit expansion but I regarded that as part of the remit of the Central Bank to address and if they had any problems in that respect, they had the tools and the policies ... levers to use, so I didn't take ... I didn't look in that great detail at the credit expansion.
And in terms of, say, financial stability within the Department, did nobody ever raise that issue?
Mr. Donal McNally
I don't recall that, no. I mean, the financial stability report indicated that the banks were well capitalised and as far as I can remember, did not give explicit warnings that there was doom around the corner.
What policy initiatives, withdrawal of tax incentives, increased capital requirements across the sector were considered by Government to address the risks emerging in the economy during your tenure in the Department of Finance?
Mr. Donal McNally
I do not understand what-----
What initiatives, what changes did the Government engage in to address the risks emerging in the economy?
Mr. Donal McNally
The main one that was done was to finally get rid of the tax reliefs. I mean, since 1997, some of them had been got rid of - the seaside resort scheme, the Temple Bar scheme, the Custom House docks scheme - and we would have recommended to the Minister certainly that these reliefs should go and I recall reading the 2003 budget where it said they would go in 2004 but when 2004 came, they were extended because as far as I remember, because of worries that there were schemes still incomplete. So when the new Minister came in, we put a proposal to him to try and get rid of most of these property reliefs but he asked for a special study to be done so that it could be explained to the public why this was being done, and not sudden. So that was the main one within my purview.
In terms of that report, can I ask your opinion of the appropriateness of some of those schemes, seaside resort one, there are others? Can I ask your view, your personal view on the appropriateness of them, the benefit that they had to the Irish economy?
Mr. Donal McNally
Well there are numbers. The urban renewal scheme was brought in in 1986 and, I think, as was the Custom House docks scheme. So the Custom House docks scheme certainly did help develop the IFSC and there was also a BES, which was ... I think property was allowed in the BES scheme. That was got rid of because property was ... the BES was supposed to be risk-taking, not investing in bricks and mortar. The schemes were reviewed in 1996 and I think the conclusion was that there was some benefit in the areas in which the schemes were concentrated and some which ... what they call a shadow effect in areas beside it, but it was difficult to conclude whether that had led to an overall increase in output in the economy or not. The seaside resort scheme, we were never convinced of the wisdom of it, and I think the idea was, and it may have been well-founded in the sense that some of the traditional resorts had ... were a bit down at heel and the accommodation wasn't as good as it should be and the amusements and facilities.
Senator, maybe you can ask Mr. McNally as to who was not convinced of the wisdom, if we could just establish that there?
Yes. Who was not convinced? Was it you personally or-----
Mr. Donal McNally
I was talking about myself and the view in the Department.
It was the view within Department.
Mr. Donal McNally
Yes, just on ... within the tax side of the Department, yes.
Was it the accepted view or was it the general view?
Mr. Donal McNally
I would say it was ... well, it was the view amongst those who were directly concerned with it. I don't know about the generality of everybody else.
Okay. So it was a political decision to advance those schemes. It wasn't with the behest of the Department of Finance?
Mr. Donal McNally
No, we didn't propose the schemes. They had been proposed, I think, in 1992 ... I think the Department ... the Minister didn't proceed, but in 1995 it was decided to go ahead with them. While there may have been some sense behind them in terms of trying to restore the attractiveness of seaside resorts in Ireland, I think most of the investment went into accommodation, rather than into facilities and, I suppose, that is to be expected if there is tax relief for investing in property or for investing in amusements and things, the likelihood is that property will win out.
Okay. And then just to revert back to my question previously, Mr. McNally, in relation to transactional taxes which, in 1987, were a total tax take of 8%. That increased up to 30% in 2006; you said corporation tax was a portion of that. Did the Department highlight that concern, that issue, to the Minister over those number of years because it wasn't just-----
Mr. Donal McNally
Well, I think-----
-----a single year?
Mr. Donal McNally
Yes, I think, from reading the documents, it was highlighted by the Secretary General that the ... that it wasn't wise to rely on ... on taxes that might not remain permanent, that might not yield the same. I mean, the problem ... one of the issues with the stamp duty was ... the stamp duty was raised from 6% to 9% in 1996 when residential property tax and, I think, local authority charges were removed. This was a way of restoring the ... the revenue. But the stamp duty rates applied not on a tranche basis, not, sort of,1% of the first €100,000; 2% of the next. Once you went over the-----
Threshold.
Mr. Donal McNally
-----the threshold, you paid the whole lot. You paid 2% on €101,000 as opposed to 1% on €90,000. So, that meant, when prices rose, there was ... there was significant elasticity and that was one of the reasons why the yield went up so much. We did think was there a better way of restructuring the stamp duty because, you know, 9% was quite a high rate and we didn't go to the Minister on this because this was just talking amongst ourselves in the tax division. But the problem was that any attempt to ... to restructure the stamp duty rates would probably have meant a lowering of the rates ... just the way the process works. And lowering the stamp duty rates could have added fuel to the fire of the house prices, so, you know, we were ... we had a system that brought in a lot of money. It probably wasn't the most judicious system but making changes in it could have raised other problems.
And did the Department ... did the Department-----
Final question.
-----communicate that advice to the Minister or was it ... or not?
Mr. Donal McNally
That was just internally, ourselves.
You didn't communicate that advice to the Minister?
Mr. Donal McNally
Well, we didn't suggest revising the ... or revamping the stamp duty. We just talked about it amongst ourselves.
Thank you.
Senator Sean Barrett. Senator, 25 minutes.
Thank you. And welcome to-----
Mr. Donal McNally
Thank you.
-----Mr. McNally. One of the earlier witnesses, Mr. McNally, Professor John FitzGerald, said:
There was a culture change in the Department of Finance in the last decade. It became more concerned about the politics of things and less interested in the technical detail. I would have had less interaction.
What's your own view of John FitzGerald's comments there?
Mr. Donal McNally
Well, I think ... I think he must have been referring to the number of instances mentioned by him when some people took exception to what was being said in the report-----
Mr. Donal McNally
-----but, you know, I didn't detect a political change, as he ... as he had done. I mean, the Ministers didn't get involved in economic forecasting or anything of that matter, so I was a bit surprised when I ... when I read it.
Okay, thank you for that. The Regling and Watson evidence book has that after 2004, the IMF, the OECD and ECOFIN all clearly recommended a tighter fiscal stance and the building up of a cushion for the time when the income from the property-related transactions would fall. Why, in your opinion, were these recommendations not more forcefully highlighted in policy?
Mr. Donal McNally
Well, I mean, they were highlighted in the budget strategy memorandums, as far as I recall, but it was Government decisions on the level of public spending. We did have a very low debt ratio, I think it fell towards 20%. We also had assets in the National Pension Reserve Fund which, I know, were to be ring-fenced for other purposes but they did reduce the net debt, so I think we thought we were doing as much as we ... as we could.
And just in this segment, the final one, that the Department advised the Minister in July '08 that economic growth would recover, even after allowing for a 45% decline in housing completions to 45,000 a year. And there was earlier research, in 2004, that every 10,000 reduction in housing output would cost the Government €500 million, so what was happening to our forecasts in that period?
Mr. Donal McNally
Well, I'm not quite ... I'm not quite sure. This is in 2008?
2008, yes. Well, I'll give it to you again: the Department advised the Minister that economic growth would recover after allowing for a 45% decline in housing completions to 45,000 a year and a further decline of 23% to 33,000 units in 2009. And the earlier work had been, in 2004 ... that every 10,000 reduction in housing output would cost the Government €500 million in ... in revenue.
Mr. Donal McNally
Well, the earlier report was in relation to a specific question and that was the metric in terms of the loss of revenue. I left the budget side on 1 May, so I don't ... I don't recall the forecasts that were made. I'm sorry.
Okay, thank you. Could I bring you back to your ... your first posting in banking in the Department of Finance, I see here, 1986 to 1992. So, I'll put that question to you: when Donal McNally was in charge of banking supervision, the banks were solvent, the bank manager in the local town was an honoured member of the community - where did it all go wrong, the €64 billion of what we're investigating now? What ... have you been keeping an eye on this sector ever since you were its ... involved in its supervision back then?
Mr. Donal McNally
Well, just before that, I was involved in insurance supervision in the Department of Industry and Commerce-----
Mr. Donal McNally
-----and had some peripheral ... I wasn't centrally involved in the PMPA and the ICI events in 1982 and '84, I think it was, or 1982 and 1985, so I knew the value of close supervision. I wouldn't have gone for this light touch regulation because, as in most of these cases, the State ends up having to pay the bill and the State should be extra vigilant. In terms of banking policy at the time, I was involved in the Central Bank Act, which was passed in 1989, which was to strengthen the powers of the bank to ... the Central Bank to supervise banks, to attach conditions to licences, to apply codes of conduct and other matters. But my recollection was of trying to take initiatives with the banks to get them to lend to ... especially to ... I think there was a young entrepreneur scheme which the Minister at the time, Minister Reynolds, persuaded the banks to lend ... or to provide €100 million for. I'm not quite sure how he did it but he managed to do it. And there wasn't the ... there wasn't the culture of ... I didn't detect a culture of profit maximisation; they might have wanted to grow the size of the banks. And I don't think there was the same culture of bonuses so, you know, the culture ... there was a cultural change in terms of seeking after profits and rewarding those who sold the most and contributed most of the profits.
So, in your early time, would banks have a different philosophy, interpreting what you said, a sort of community-----
Mr. Donal McNally
Well that's-----
-----service, minding people's savings, was that, sort of, their emphasis?
Mr. Donal McNally
Well, I don't know if they were as ... as altruistic as that, but I do remember one gentleman who was in the ... head of the Trustee Savings Bank in the UK relating that when he joined and somebody came in to take out money, they would do their best to persuade them to leave the money where it was; that, "You don't need this money really, you don't need a car, you have a bicycle, you can use that." Whereas, you know, 20 years later when he was in charge of the organisation, he was finding ways to get people to borrow money. So I think the emphasis changed from guardianship to-----
Mr. Donal McNally
-----seeking to lend as much as possible.
And do you think the culture of the management and the boards of Irish banks changed?
Mr. Donal McNally
Well, I think so, from the ... from my experience, from my observation, I would think so, yes.
When you were then back in Finance, you mentioned to my colleague, Senator D'Arcy, that you were trying to restrain the growth of public expenditure and to drive down the debt-to-GDP ratio.
Did it ever occur in those conversations that maybe the correct stance from the Department of Finance would be to look at the rate of growth of credit? Central Bank was telling you to control cost and improve competitiveness. Did you ever say, "We could do with some assistance from Dame Street in view of the high rate of credit growth"?
Mr. Donal McNally
Well, as I said earlier, I'd left that to the Central Bank, and, as you remarked to some other witness, maybe we should have been writing letters to the Governor instead of the other way round. So I didn't focus on the credit expansion; I'd left that to the bank itself.
Wouldn't it have required massive physical surpluses to counteract such huge monetary expansion?
Mr. Donal McNally
Yes. I remember that, when we were subject to the recommendation, asking my Italian colleague what were we doing wrong. We had a surplus of 4%, and what he said was, "Well, with your rate of growth, you should have a surplus of 8%", which is probably true economically, but not really ... I don't see how you could do that politically. I did ask him if Italy ever had a surplus and he said once, in 1861. So I was speaking to the right man, obviously.
Yes. Did it ever arise that people would say, "We're now in a currency union dominated by Germany and that it's risky for Ireland to expand credit into the economy faster than the dominant country", i.e. Germany?
Mr. Donal McNally
No, I wouldn't have asked that question myself. I'm sure that's a question the Central Bank must have asked.
Was the definition of competitiveness - and you have that on page 3 of your written address - was it inadequate in that the very rapid rise in house prices was not really reflected in the consumer price index so that houses were getting from two and a half times incomes up to ten times incomes and ... and there was nothing to restrain that, in the interest of competitiveness?
Mr. Donal McNally
Well, the competitiveness was looking at the unit labour cost compared with other countries. A lot of the competitiveness may have been due to compositional shifts in the economy so that, you know, when housing assumed such a greater proportion, the overall competitiveness would have gone down.
And the sectoral concentration of all this lending did that ... was that discussed in the Department of Finance?
Mr. Donal McNally
Not in ... not to my knowledge, and I wasn't aware of the breakdown of the credit.
Yes. Thank you. And the commercial lending, which the evidence to this committee was extremely volatile was ... did that set off any alarm bells or discussions and so on in the Department?
Mr. Donal McNally
Not that I recall, no.
The ... so we were operating ... your own quote there, on page 6, "To offset the pro-cyclical effect of low interest rates and easy money would have required running a significant General Government Surplus ...". Was that going beyond any bounds of political feasibility, that the surplus required to have €64 billion ready on 29 September 2008 would have been impossible for any Government to generate?
Mr. Donal McNally
Well, I think what we tried in the memorandum to suggest was not huge surpluses, but they stayed close to balance or in a surplus and that would keep the overall debt down, which would give you the facility to borrow when economic circumstances change.
You said, on page 7, that there was only limited contrarian views in the Department of Finance, but I think you've expressed a good number of them about those property proposals and the SSIAs and so could you tell us about how decisions were made?
Mr. Donal McNally
In relation to the Department?
In the Department of Finance, yes.
Mr. Donal McNally
Well, on the tax side, proposals would be considered in the run up to the budget, the Minister might have some proposals, the Department might want to propose some changes. A memorandum was prepared, which set out the ... analysed the proposal and set out the pros and cons and then there'd be a discussion with the Minister and the Minister would give his ... either his agreement or not, and there would be discussion within the tax side ... on the relevant side between the various people involved in coming up with the proposals.
But you presented this morning a picture of more discussion than might be indicated here. You say that there was ... in your presentation there was only "limited contrarian views", but there seemed to have been a bit more discussion than that, that if you had doubts about the SSIAs or certain seaside resort building schemes and so on, that that was actually discussed within the Department.
Mr. Donal McNally
Yes, well, maybe I was understating the case. I mean Finance does tend to express doubts and scepticism on ... I don't want to say nearly everything, but I mean there is a tradition of debate and discussion.
Yes, there was a famous member, who shall be nameless, of course, whose nickname was "Dr. No" for that purpose.
Mr. Donal McNally
Yes.
Are you talking about James Bond or a politician there like?
He was in the Department of Finance, Chairman.
All right.
In relation to the Wright report, how did you react when you saw that? Because he was ... he's very critical of the lack of specialist economists. In fact, I think he had only 7% of people at the top level had degrees in economics at master's level or above.
Mr. Donal McNally
Yes, well I ... you know, I think the Wright report was a fair review of the Department, and we initiated it ourselves to see what lessons could be learned from it. I was surprised at the level of economists they mentioned in the finance in Canada. I mean, we're a smaller country with smaller resources, and, as I said, even though there might have been limited numbers on the economic side, the quality, as far as I could see, was good, and they had available the economic ... economists in the other institutions that were being dealt with. So, I was a bit surprised to find that we were so underweight, and, you know, we had tried to improve that. And I think the initiative of the Government in the Government Economic and Evaluation Service is a worthwhile initiative in trying to recruit people to that particular job, and then giving them the opportunity for career development.
And your advice to us, I think, on page 9 is that you found it difficult to recruit staff being labelled in a technical area, which presumably includes economists. And there was also some documents we saw that those people should have only a three-year contract, I mean ... I think ... you're an integrationist, I think, if I interpreted you correct that those economists should be, in the general scheme of things, in the Department. Is that correct?
Mr. Donal McNally
Well, yes, but across the ... the Civil Service as well. I mean, a lot of work was being done on evaluation, and the ... more could have been done on the use of economists in that respect, and that's what's being done now in the Government Economic and Evaluation Service. The idea ... there was a feeling that at interviews what people were looking for was people with broader experience having worked in different areas and not being ... I mean, it's wrong to say technical, because being an ... and having studied economics, it is broader than simply crunching numbers. But there were ... there was a view that people were hampered in some way by being too closely defined with a special area. I mean, I did experience it myself in interviewing people who were excellent on the budgetary numbers and on all the number crunching but when asked a question outside their area, showed great difficulty. So there was something in what was being said, but we needed to have economists; we needed people to work in the area, and, you know, getting somebody from the Central Bank was a help, but it was only a ... it was a stop-gap in some ways.
Now, you've two clear experiences from your CV that are, I think, of interest to this committee as we, sort of, try to plan future recommendations.
You served on an bord snip, the second one, isn't that right? And ... or was ... or was it way back the first one? I think it is the second.
Mr. Donal McNally
I'm not quite sure which one - it's called an bord snip nua.
Yes. The more recent one with Colm McCarthy. Was that-----
Mr. Donal McNally
That was the one I was on, yes.
And you also, I think, served on the McLaughlin report on local government.
Mr. Donal McNally
That's right, yes.
So, you know, how should governance be addressed in Ireland, you know, to make sure we don't get into the kind of troubles of 2008-'11 and, indeed, the years leading up to that time?
Mr. Donal McNally
Well, the very fact that we have gone through the experience means that there will be more caution in future and people will understand the need to run surpluses. I mean, as I understand it, the Finns run a large surplus because of the history they had, as do some of the other Scandinavian countries. As to how governance should work, I did suggest that there is ... possibly it needs to be explained or some sort of social compact or social consensus that you don't have to spend all the money just because you have the money and that there's a need to ... whatever you have, rainy day funds or some way of segregating some of the surplus to be used later. The other way is to have some sort of rule which limits expenditure. I know there's one in the EU which was changed a bit at our request. So it's either learn the lesson, agree something at a social level or have a rule that limits the growth to spending when the resources are there - a sort of counter-cyclical spending rule.
Can I ask you, finally, on the one-off tax revenues that you described with my colleague, Senator D'Arcy, was there any recognition in the Department of Finance, "These are one-offs"?
Mr. Donal McNally
Well, there were one-offs for a succession ... over a good number of years. There was a recognition that, you know, it couldn't keep going at the same rate, but if you subscribe to the view of a soft landing then it was possible to cope with that when the revenue reduced.
Because when we've moved to the recurrent taxes like the property tax annual and the water charge annual, we've kept development levies, I think, at €60,000 a house in south Dublin, so is the Department of Finance getting the best of both worlds? It both gets the one-off taxes and has invented new forms of recurrent taxes.
Mr. Donal McNally
Perhaps. I thought ... didn't think development levies were raising that much money nowadays. That was one of the most cyclical taxes because when development stopped the revenue went. I mean, the stamp duty was a good revenue earner but it could not be relied upon. It obviously depended on the amount of transactions. The property tax is better because it'll be more stable but I didn't detect, during my time, a great enthusiasm for property tax. We had done some work on it for the tax strategy group in 1996 but it wasn't really on the agenda.
Thank you very much. Thank you, Chairman.
Very good. Can I just deal with a couple of matters there, if you don't mind, before we move on? Just in follow up there to Senator Barrett's question, Mr. McNally, and it's just to ask that after 2004, did you or the Department undertake any additional or new reviews on housing completions and the impact upon economic growth?
Mr. Donal McNally
Well, the impact on economic growth would have been as set out in this document in terms of, I think it was a 0.5% reduction for every 10,000. I'm not aware that we did anything further than that.
Okay. And maybe if I could-----
Mr. Donal McNally
And the ... the-----
Yes, sure.
Mr. Donal McNally
It wouldn't change. I mean, the same metric would apply.
And that kind of brings me into the space of the whole issue of a soft landing and what attempts were made to quantify the effects of a soft landing and what impact this would have on Government finances in terms of loss of revenue and increased expenditure and so forth, and what advice was given to Government on this regard. So maybe if I could ask you to recall, what was the discussion kind of going on from that period afterwards then as to what was the discourse and evidence that was supporting the discourse of a soft landing?
Mr. Donal McNally
Well, what I took was from the work done by the economics side and the information of the OECD, the IMF-----
Yes.
Mr. Donal McNally
-----who foresaw continued growth, that there was the capacity to grow. I'm not quite sure how one can prove it or not.
You didn't see any proof yourself. Is that what you're saying, is it?
Mr. Donal McNally
Well, you know, it's a forecast. It's an estimate.
Okay. Maybe if I can draw attention to one document there. It's in your evidence book and it's the Central Bank 2007 annual report and a summary is given at the top of it there, Mr. McNally:
... the Central Bank is forecasting that growth in both GDP and GNP terms will be "significantly less than 1 per cent" this year, with some modest improvement in prospect next year with growth forecast to be about 2 per cent. Unemployment is forecast to average 6 per cent this year, mainly on foot of the construction and slowdown, and Ireland like others is facing ... difficult inflationary pressures. In terms of public finances, the Bank concurs with our assessment. The Bank reiterates the assessment that Irish Bank's [sic] are well capitalised with good quality assets and that the banking sector's shock absorption capacity remains strong.
Do you recall that document and that advice at the time, do you?
Mr. Donal McNally
Well, I don't recall it particularly-----
Yes.
Mr. Donal McNally
-----because there was ... this was a common enough-----
Yes, but the general projection of that advice, yes?
Mr. Donal McNally
There was a ... it was a common enough document that we gave a synopsis to the Minister of what the Central Bank was saying. So, I mean, there seems to be nothing exceptional there that the-----
Yes, okay. And was this the advice that was being given to Government from the Department of Finance then as to how to base your budgets and decisions upon?
Mr. Donal McNally
Well, my recollection was that the forecasts, from what I remember, were 4% or 5% for 2008.
Right, okay. Looking back at it now, given that a lot of these figures were based upon the construction sector, incomes coming from consumption taxes, a lot of them construction-related, so you'd have the VAT on a house being constructed, you'd have white goods that would come afterwards, carpets and all the rest of it, and 24% of the Irish economy and the construction sector employment levels inside there and all the net cost that would come with that. How do you view that advice now in terms of what actually happened subsequently?
Mr. Donal McNally
Well, in retrospect, we didn't give enough attention to the fact that the construction sector was such a large part of the economy and that was probably generating some of the fundamentals on which we were basing our assessment of a soft landing.
And where did that gap of information or knowledge of awareness come from? It would have been ... the general discourse at the time would have been morning, noon and night, every radio show, newspaper had property construction or something very much to the forefront.
Mr. Donal McNally
I'm not sure, and I ... that was the general view that there would be a soft landing. I'm not quite sure.
Was there any evidence that the Department of Finance, to your knowledge, engaged, researched, carried out, that supported their soft landing theory or was it drawn from external commentaries and a general consensus, or was there a hard book-----
Mr. Donal McNally
Well, I don't think there was such research. I think it was from the internal analysis and from what others were saying as well.
I just need you to ... to clarify that with you. Is it that this was a mirroring and a re-echoing of ... it's like somebody going ... if I was heading to the doctor this morning and somebody says, "You're all right, you don't have to go to the doctor." And I go up to the doctor and I says, "Well, I don't need to be here this morning, because somebody said I'm all right on my way down." That's external advice. What I'm trying to find out here is that the Department of Finance would be the nation's doctor in terms of its finances. Were you carrying out your own diagnostics or were you taking second-hand information and making a diagnosis on that?
Mr. Donal McNally
Well, there would have been ... there would have been analysis carried out within the economics side and there would have also been compared with what others were saying as well.
Okay. And what detail was that diagnostics carried out at? How detailed and how in-depth?
Mr. Donal McNally
I didn't go into details of that.
Okay.
Mr. Donal McNally
And I can't recall.
Okay. All right. Thank you. Deputy Pearse Doherty.
I just want to pick up ... go raibh maith agat, a Chathaoirligh, agus fáilte roimh an tUasal. I just want to pick up on that point because we've been hearing evidence from different agencies, the Department of Finance as well, and your own evidence, and from the ESRI, the Central Bank. Can you explain to me this ... because we've heard a lot of people say, well, in terms of the soft landing or in terms of that consensus view, that, "Well, the Department of Finance said it." And then the Department of Finance say, "Well, the IMF were saying it," and the IMF don't do their own analysis so they're saying, "Well, the Central Bank were saying it." The Central Bank will tell us, "The Department of Finance were saying it."
So, where did this originate from? Did it come from on high and everybody just started passing the parcel, or was there original work done within the Department of Finance that concluded that there was a soft landing was what was going to happen?
Mr. Donal McNally
Well, there was ... there would have been projections made within the economic side and they would have been compared with what others were saying, but, maybe, we were relying a bit much on each other and going round in a bit of a circle.
And you would have seen those projections?
Mr. Donal McNally
The projections from others?
No, the projections ... forget about others for this point, because you're speaking on behalf of the Department-----
Mr. Donal McNally
Yes, I would have seen those.
You would have see those. So what did the projections say? What did the ... how did, what-----
Mr. Donal McNally
This would've been projections in growth, broken down into consumption and investment. And this ... I would have compared this with what others were saying in the private sector as well as international bodies.
So, the projections for a soft landing, we're talking about. So what did they look like in terms of how soft was this landing going to be or how hard was this landing going to be? What did you see?
Mr. Donal McNally
Well ... what was ... what I took from it was that it could be managed, that that was what a soft landing meant.
So what type of drop in house prices were they suggesting, and ... on the document, the internal document to the Department-----
Mr. Donal McNally
I'm not quite sure about the prices, but the ... that housing output would return to more normal levels of 40,000, 50,000 and that projections were made of, I think, 6,000 to 8,000 per annum, which, you know, if it happened like that would have been capable of being managed.
And what was the impact, from your point of view, in relation to taxation and employment and, therefore, other pressures on the service as result of that? What hole did that create, in terms of the soft landing, from a budgetary point of view?
Mr. Donal McNally
Well, the figures that were given there in terms of the lower income tax and VAT and the higher payments, which is higher live register payments, which is €570 million.
And was that first round effects only?
Mr. Donal McNally
That would be the first round effects.
Did you model the entire effects of a soft landing?
Mr. Donal McNally
I'm not sure on that.
Okay. How did you get it so wrong in relation to the soft landing, first of all. And it seems that there would have been more effects even if you were to see a drop in house prices of the nature that was suggested by the ... to the Department or by the Department?
Mr. Donal McNally
I'm not quite sure how we got it so wrong; we just did get it wrong. We relied on external advice and on our own assessment but it turned out much worse.
Mr. McNally, there's a parable in the book that you swore your oath on; it's called the parable of the two builders. It talks about one builder who builds his house on rock and the other who builds his house on sand. One was foolish and one was wise. Was the Department's strategy, budgetary strategy, foolish or wise during your time in office?
Mr. Donal McNally
Well, it wasn't wise, as events turned out; I can't quibble with that.
You've been employed with the Department of Finance in a range of roles since 1986, and appointed to the second secretary general in 2002. In your views, what changes do you believe were necessary to the operation of the Department prior to your appointment to the Department, and what steps have you taken to highlight any perceived shortcomings or improvements in fiscal strategy and budgetary strategy, or the interaction with the Central Bank?
Mr. Donal McNally
Well, I didn't have very much interaction with the Central Bank at my level. I mean, the main things I've tried to do, in terms of the strategy to try and reduce the rate of growth in public spending and to remove the property tax reliefs from the economic environment. But I can't claim much for change or ... I mean, I took the system as it was. Maybe I was wrong but I can't claim credit for change.
Did you believe that changes were needed prior to your appointment as ... in the Department of Finance as second secretary general?
Mr. Donal McNally
I can't say that I did, no.
Okay, okay. You mentioned in ... on, in your opening statement, page 10, you talk about external, expert advice. You say:
In relation to the use of outside expert advice in my time this was mainly in the area of tax issues and tax relief schemes where independent advice was seen as necessary. The standard of this advice was good and generally followed.
So what were the main tax issues and tax relief issues that you were getting outside advice? And who was giving that outside advice? And how was it generally followed?
Mr. Donal McNally
Well, the main advice that I recall was, first of all, the study of the urban renewal incentives in 1996. I forget who carried that out. There was also the Bacon report, which made some changes and suggestions, which the Government accepted at the time-----
Would you say they accepted ... sorry for interrupting, would you say they accepted the majority of those recommendations, or a minority of them, or all of them?
Mr. Donal McNally
Of the Bacon?
Mr. Donal McNally
I think it was accepted fairly generally, from my recollection. There was also the review carried out in 2005 or 2006 ... 2005. And then there were various reviews by ... of individual schemes, like the film relief, BES and things like that, which were carried out, one of them, by Indecon. So that ... I mean, you could review these internally, but generally, given that we would have a particular view on tax, I think it was felt that it was wiser to get some independent advice.
Okay, and in relation to your own ... the internal opinion, as opposed to the external advice. The internal opinion in the Department of Finance in relation to the continuous extension of property tax reliefs was in the negative, you were ... am I right in saying you were arguing with the Minister, or recommended to the Minister that they should be abolished or not extended?
Mr. Donal McNally
Well, the general view was that it was better to, if you had the resources, to lower the tax rate generally rather than to favour reliefs. So we would have been sceptical about them and would have sought to bring them to an end, especially in a ... at a time when the property market was booming and there's less need for them.
You mentioned the Minister for Finance, which would be Charlie McCreevy at the time of 2003 and 2004. You said there was an expectation, or there was an announcement that the rates would be abolished, and in 2004 they were extended. Clarify one thing for me, first of all, if Minister McCreevy did nothing on budget day, those tax reliefs would be gone, am I correct in relation to that, because there was a cut-off point for them?
Mr. Donal McNally
Well, if they weren't extended in 2004 they would have gone, yes.
Basically, if he did nothing ... as in ... if the Finance Bill wasn't changed, then they-----
Mr. Donal McNally
They would have terminated, yes-----
They would have terminated.
Mr. Donal McNally
But, you know a conscious decision has to be made whether to let that go ahead or not. I mean you wouldn't ... you would mention to the Minister that these were due to end, and the Minister might have a view on whether they should or should not.
Yes, but they were due to terminate in 2004?
Mr. Donal McNally
Well, there was a termination date put in. I mean, part of putting in so-called sunset clauses was to make sure these were reviewed periodically.
Yes, but the point I'm making, they're not like income tax, where the tax is there indefinitely. These were tax reliefs for a period ... a set period of time, which were supposed to ... and the decision was taken by Minister McCreevy, am I right in saying, against the recommendation of the Department to extend those for another period of two years?
Mr. Donal McNally
Well, I think we would have set out the pros and cons. I'm not quite sure if we recommended ... I mean, our general view was that they should have ended, yes.
Okay. Well, if it's your general view, did you ever express that to the Minister? Or was ... did anybody express that to the Minister?
Mr. Donal McNally
Well, they would have been expressed in the notes going to him, yes.
Do you understand why the Minister rejected the views of the Department in that regard?
Mr. Donal McNally
Well, I think the Minister was persuaded by representations that some of these schemes should continue, that they were a work in progress.
Which representations would they be? Were they representations from the sector, representations from other-----
Mr. Donal McNally
Well, in general, they would be from people who are making use of the reliefs.
So the property developers, speculators, individuals who were investing into the reliefs?
Mr. Donal McNally
Well, I don't know if they were speculators or whatever. They were people who were using the reliefs would have made representations.
And the reliefs in ... the reliefs, the review of the reliefs ... am I right in saying this that they were to the benefit to the most wealthiest in society as opposed to those in the middle or those on the bottom?
Mr. Donal McNally
Well, in 1996 and 1997 when we were talking ... in fact, it was with Ann Nolan, who was with you just this morning ... we were talking about these reliefs and what could be done to ... to attenuate them, or what effect they had. We did persuade revenue to do a survey of the top 400 earners, trying to find out which reliefs were being used or not.
And, you know, the conclusion was that these were favouring those with the money to invest and with the taxable income to offset it against and as a result ... and those reviews are published each year, but there was a change made in 1998 Finance Act which limited the amount that could be set off by passive investors against other income. So, you know, it was known that these reliefs benefited high earners, yes.
Thank you.
Okay, thank you. Senator Marc MacSharry. Senator.
Thanks very much. I think Deputy Doherty has covered most of the specific questions that we'd agreed to ask. Just to follow on slightly from the soft landing, was there ever a forum internally where assistant secretaries, senior principal officers would sit down and say, "Okay, the consensus from the IMF and the ESRI and the OECD and various other people and the data and, indeed, our own individual units, is that we are going to have a soft landing."? So, was there a forum that that was discussed at ... that you can recall where it was decided, "Yes, that is the likely outcome so, therefore, that's the position"?
Mr. Donal McNally
Well, there would've been annual presentations by the different business units, which is the only one that I'm aware of. There wasn't a general policy committee as there is now and, you know, perhaps that would've been a useful thing to have ... to have a general discussion outside the area of whether this soft landing ... was it just an assumption or was it a hope or was it a reality?
In the absence of the general advice council that operates now internally, were the various divisions a set of pigeonholes that didn't, perhaps, interrelate to the extent that they should?
Mr. Donal McNally
Well, each did its own work and it was integrated at the management advisory committee and that ... the business presentations for people explained what they were doing and what the issues were.
So at the management advisory committee, was it never considered that, "Look, do we all agree that this is a soft landing situation?" or-----
Mr. Donal McNally
I think it just took the advice from the economic side that this was the general consensus.
Okay, and so ... would it always be the case or was it often the case that when stuff came up from the various units, that the advice was taken as read, as was the case with the soft landing as you've suggested there?
Mr. Donal McNally
I ... not necessarily. I mean-----
Okay, but on the soft landing one it was-----
Mr. Donal McNally
Well that's what I said, I was never-----
-----at management council, that was accepted?
Mr. Donal McNally
Well, that's what I said. I wasn't aware of that much contrarian views. It was-----
And you were on that at the time, the management council, so there was just a kind of a contentedness to accept that as the-----
Mr. Donal McNally
Well, I don't know if you'd call it contentedness, but there was-----
How would you describe it, if it wasn't contentedness?
Mr. Donal McNally
It was a consensus view.
So would that be ... if it was consensus, you were happy with the view, would that be-----
Mr. Donal McNally
Yes.
Okay. So that view then ... would that view then, following a management ... would that be shared with the Minister or what way did it work from then?
Mr. Donal McNally
Well, the Minister would be given forecasts and informed that that was the assumption. That's my recollection.
Can you ever recall the Minister saying, "Look, are you sure about this?" I mean-----
Mr. Donal McNally
No.
No. He was equally content.
Mr. Donal McNally
Well, I don't know.
Okay. Did you ever feel that the Government deliberately ignored your advice?
Mr. Donal McNally
I don't think so. I think the Government assessed it or would've talked about it. I wouldn't think they ignored it or they ... they didn't have to follow it. I mean, the Department of Finance is not always right. So, you know, it's up to the Government to decide, in the public interest, what the ... what should be done.
The Economic and Financial Council, under Article 99(4) of the treaty in 2001, recommended that - now I'm quoting from your own speech - that Ireland would "take countervailing budgetary measures [in] 2001 to avoid overheating." And I think you said in your statement that that was dismissed at the time. Was it dismissed by the management council or by the Government or by the Government having been advised as such by the management council or ... why was this dismissed?
Mr. Donal McNally
Well, it wasn't dismissed as much in ... it was not accepted by the Government because we had one of the fastest-growing economies, we had very good competitiveness, we had recorded a surplus of 4% in 2000 and we were projecting one for 2001 and it was felt that, you know, we were the best pupil in the class and were being unfairly picked out for this piece of advice, which was a formal recommendation. I mean, there could've been other ways of dealing with it rather than - as, perhaps, we thought - trying to make some sort of example of us. So, you know, we didn't feel it was a justified ... especially when other countries were struggling to make the 3% deficit and were using a lot of one-off measures to comply with the Stability and Growth Pact.
And could-----
Mr. Donal McNally
And the decision would've been ... I mean, it was a half a per cent, which was a small adjustment, but it came post-budget and I think the Government decided that the budget was right and that they weren't going to alter it.
Can you remember the reason for saying that we were overheating? Can you remember why they were, I mean, in a sentence or two, could you outline ... why were they saying that we were overheating?
Mr. Donal McNally
Well, I think it was because of the fast growth rate and the service sector inflation, which is part ... I mean, if you're catching up with other countries, you will find that that inflation will be a bit higher on the services sector side, which has less productivity than the traded side ... that that will tend to show higher rates with inflation. So, I think that was their motivation.
Was there any focus on the reducing percentage of exports as a contribution to national income as opposed to-----
Mr. Donal McNally
Not that I recall-----
-----transaction taxes?
Mr. Donal McNally
Not that I recall in the-----
Would your unit ever have recommended tax cuts?
Mr. Donal McNally
There were ... I don't know whether you'd use the word "recommended". There would be a tax package which was set out in the memorandum, with resources available for that tax package. And then, when it came to the actual formulation of these, you would've put proposals to the Minister, or a range of options, in terms of whether it should be rates or bands or allowances, and then for the Minister to decide on that. I mean, formerly, in the budget strategy memorandum, we were only recommending indexation. We were recommending limited tax reductions.
So, the-----
Mr. Donal McNally
But we wouldn't have recommended that they cut the top rated tax by X%.
And how would it work typically? Would a Minister say to the other Department or say to the secretary of the Department, who, in turn, might say to yourself, or maybe directly to you, "Look, we want to cut taxes this year. What are the options?" Does it happen like that or-----
Mr. Donal McNally
Well, a range of options would be given to the Minister in terms of changes to the tax rate ... well, not so much the tax rates but to the bands and the allowances and keeping people out of the tax net and what this would cost. And the Minister would make the decision on the amount of resources he wanted to give. I mean, it wasn't always huge cuts, there was ... there were very substantial cuts. In 1999 I think it was €1.5 billion and in 2003 it was €300 million. And I remember the Minister saying to me that because of the advance publicity, people seemed to more grateful to get the €300 million than they were to get the €1,500 million because of the expectations that there were.
Okay, just three very last questions. Just quickly, I got your advice in terms of the SSIAs which were covered earlier on. Was that introduced at the time as a countermeasure to inflation ... to rising inflation? Was that the theory anyway, behind it, from a Government perspective or-----
Mr. Donal McNally
Well, as I understood from the Minister, he wanted to encourage people to save rather than to spend and to put something aside.
To spend. Okay. And did it work?
Mr. Donal McNally
Well, it certainly cost a lot of money and-----
No, no, I didn't ask that. We know how much it cost. I'm just wondering, did it work as a countermeasure to inflation or consumer spending at the time?
Mr. Donal McNally
I can't say. There wasn't any study ... regrettably, there wasn't any study-----
There's no study done on it, okay.
Mr. Donal McNally
So ... and I'm not quite sure how you would prove this.
No problem, I've just two more now. The ... you mentioned, in terms of tax issues and tax relief and something like that, sometimes independent advice was seen as necessary. Which areas of tax policy were looked at as necessary and what independent bodies was it sought from? I've one very last one after this, Chairman.
Mr. Donal McNally
Well, as I mentioned, there was a review in 1996 of the urban renewal. There were regular reviews of the film relief following which there were some changes made and, as far as I recall, it was Indecon who did those. It was just ... obviously the Department of Finance, if it had it's way, would have liked to curtail or get rid of some of these reliefs, whereas there were those who felt that they were important for the economy. We would have thought that, for example, the film relief was too generous and it was necessary ... it felt necessary for somebody outside who would have the confidence of both sides to review both the reliefs.
Yes, okay.
Mr. Donal McNally
That was the main reason for going for independent advice.
Just very finally and on a different issue, we had Tony O'Connell, the chief economist of the Central Bank in here, who, as part of his evidence, made reference to what he called "the political and property interests on the board". Can I ask, from your perspective in the Department of Finance, did the Department of Finance, you and your colleagues feel that there was any, sort of, a political or property complexion among the authorities in the Central Bank?
Mr. Donal McNally
I wouldn't have been that aware of the membership but I take the evidence of others that they fulfilled their duty in a public interest manner. I mean-----
But I mean, you could have a view, I mean, if ... did you have a view at the time, the Central Bank was working well or there seems to be a very-----
Mr. Donal McNally
No I didn't have a view.
-----political property type-----
Mr. Donal McNally
I didn't have any view that there was any political property type in the-----
Okay, thank you.
Deputy, you want ... actually on that before I ... you move on from Senator MacSharry's questioning. Just on the SSIA scheme; was there any study before or after its implementation as to its merits, goals, objectives and if or how these were achieved?
Mr. Donal McNally
No, there wasn't any study carried out subsequent. The only evidence there was, I think, OECD work on savings schemes and savings incentivised schemes, which suggested that the money was moved around rather than that there was an actual increase in the amount of savings. I mean, there should have been a follow-up review of it but there wasn't.
Was there something to review, when the SSIA scheme came out first, was it saying, "Here's a big document, this is what this going to achieve, this is what the rationale for it is", and all the rest of it, then four years later, when the scheme expired-----
Mr. Donal McNally
No, it didn't ... it didn't work like that, no.
There wasn't ... was there anything at the start?
Mr. Donal McNally
Sorry?
Was there any document at the start saying this is what the SSIA is going to do or the SSIA-----
Mr. Donal McNally
Well, there would have been a submission to the Minister outlining the various schemes.
Where did it originate if you don't mind me asking you, Mr. McNally? Did it originate from the Department or was it a political orientation?
Mr. Donal McNally
I think it was the Minister's wish to encourage people to save, that people had forgotten about saving and that this would be a prudent measure.
So this ... the genesis of this came at a political level not at a Department level, yes?
Mr. Donal McNally
Yes.
And was it the Minister himself or-----
Mr. Donal McNally
It was the Minster himself, as far as I recall.
Okay, thank you very much. Deputy Eoghan Murphy.
Thank you, Chairman. Thank you, Mr. McNally, you're very welcome. Earlier today, you spoke about challenging the Minister on different areas of policy or different proposals that were being put forward because you disagreed with them. Is that correct? You would disagree with the idea or policy that was being proposed so you would-----
Mr. Donal McNally
Well, we'd put forward ... if there was a proposal, we'd analyse it and give the reasons for and against and it wasn't challenging the Minister; it was just trying to advise the Minister as best we could.
But would you come down on a certain ... would you favour a certain advice? I mean, for example you talked about the SSIA and you talked about the holiday resort tax reliefs and you not being in favour of them. So would the Department present ... analyse the proposal and come back and say, you know, "We think X and Y but we're in favour of X"?
Mr. Donal McNally
But we would have, well ... the memoranda would have set out pros and cons, but I think it would have been clear from the pros and cons where the Department's feelings were.
And, in those two instances, you think it was clear from the memo where the Department's feelings were and they were against those two schemes?
Mr. Donal McNally
I think so, yes-----
What-----
Mr. Donal McNally
-----because we were expressing doubt over whether this would incentivise savings.
Okay, what other proposals that came from the Ministers you served under? Would memos have come back where the emphasis was clearly on the con side?
Mr. Donal McNally
Well, the memo set out the options and when reading the pros and cons, you'd be able to get a good idea where the Department's view lay.
Okay, so-----
Mr. Donal McNally
It was up to the Minister to make the decision.
So what other proposals that came from the Ministers that you worked for did the Department basically disagree with?
Mr. Donal McNally
Well, the SSIA one is just the only one I can think at the moment. The rural renewal - we would have expressed some doubts as to the generosity of the reliefs.
What about decentralisation?
Mr. Donal McNally
I wasn't involved in the decentralisation. I don't know what advice was given in that regard.
What about tax policies like halving CGT?
Mr. Donal McNally
Well ... the ... we would have taken the view that there would have been a cost. And ... to my ... I'm telling a story against myself but I estimated that the cut in CGT would cost something like €19 million, but over the next four or five years, the revenue increased by tenfold, so there was obviously a behavioural change. People used the lower rate to cash in. So I mean, wouldn't say we opposed the cut. We pointed out the consequences there might be, which, in my case, it was wrong, plain and simple.
And so following something like that where the Department provides advices and they prove to be incorrect - and I suppose in that case it's dramatically incorrect - do you think then that has an effect on the way those advices are then treated or regarded going into future budgets?
Mr. Donal McNally
I don't think so. I don't think the Minister discounted the advice but he always said that it's up to us to propose and him to decide.
Okay, and so again in terms of this culture of ... I suppose robust culture of challenging the Minister on different ideas and different proposals and writing memos, did you ever do this work in relation to what was happening in the property sector and the housing boom and what contribution that was making to the economy?
Mr. Donal McNally
I don't recall having inputted on that.
Okay. Right, so ... one of the pieces of evidence we've heard about in previous sessions in relation to Morgan Kelly's work and how he published an article on a potential house price bubble in The Irish Times at the end of 2006, and later published a report on the same theme as part of the ESRI's quarterly bulletin in the summer of 2007. So, when outside people, were, you know, having an impact on the debate in that way, what was happening in the Department at the official level in terms of analysing that advice and considering whether or not to take it to Government?
Mr. Donal McNally
We would have analysed the advice and looked at what the OECD had said in 1986 where they felt that a soft landing was the likely outcome but a hard landing couldn't be ruled out.
So this is written in 2006 and 2007 and you went back to work from the OECD from 1996, is that-----
Mr. Donal McNally
No, 2006.
2006, okay.
Mr. Donal McNally
Yes.
So you would have given serious consideration to Morgan Kelly's work at the time?
Mr. Donal McNally
It would have been looked at, yes.
Okay. And then when we look at things like the pre-budget letters coming in from the Central Bank, I mean, how much consideration would have been given to them? Because in the pre-budget letter from 2000, towards the end of 2000, looking ahead to 2001, it warned of a hard landing. It drew attention to the commercial price rise in property, to the residential price rise in property, to overheating in the economy and it talked about a risk of a hard landing so-----
Mr. Donal McNally
I don't remember this particular letter. Sorry, Deputy.
Okay, well, we have it in evidence but you don't recall anyone going back, say, instead to a Central Bank pre-budget letter to look for ... to test against what Morgan Kelly was saying?
Mr. Donal McNally
Not as far as I recall, no.
Okay. In the Nyberg report on the banking crisis, he states that there was a general ... in general a pervasive pressure for consensus and conformity of views across institutions and one of the reasons was to "adopt specific policies and accepted practices that later proved unsound". So, in your opinion, was there a pressure in the Department of Finance in the years up to 2006, this pervasive pressure for consensus?
Mr. Donal McNally
I don't think there was a pervasive pressure for consensus. I think that was the view; it wasn't forced on people. That was the view that was taken having analysed in economic data.
Okay. So you didn't feel like it was a culture or political pressure at work within the Department?
Mr. Donal McNally
No, there wasn't ... I mean, Ministers didn't get involved in economic projections. There wasn't any political input of that sort.
Okay. Can you comment on what changes, if any, occurred with the change in Ministers in 2004 in the workings of the Department?
Mr. Donal McNally
I don't think there was any real change in the workings of the Department, the process continued as before. I mean, the main change that was made was the abolition of the tax reliefs, as far as I was concerned.
But in relation, in terms of practices, preparations for the budgetary process, was there any change in how that went?
Mr. Donal McNally
It would have continued the same, as far as I ... I mean, there are things that have to be done, the Estimates settled, the decisions made on tax policy. It follows a particular course, there's a schedule of things and when decisions have to be made, which is normal, I presume the same happens now.
But the Department continued to play the central role it had played up to 2004, after 2004?
Mr. Donal McNally
Yes, I think so, yes.
Okay. The final question I wanted to ask was in relation to lessons for the future. You spoke about prudent being not spending all your tax receipts in a given year, so I just wondered what the current thinking is, in relation to when you have a surplus, is it to run a surplus, is it to direct a surplus into some sort of fund like a pension reserve fund, or is it to pay off the debt? What would be the prudent thing, looking forward?
Mr. Donal McNally
At the moment, I think we still are trying to make the 3% deficit, so a surplus may be a bit off. But I would think that the main recommendation of the Department would be to use the surplus to run down the debt as that's a burden on the people, which, you know, if interest rates rise will be ... will absorb more of the tax revenue. That's what I would imagine; I haven't asked in the Department what the priority is, but that would be my sense of it. That's what I would be recommending anyway, to use the resources to get down the debt or to find some way of minimising the debt.
Okay. Thank you. Thank you, Chair.
Thank you very much. Okay, I'll just deal with one question myself, Mr. McNally, and then we'll move towards the wrap-up and I'll invite both Senator Barrett and Senator D'Arcy back in again. If I could just relate to, and I think Senator MacSharry touched upon this with you just a moment ago, on 24 January 2001, the European Commission concluded that Irish fiscal policy was inconsistent with the broad European policy guidelines. They further asked Ireland to avoid further overheating of its economy, and there's a document, I think, coming up on the screen there now, but you make reference to this, I think, actually in your own opening address today, where you mention, I think, it's on page 4 of your opening statement:
The only notable exception to this is the recommendation issued to the State in 2001 by the Economic and Finance Council under Article 99(4) of the Treaty to take countervailing budgetary measures during 2001 to avoid overheating. This recommendation was not felt warranted and was not accepted by the Irish authorities.
And if I just, the document is there, if I just move one or two pages into it, it's page 13 of the document itself, on the bottom, it's ... next one ... next one again ... just page 13 of it. And if you look at the last paragraph of it there, Mr. McNally, just come in there about three lines down, it says:
Against this background, the Council finds that the planned contribution of fiscal policy to the macroeconomic policy mix in Ireland is inappropriate. The Council recalls that it has repeatedly urged the Irish authorities, most recently in its 2000 broad guidelines of the economic policies, to ensure economic stability by means of fiscal policy. The Council regrets that this advice was not reflected in the budget [of] 2001, despite developments in the course of 2000 indicating an increasing extent of overheating. The Council considers that Irish fiscal policy [of] 2001 is not consistent with ... broad guidelines of the economic policies as regards budgetary policy.
And it goes on and on.
Now, we've had reports from some institutions like the IMF and others that said in around 2005, 2006, they were getting things wrong. But this one would seem to be very, very strident in its language and in its indication of action required and so forth. So could you, as I say, I think the document is of 12 February 2001, this, so ... and the European Council recommend that countervailing measures be taken, as I just cited. Could you tell us what action was taken by the Department of Finance on receipt of this very, very strong advice as outlined from the European Council?
Mr. Donal McNally
Well, the ... I would have been advised just before that meeting of the Economic and Finance Committee, that they were planning to make this recommendation and I would have reported back to the Minister, who felt that it wasn't justified, and I would have argued at the Economic and Finance Committee that the recommendation was not warranted. I agree that they did, in the 2000 broad guidelines, say that we should stand ready to use countervailing measures. But we had a surplus of 4.3% in 2000 and were planning another surplus of 4%, so, you know, that is taking a lot of resources out of the economy. What they were suggesting was another 0.5%. In the end, the economy slowed in 2001, and the Commission did not renew the recommendation, it, sort of ... a draw was called, I suppose.
But, was the slowdown at the end of that year what you might call a quarter aberration that you get, you get a couple of weeks or a couple of months in the year but then the Christmas retail market comes along, expenditure, then growth and inflation kick off again, and it's business as usual? So is a one-quarter observation of an economic trend sufficient to say that things have changed?
Mr. Donal McNally
Well, I just note the point that the Commission were asking us to do a lot more, or somewhat more, than what we were doing. And the economy did slow down; the initial forecasts were for no growth, that turned out to be growth in the end. But, you know, it's ... there was a feeling that we were being picked on, somewhat unfairly, and that did influence the view that was taken.
Was that an official view or a political view, that you were being picked on?
Mr. Donal McNally
It would have been both, because I would have been at meetings where some countries managed to stay within the deficit by the use of once-off measures that couldn't be relied upon and others who managed to stay within minus 2.94%, just barely scraping within, and there wasn't that great level of growth in Europe. My view would be that they should have been concentrating on those issues, rather than on ourselves.
Okay, thank you. Senator Michael D'Arcy, five minutes to wrap up, please.
Mr. McNally, can I just ask your view on the SSIAs again, please? Was that an example of the Government putting its hand into the national till for their electoral gain, in your opinion?
Mr. Donal McNally
I think that what it was, was the Minister trying to encourage people to save and this was the way he saw as best doing so. The relief was given at 20%, which was the standard rate, and was given by means of a top-up, so everybody got it, irrespective of income. But I didn't see a political motivation behind it; at least, I wasn't aware of one.
And the decentralisation programme, could you clarify for me, please, you were unaware of that being announced in budget '04, is that ... did you say that?
Mr. Donal McNally
Well, I knew there was work going on on decentralisation but it was kept within a fairly tight team, so that I wouldn't have known the details beforehand.
You didn't know the-----
Mr. Donal McNally
I didn't, no.
You didn't.
Mr. Donal McNally
I just knew that there was space in the budget speech for this announcement.
Okay. But you were one of the most senior people in the expenditure side.
Mr. Donal McNally
No, I was on the budget side at that time, I wasn't on the expenditure side.
But you were one of the most senior people on the budget side.
Mr. Donal McNally
Yes.
And how many people were above you?
Mr. Donal McNally
Just the Secretary General.
Just the Secretary General. And you didn't know about it in the-----
Mr. Donal McNally
I knew there was something planned on decentralisation but I didn't know the details.
You didn't know the details, okay. Can I just ask one final question, Mr. McNally, and it's ... Rob Wright said he would have pressed the red button within the Department of Finance if he had been there. Is there a red button in the Department of Finance to press?
Mr. Donal McNally
Well, I haven't seen one, myself.
Thank you very much.
Mr. Donal McNally
But you know, if, the Department would, if it saw the danger, would advise the Minister.
But there's no red button as such to press?
Mr. Donal McNally
Not that I'm ... well-----
I think the question is very pertinent to a time that he would have pressed the proverbial red button. Do you have a view as to when that proverbial red button would have been pressed, Mr. McNally?
Mr. Donal McNally
I beg your pardon?
The question ... the concept of the red button arose when it was put to Mr. Wright as to when should the brakes have been put upon things and would you have had a view as to when the brakes should have been put upon things?
Mr. Donal McNally
Well, we were trying to advise the Government to step on the brakes ... that when you're ... when the economy is favourable, the time is to put some money in reserve and to, you know, slow down. So, I don't know whether it would have been a specific moment but we were trying to get this message across for some time.
Okay. Thank you. Senator, that it? Okay, thank you. Senator Barrett.
Thank you, Chairman, and thanks, Mr. McNally. When you were in the budget and economic advice section, Mr. McNally, 2000-2008, do you recall being "under siege" in 2007? Did that phrase be ... was it used at that time?
Mr. Donal McNally
I don't recall being under siege in 2007, no.
Because Simon Carswell gave it in evidence and I'll give you the context now:
At one point the Department of Finance was described by one of its own officials as being "under siege" in [a] lobbying campaign by the financial industry. The aim was to get legislation passed to allow banks to issue bonds backed by commercial mortgages. The financial sector won out. The legislation was passed in early 2007, [right] at the peak of the property boom, making it easier for banks to borrow more money to provide more loans to more customers.
And this was the Asset Covered Security (Amendment) Act, No. 13, 2007. Were you involved in that debate?
Mr. Donal McNally
No, no.
That doesn't refresh your memory?
Mr. Donal McNally
No, not in any way and, I mean, I don't doubt ... I accept what is said there but I wasn't involved in that piece of legislation.
Because Mr. Carswell gave evidence that named bankers were particularly active at knocking on doors in the Department of Finance but yours wasn't one of them?
Mr. Donal McNally
No, there was nobody knocking on my door on that piece of legislation.
In relation to your work on the McLaughlin commission, how does that stand now? Do you see the reforms that were recommended having had any impact at all or do you feel a certain amount of frustration?
Mr. Donal McNally
Well, we were ... I know one of them was done in relation to motor tax and when vehicles are off the road. I'm not quite sure what was done in the follow-up on the other efficiency measures. I didn't keep track of that.
Because there were concerns about managerialism and bureaucracy and so on in that report, quite strong ones, directors of services, I mean, large surpluses. In fact, the excess numbers were quantified.
Mr. Donal McNally
Yes. I didn't keep up with that, I'm afraid.
No. Have we wasted a good recession in that phrase then if we don't reform when these reports are there and we go through all the financial stringencies that we have had in this number of years?
Mr. Donal McNally
Well, there have been cutbacks in numbers in the public service and there have been reforms undertaken. There's been the pay issue dealt with where pay scales got a bit too ... too generous but I don't know whether we've wasted this recession or not.
Thank you very much. Thank you, Chairman.
Excellent. Thank you very much, Senator, and I'll bring things to a conclusion, Mr. McNally, and before I do, I just would like to give you the opportunity, if you have any final comments or remarks or a consideration that you might like to add as I bring matters to a close.
Mr. Donal McNally
Thank you, Mr. Chairman, and thank you, committee members. I'm conscious that I may not have been as helpful as I set out to be because some of the issues were not directly my concern but I do hope that some lessons can be learned for the future, that some device is found whereby the natural inclination to spend the money when you have it, can be replaced by a more prudent and far-seeing course and I wish you well in that regard.
Are you familiar with the term "euphoric recall", Mr. McNally, are you? The term "euphoric recall". It's used in terms of recovery, particularly with addiction studies and stuff like this, and by means of a time to find a relapse. They also ... they note with addicts that they start recalling the past in a different type of light to the type of damaging way it was. Would you ... considering that you are maybe now retired but you're observing things as we move into the future, do you see any sort of dangers like this? That we look back to the past? Things like the SSIA scheme that we were discussing earlier and we might reshape them in our heads that might create difficulties for us going into the future.
Mr. Donal McNally
Well, there's always that ... there's always that danger but hopefully the work and recommendations of the committee might be able to dispel that particular phenomenon. I'm not familiar with addiction.
Well put, that's a good point to close with, we'll keep you on. With that said, I would like to thank Mr. McNally for his participation today and for his engagement with the inquiry. The witness is now excused and I propose that we will break for one hour, resuming at 2.45 p.m. Is that agreed? At which time, we will hear from Mr. Charlie McCreevy, former Minister for Finance.
Department of Finance - Mr. Charlie McCreevy
So, will I call the meeting back into public session? Is that agreed? Okay. And we'll now commence with session 2 of today's public hearings with a discussion with Mr. Charlie McCreevy, former Minister for Finance. The Committee of Inquiry into the Banking Crisis is now resuming in public session. And can I ask members and those in public Gallery to ensure that their mobile devices are switched off? This afternoon we have the first of a number of hearings with senior members of Government who had key roles in the run-up to the crisis period. At this afternoon's session we will hear from Mr. Charlie McCreevy, former Minister for Finance. Charlie McCreevy was a member of the Dail for County Kildare from 1977 to 2004. He held several senior posts in Government and was Minister for Finance from 1997 to September 2004, after which he became EU Commissioner for Internal Market and Services from 2004 to 2010. Mr. McCreevy, you're very welcome before the committee this afternoon.
Mr. Charlie McCreevy
Thank you.
Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. And I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which will overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings.
Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.
The witness has been directed to attend the meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to Mr. McCreevy, please.
Once again, if I could thank Mr. McCreevy for being here this afternoon. And if I can invite you to make your opening remarks or statement to the committee please, Mr. McCreevy.
Mr. Charlie McCreevy
Thank you, Mr. Chairman. I was Minister for Finance from the 26 June 1997 to the 29 September 2004. As directed by the committee, I submitted a statement on specific lines of inquiry relating to my role as Minister for Finance. As my period as Minister for Finance ended in September 2004, some considerable time before the banking collapse, my statement deals only with those areas of interest of which I might have some direct knowledge or which would have arisen during my tenure as Minister. This opening statement refers briefly to areas of my written statement.
The new regulatory structure was set up during my time and culminated in two separate Bills in 2002 and 2003. In 1998 the Government agreed in principle to the setting up of a single regulatory authority for financial services. Interestingly, the idea of an SRA was first mooted in 1989 but it was decided not to go ahead with same at that time. We asked Michael McDowell to chair the implementation advisory group. It consisted of nine persons and produced two reports, a majority report and the minority alternative model. It took some time to reach political agreement as to the new structure, which eventually led to the two Bills as referred to above. There was considerable disagreement and not just between the politicians. If you read the commentary on stances of that time, there was not universal agreement as to how and where the new authority should be located. I've noted with a certain degree of irony that a number of the politicians and commentators who wished to keep the Central Bank out of the key role at that time were to the forefront in advocating the return of all powers to the Central Bank post the recent financial crisis, and that has now been done.
Practically all of the debate of those years centred on the consumer protection angle, and little on prudential supervision. I outlined in my statement the various reasons for such debate orientation. I further outlined in my statement that the rules for the capital requirements for banks were designed internationally following the Basel committee recommendations. There has been a recurring notion in much of the Irish media commentary of recent years that principle-based regulation, also referred to as light-touch regulation, was an Irish invention. In particular, some commentators have gone so far as to advise that light-touch regulation was even a Charlie McCreevy invention. Much as I might be flattered to think that I might own the copyright, it is not the case, and light-touch, principle-based regulation was a long time in vogue internationally, and years before I arrived as Minister for Finance. At least some of the earlier evidence to this committee has at least scotched that notion.
I have outlined in my statement as to how capital requirements for Irish banks were managed under the same formulae and policies which applied to all the other European banks.
As the new structures were in the embryonic stage of development before I ceased as Minister in 2004, I can only comment in a cursory way on the co-operation and integration of the new bodies. However, during the setting up of IFSRA, I was strongly of the view that there was an excellent level of co-operation between the chair of IFSRA and the Governor of the Central Bank. The new structure allowed the Central Bank to concentrate on the macro level and to produce financial stability reports which contain guidance for the financial regulation to follow. IFSRA had responsibility for the individual institutions under their remit.
I now turn to direction from the committee on advice. Strictly, the reprimand from Brussels on our 2001 budget would fall under the heading of "advice". The European Union was of the opinion that our budget and stability programme update were inconsistent with the broad economic policy guidelines and issued this reprimand early in 2001. However, in November 2001, the Council of Ministers lifted its earlier reprimand and stated, "Unexpected economic developments were such that the inconsistency underlying the recommendation has lost its force." This says much about the whole art, if it is one, of economic forecasting. In fact, during the course of 2001, the international economic slowdown had gathered force arising from a number of factors, and economic activity in Ireland had declined sharply. In fact, the year-on-year increase in real GDP in Ireland decelerated from 13.1% to 0.1% in the last quarter, thus the 2001 Irish budget was then seen in a different light in Brussels. I shall also mention that, in 2001, there was much criticism of the EU reprimand, and not just from the Irish Government. Many commentators, nationally and internationally, were critical of the EU stance. As many referred to at the time, there appeared to be one set of rules for the larger countries, and a different book for the smaller member states.
On the issue of advice given to governments from many quarters, the Department of Finance, Central Bank, ESRI, OECD, European Union, IMF, and others, the line taken by all democratic governments is that it is just what it says on the tin, advice. Democratically elected governments must, at all times, with their freedom, do what they consider best, in the interests of their people. Yes, this means the ignoring of some advice and the taking of others. I note with some wry amusement that the current Government, as is their right, seems to be steadfastly ignoring advice from a plethora of sources. The Fiscal Advisory Council, established in law by the present Administration, are saying that the projections for growth, consumer spending and population are too optimistic. Also being sidelined are commentaries from the ESRI, the European Commission, and the IMF, not to mention some domestic economists and commentators.
My high regard for the Department of Finance and the staff is well known and has been documented many times previously. However, it is not a criticism when I note the very obvious. Very few worthwhile initiatives of different political Administrations would never have seen the light of day if advice from the Department of Finance had been followed. One of the most groundbreaking changes in Ireland was the introduction of free secondary education in the sixties by the late Donogh O'Malley. This was done without the approval of Finance, and those of an historical bent know that the Department was so exercised, that it got its Minister, the late Jack Lynch, to formally complain to the Taoiseach. Finance were totally unaware of the proposal, and O'Malley was, indeed, in contravention of Cabinet rules for making such a major announcement without informing his other colleagues, and, in particular, the Minister for Finance. Wasn't it a good job for Ireland that Seán Lemass ignored the angst of the Department of Finance?
I look back on the advices from a number of the already mentioned sources. For example, in 2002 the main theme seemed to be the threat of inflation, and there was little talk of housing prices, or that general area, in any of the commentary. In fact, a leading economist was so concerned in 2002 on the slowdown, that he suggested the diverting of funds, of the annual contribution of the pension reserve fund, and putting that money into capital projects. Some commentary always referred to the fact that we had €1.5 million people between the age of 50 and 34, and that the demand for housing would continue to be very strong. To illustrate, again, the futility of forecasting, I would draw attention to the 2000 report from the long-term issues group of the Department of Finance. It predicted a total population of 4.1 million in 2056. It's about 4.6 million today. And that the Exchequer debt would be wiped out entirely by 2012. During my time as Minister for Finance, I was painted as a right wing ideologue, possessed of a Scrooge-like parsimony when it came to public spending. On the other hand, post the financial crisis, I've been turned into a kind of Santa Claus and the philosophy most often attributed to me by my detractors is supposedly encapsulated in the quote, "When you have it, you spend it". It is ironic that this comment was made on the publication, in November 2001, of the following year's departmental Estimates. The headline in the Irish Independent on the following day was entitled, "McCreevy takes the axe to public spending". The first line of that article reads, "Finance Minister Charlie McCreevy last night brought to a shuddering halt the big-spending era that went with the economic boom", end of the headline. Later on, in that article, it refers to me saying, "When you have it you spend it. The mistake is to try to spend it when you haven't got it". Now, however, I think it can be fairly said that the above actual comments of mine, when I was answering a question as to why I was reducing public spending, have been distorted and non-contextualised to an extraordinary degree. The comment at that time attracted little attention but seems to have got a special lease of life during the economic downturn. The reason for such misrepresentation ... well, to quote from another scribe, "It might just be an interesting example of the way popular quotes get distorted over time to better fit the public perception of the person who made them".
I vigorously disagree with the assertion that the Government, during my term as Minister for Finance, misspent the proceeds of the stellar economic growth of that period. We did increase spending in a large number of areas to make up for lost time, and for the under-provision of services in the previous decade and a half. As a percentage of GNP, in 1986, Government expenditures stood at 58%, and Government debt at 122%. At the end of 2003, the respective figures would have been 38% and 35%. In respect of spending during my time in office, I've set out, in tabular form, the percentages for total Government expenditure and gross current expenditure. These figures are taken from the public document Budget Statistics 2014, published by the Department of Finance. The figures I quote are in respect of GNP and, of course, the percentage figures in terms of GDP would be lower. In terms of GNP, gross Government ... gross current expenditure ... I'll leave ... the figures for Government expenditure are in a different column; I'll just refer to the gross current expenditure figures. As a percentage of GNP, in 1997 it was 35.2%, and that relates to a previous Government of Fine Gael and Labour. In 1998, for me, it was 31.7%; in 1999, it was 30.4%; in 2000, it was 28.1%; in 2001, it was 29.5%; in 2002, it was 30% even; in 2003, it was 29.8%; and in 2004, it was 29.8%. No matter how these figures are interpreted, it is quite clear that there was no splurge over the period. This was a period of considerable economic success. The numbers for people at work increased massively; there was practical full employment; the scourge of forced emigration ceased after 150 years; we experienced the welcome new phenomenon of migration to Ireland; the population increased dramatically; we increased spending considerably in the areas of health, education and social welfare; the pension for the aged was increased to a proper level; child benefit more than doubled; and many other improvements in public services. And, during all of those years, we ran substantial Exchequer surpluses, except for a small minus in one year. This was achieved after paying for a massive public capital programme, the most visible example being the now excellent road network, and yet there was still a surplus. We also set up the National Pensions Reserve Fund, setting aside most of the proceeds from the Telecom privatisation, and setting aside 1% of GNP annually. This fund was intended not to be touched until after 2025, and was there to provide for future pension liabilities. Since the recent financial downturn, critics are suggesting that we should not have spent all of this money.
So if we had spent less, it would have meant larger budget surpluses and some have gone on to say we should have built up further rainy day funds, apart from the pension reserve. Now, are these people for real? In a political democracy, it is especially difficult to run any kind of a budget surplus and many were even against the idea of the pension reserve fund. It is difficult to run a surplus in a democracy. If there was one patient untreated by the health services, one family without a house, one special needs person without proper services, one pay demand unmet, what justification would any Government have had for increasing the reserve fund and initiating further buffers? Not alone would it be politically unacceptable but I suggest it would be morally wrong also.
The next theme of the committee refers to the property sector and, by implication, the question of tax incentives in that area. Activity in the construction sector has always been a key driver of economic activity. Despite the gains made in residential construction over the years, Ireland's housing stock is still below the EU average in units per 1,000 of population. This is particularly obvious in 2015, which results in rents climbing substantially. Furthermore, it has always been part of the Irish social culture for persons to actually own their own home. This led the Government to initiate various reports of the housing market, which resulted in some changes. Tax incentives for the property investment have been a feature of the Irish tax code for over 50 years. As far as I can research, there are incentives as far back as the 1959 Finance Act. Some have sought to give the impression that the property tax incentives only really started after the '97 Government came into office. However, if you look at the list of incentives by non-Fianna Fáil-led Governments, you will find many others, such as urban renewal, seaside resorts, designated islands and many more.
My attitude to property tax incentives is summed up in my budget speech on the 2003 budget, when I was going about ending the deadline for some of the schemes. I proposed ending many on 31 December 2004. As I said in that speech, "the existing demand for property investment and the desire to improve equity in the tax system, there is no justification for a continuation of these reliefs beyond 2004". Regarding the philosophy of property tax incentives, I stated, "I am a supporter of properly-focused, clearly defined, specific reliefs which can encourage the development of goods and services, including public services, which might otherwise not be provided, or where provided, are too little or too late." So to conclude, quite recently an Irish commentator wrote the following:
The reality is that economics is a social and not a physical science. Economic outcomes are generally driven and shaped by human behaviour, and unfortunately human behaviour is rarely possible to predict with any degree of certainty.
During my time as a student in University College Dublin, what is now the department of economics was then known as the faculty of political economy. The longer I was in politics, the more I understood the accuracy of that old definition in UCD. Thank you very much.
Thank you very much, Mr. McCreevy, for your opening statement and we'll get matters under way. I just want to deal with one item first with you if you don't mind and maybe that is just to ask your comments from contributors to the Wright report indicating that there was a lack of leadership and direction in the Department of Finance during the period of 2000 to 2010, and its effectiveness was limited. Would you agree with the comments made and what should have been done or is still to be done to improve the Department's role and effectiveness going forward?
Mr. Charlie McCreevy
On the basis that there is nothing being done today that couldn't be done better and I suppose there are things being done today in the Department of Finance which are being done better than they were during my time but ... so, I am sure the Department of Finance has taken on board some of the commentary in Wright and other inquiries that they made themselves and the ongoing work that they do to improve themselves. I can only speak for my time at the Department of Finance. I found the officials there very helpful, working extremely long hours, prepared to - at the drop of a pin - to go and do things which were way above and beyond the call of duty. I found them helpful in every respect. They argued their viewpoint very forcibly, they ... and then when, if you wanted to go in another direction, they went off and did what you told them to do. That's the job of what good public servants do and I can only say that I think they vigorously fought their corner. I found nothing during my time to say that there was anything but the highest level of intellectual capacity applied to all the problems and the best officials I think in the public service were there.
One of the continuous themes running through the Wright report is the positioning of counter-cyclical policies that may have been advocated by the Department of Finance and issues relating to potential overheating in the economy. The question, as I put it to you, was that Mr. Wright makes a critique of leadership and direction in the Department during that period, in terms of trying to make those arguments and that it was very very limited. Would you agree with Mr. Wright's analysis or would you have a different opinion?
Mr. Charlie McCreevy
Well, I found the Department of Finance came along and put their views. But, like, unless we want to go to another kind of structure on ... whatever kind of democracy you want to call it, it's the Government of the day that makes the decisions and it's the Minister of the day that runs his Department. There is no ... in the words of a former Secretary General at Finance, still alive I know, there is no such thing as a departmental view of government. There are only Ministers' views. I am some time intrigued in recent times to read when politicians, and we all have done this, try to get out of trouble as to why something can't be done. They come along and say the Department of Finance won't let us. That's only a cop out. If you convince the Minister for Finance - that's the person to go to and he can overrule his officials if it's a good enough case. I am sure if you go back over my 27 years in the Dáil when I was a backbencher, I perhaps used that as well. I don't recall so doing but it's an absolute ... so if the Department of Finance come along, argues it case, it puts some of those things in writing and they fight their case. Then the Minister goes and makes the decision and the Government makes the decision based on what the Minister and the Government want to do. So, therefore, there is no difficulty, I found no difficulty with the Department of Finance giving their views. I don't really understand what Mr. Wright wants the officials in the Department of Finance to do. Maybe to stand outside Merrion Street with a loud hailer or something like that. But you couldn't run any democracy on that basis. I am sure when Deputy Pearse Doherty becomes Minister for Finance and Deputy Joe Higgins is Minister for Public Expenditure, that they will get loads of advice from the Department of Finance and they'll blindly ignore it.
Thank you very much, Mr. McCreevy, and you are correct in the points you are making there and I made it to Mr. Cardiff there last week when he was before us. Just to remind both witnesses and members of the committee that as we look at public servants and we look at politicians, while public servants may give advices and bring advices to Ministers of the day, the decision rests solely with the politician, not with the finance-----
Mr. Charlie McCreevy
Correct and that is the way it should be, and that is the way it is in every representative democracy.
Okay thank you. Deputy Pearse Doherty.
Go raibh maith agat, a Chathaoirligh, agus fáilte roimh an tUasal McCreevy. Can I begin first of all by asking you through 1999 to 2003, the Governor and the Central Bank warned you of excessive growth in the credit markets, warned you about the housing markets, commercial property markets, overheating in the economy and, finally, the possibility of a hard landing and this could lead to unhappy economic and social consequences. So Mr. McCreevy, with hindsight, and given the advice you were receiving, should you have been more cautious in taxation and spending policies in your budgets?
Mr. Charlie McCreevy
Well, I have outlined in my opening statement as to what the success of that economic period gave us and what we spent the money on and at the same time, we see we ran budget surpluses. And during my ... there was, of course, an increase in house prices over that period but there has been an increase in house prices long before that period as well. In fact, I took a little liberty of going back and looking at Central Bank kind of commendations for the last 30 years or so and you'll nearly find the same thing in every report of a central bank in Ireland and elsewhere as well. Central bankers are by nature, and rightly so, obliged to worry about things like inflation. They'll always advise the Government to run surpluses if they can run surpluses and even when we had large indebtedness, they were saying back years ago "well you shouldn't give any tax concessions at all and you should more or less cut down the public services entirely."
And Governments took some of that advice on board and trained their budgets, as I did in my time, in what I considered the best possible way and the proof of the pudding has been in the eating. We achieved economic growth of considerable measure. We did the things which I've outlined there earlier and no disaster came to pass. So I don't accept that, in my time as Minister for Finance, until 26 September 2004, that any of these disasters occurred as predicted by all these people. It just didn't happen.
So, would that be a "No"?
Mr. Charlie McCreevy
A "No" to what?
The question I asked you. The question was, in relation to the warnings that the Central Bank were issuing you in relation to your policies in terms of the credit market, the housing market, the commercial property, the fact that they were warning of the possibility of a hard landing which could lead to unhappy economic and social consequences, with hindsight, and given the advice you were receiving, should you have been more cautious in taxation and spending policies in your budget?
Mr. Charlie McCreevy
No.
Okay, I appreciate that. Do you accept at all that your policies had ... well, first of all, can I ask you do you believe that there was a property bubble?
Mr. Charlie McCreevy
Well, I think, at the end of 2003, I think an interesting few figures - and I'm sure the committee has got these from the Central Bank and from other organisations as well - I think if you look at the lending figures to ... in this whole area of residential development and commercial development, when you summate it from all the banks, you come at one ... there's a fairly ... it's a reasonable figure, but it's ... but, by the end ... over the next ... from 2003, say, to 2007, I think ... it went up by an extraordinary amount, the amount of moneys that banks were setting aside in this general area. I'm sure the committee has the figures-----
Yes, we do.
Mr. Charlie McCreevy
-----from other sources. Like, it's a colossal change so I'd be pretty satisfied, at the end of 2003, and I was also responsible for the budget for 2004, I didn't see any of the dangers to which you are referring to, no.
So ... but do you believe, do you acknowledge that there was a property bubble-----
Mr. Charlie McCreevy
Well-----
-----at some stage?
Mr. Charlie McCreevy
Well from 1990 ... you must remember at different periods, different things happened. At the end of ... in early ... if you look at the figures, when we implemented some of the Bacon recommendations regarding interest and other ... the interest, deductability, etc., etc., whether it was as a result of that or other factors in the global economy or in the Irish economy, construction activity fell off markedly in that particular period and we were ... instead of employment going up in the area and prices going up, they started to come down. But we're also looking ... look, as I said in my earlier address, economic growth in that ... from the first quarter of 2001 to the last quarter went from 38% to 0.1% and so, therefore ... therefore, it wasn't a universal spike all the while where it's going upwards in terms of property prices either. There was that period as well. But you must remember, in Ireland, like, the population of Ireland increased dramatically. I was here in the Dáil since 1977 and-----
Yes, I appreciate that, Mr. McCreevy.
Mr. Charlie McCreevy
-----the population went as low as 3.5 million and now ... it increased dramatically so there was a continuous demand for housing-----
I know. I understand. I am not-----
Mr. Charlie McCreevy
-----and houses were in short supply.
-----looking for an answer in terms of the demographics, I just wanted to know, as a former Minister for Finance, do you believe that in any time there was a property bubble in the last 15 years in Ireland? Just to find some basics as to what your thinking is.
Mr. Charlie McCreevy
Well, I'm only ... I was only directed by the committee to refer to my role as Minister in my time as Minister for Finance and that ended in 2004 and I'm answering for my stewardship.
And any other questions that the committee deem relevant and this is one of the questions to try and understand your thinking, whether you're a person who denies that there was a property bubble in the run-up to the crisis or whether you're a person who accepts there was a property bubble and then it will lead me on to looking at your policies and seeing did your policies have a role-----
Mr. Charlie McCreevy
Well-----
-----on that either fictional property bubble or a property bubble that you acknowledge exists.
Mr. Charlie McCreevy
Well, I can only answer from my time as ... in the role as Minister for Finance and that's all I've been asked to do.
Mr. McCreevy, there would be relevance and I would try to be consistent with all witnesses and I usually wrap up with asking witnesses if there's anything they could offer in terms of advice to this committee to the future - you might just stop the clock there for a moment - because one of the things I would hope that everybody would want to see at the final report when this committee has completed its work is to ensure that the type of trauma and difficulties that was put on the shoulders of ordinary people in this country do not have that revisited upon them again. So, what we ... so I would see a relevance to different decisions made at different times and the systemic consequences of them. That's not to say that you're to blame or to fault, but whether there is a relationship or not a relationship. So, in that regard, I would allow a freedom to be discussing things beyond 2004 that may be related to decisions ... or decisions that were or were not taken during the period leading up to 2004.
Mr. Charlie McCreevy
Well, can I just say, Chairman, the following. You can check the record to establish that this is correct or not. I ceased as Commissioner in February ... European Commissioner in February 2010. I have not made any comments on any aspect of Irish public policy since that time. In fact, during my time as Commissioner I was very reluctant to say any comments at all, but since that time, despite requests from all types of media, journalists of all descriptions, people that write books, etc., I ... and I've been very tempted on occasions to so do, I have never, ever made a comment either to defend my own record-----
Sure.
Mr. Charlie McCreevy
-----or anything else. I said that's what I was going to do when I finished public life and I've stuck by it, even though I've been sorely tempted-----
Sure.
Mr. Charlie McCreevy
-----and I'm not going to break it today.
Okay, but I would still ask you ... because you are under direction and you are under oath to ask questions that are put to you by members that are in order.
Mr. Charlie McCreevy
They can, of course.
Okay, thank you. Deputy Doherty.
So, will you answer the question?
Mr. Charlie McCreevy
Which question?
The question again is do you ... are you somebody who acknowledges that a property bubble happened in this country in the lead-up to the crisis?
Mr. Charlie McCreevy
I have answered the question to the best of my ability ... is that, what I was ... what were the figures when I ... during my time as Minister for Finance, which ended in 2004, and I didn't think at that time that there was a property bubble.
Do you acknowledge that a property bubble emerged after your time as Minister for Finance?
Mr. Charlie McCreevy
I'm sure that's what the committee is going to deliberate upon and come to a conclusion when it makes its report.
I'm looking for your view.
Mr. Charlie McCreevy
I don't have one.
You don't have a view?
Mr. Charlie McCreevy
Well, I don't have a view which ... I am not going to break the edict I put on myself, is that, in commenting on what happened after my time.
See, can I ask the Chair ... just a minute. I want to ask the Minster for ... I want to ask the former Minister about property tax reliefs that you introduced and continued to extend and did they have an impact to fuel the property bubble. I need to determine here, at the committee, whether you believe there was a property bubble or not. I cannot ask the questions because you're avoiding answering a very simple question which I think is very relevant to this committee-----
Mr. Charlie McCreevy
Well I don't know-----
-----and which has been ... you know, which has come from the Honohan report and other reports. Chairperson, I'm asking-----
Mr. Charlie McCreevy
You see, I don't believe-----
-----for a direction here.
Mr. Charlie McCreevy
But, Deputy, I don't believe that there was a property bubble during my time.
Okay. I ... Mr. McCreevy ... and if need be, we can kind of break into private session to discuss this and iron out the legalities of it, but I'd rather not do that. There is-----
Mr. Charlie McCreevy
I've no trouble answering a question about property tax incentives. That's not going to a problem at all.
Okay. I think the question that ... that would be leading to is a systemic relationship between decisions - action, outcome and consequence and so on - and the issue here is policies taken at a particular time, did they have systemic consequences to lead to something else. And the question that Deputy Doherty is presenting is did these actions add to something happening afterwards and, within the terms of reference, I would consider that to be a fair question. Deputy Doherty.
Again, could you answer the question? Do you believe that there was ... a property bubble had emerged in this country before the crisis?
Mr. Charlie McCreevy
I ... when I left as Minister for Finance in September of 2004, I didn't think there was a property bubble.
And, Chair, I'm going to ask for ... that we adjourn because this is just ... we need to deal with this, unfortunately, but I've asked the question now five times and I'm halfway through my time.
Okay, we'll adjourn. I'd propose that we adjourn. In doing so that the ... and we're suspending ... sorry, suspending, not adjourned. And the witness is reminded once he begins giving evidence he should not confer with any person other than his legal team in relation to his evidence on matters that are being discussed before the committee. With that in mind, I now suspend the meeting until I deem it time to resume again and I remind the witness that, while we are doing so, he is still under oath until we resume. So, I just need to go into private session for a moment, we'll get a legal position actually on this, and then we shall resume. So, if I can clear the public Gallery, please, and the ushers will indicate when we're back in public session.
Mr. McCreevy, thank you for coming back into the committee room and I just want to deal with some matters formally. And I would like to remind the witness that if you refuse to answer a question which falls within your direction, you may be subject to criminal sanctions under section 75 of the Houses of the Oireachtas (Inquiries, Privileges and Procedures) Act 2009. Further, if you refuse to answer any question without being entitled in law to so refuse, the committee may make a finding of you that you failed to comply or fully co-operate with the inquiry in its final report under section 14 of the Act. Also, in your direction to come before the committee here today, you were also put on notice that the committee may make a recall of you on Wednesday or Thursday of next week, at which time we can amend the directions to actually broaden out the line of questioning, if we so desire, once it falls within the terms of reference of the broader inquiry. So, with that said, if we can now actually proceed with our line of questioning and if I can start ... restart the clock and ask Deputy Doherty to ask his question again, please.
Thank you, Chair. Mr. McCreevy, at any time in the decade preceding the crisis, do you believe that there was a property bubble in this country?
Mr. Charlie McCreevy
Well, as I said before we were interrupted, certainly after ... from 2003 to 2007, all the figures would seem to indicate that the price ... house price escalation was of an extraordinary degree. So in that particular context you could call it, I suppose, a bubble.
Okay. And in relation ... do you believe that your policies impacted on that bubble or helped to create that bubble or to sustain that bubble?
Mr. Charlie McCreevy
I don't believe that the policies I pursued helped to create that bubble.
Okay. Okay.
Mr. Charlie McCreevy
It's for others ... others can have a different opinion about this-----
No, that's ... yes.
Mr. Charlie McCreevy
-----but I don't.
That's fine. The Bacon report proposed a series of measures to curb price increases, including a 9% stamp duty rate for investors, a 2% anti-speculation property tax - measures that you initially supported, Mr. McCreevy, but then rejected. Why did you change your mind?
Mr. Charlie McCreevy
Well, let's go back a little bit. There were three separate Bacon reports. They were commissioned by the Minister for housing. The first one was requested in November '97, and reported in April '98. The evidence in all of that time was on the first-time buyer. If you read the commentary in the newspapers and the Dáil debates, everybody was concerned that the first-time buyer was being forced out of the market, and he or she couldn't get their foot on the first rung of a ladder, so the Minister for housing requested the Bacon report. The Bacon report made, kind of, certain recommendations and that resulted in the Finance (No. 2) Bill of 1998. The main reasons for ... there were a lot of other things in the Bacon report related to housing supply, etc.-----
We're ... we're aware, we've had Mr. Bacon before the committee and he gave us a good chronology of the report.
Allow Mr. McCreevy a bit of time to answer now as well, Deputy.
Mr. Charlie McCreevy
But the Finance (No. 2) Bill 1998, the main things it did was it disallowed the interest on persons purchasing second homes; it changed the stamp duty regime substantially; we had a reduction of CGT and development of land from 40% to 20%, if it was to be developed within five years, and the penalty was to increase CGT to 60% if hoarded. There was an interesting, very interesting Dáil debates at the time. The two main Opposition parties opposed it. One of the Opposition parties was considerably against the interest ... the disallowance of interest deductibility. And I remember him saying, and you can check the Dáil debates, that all this would have unintended consequences. So that was the effect of the first Bacon report.
Then we have the second Bacon report, and when the second Bacon report came out, prices had slowed down since 1998, but rents ... prices had gone down on houses, but rents had gone up 24% in Dublin and 17% in the rest of the country. Apartment prices had gone up 24% and there were about 42,000 units completed that year. Now, actually that report of second Bacon 2 praised the new student accommodation tax relief that I had in budget 1999. And it also praised the new urban tax scheme for 43 towns cities that was in that time as well. And then we had the Bacon No. 3 report that reported in June 2000. And that report concluded firmly that rates of increase in prices on new and existing homes in Dublin were down sharply since 1998, and that's what the report said. It also said that immigration of 200,000 to the country was expected over the next seven years, and this led to the Finance (No. 2) Bill of 2000, and that third Bacon report and the subsequent Finance (No. 2) Bill 2000, led to the introduction of the 2% anti-speculative tax, and tax of 2% of non-principal private residences. Now, the interest deductibility and other changes were made subsequently, as Deputy Doherty has pointed out, and the reason for so doing was that we got a fair shock as to what was happening in the economy in 2001 into 2002. As I referred to early in my address, growth had fallen off considerably. There ... if you read the figures from the CIF and from the housing bodies, there was considerably less economic activity in the housing sector, or in the construction sector generally, and unemployment in that area was starting to rise, and that's why we reversed our approach on deductibility and the 2% anti-speculative tax did not take place. It was really made redundant as well.
And why did you scrap the ... the original question, why did you change your mind on the 2%?
Mr. Charlie McCreevy
Because I just said ... because we thought ... we believed at the time and the figures had borne it out, is that the effect of what we done in Bacon No. 1, in particular, was in danger of killing off the whole construction activity in the country and-----
So, it was to boost the construction activity? Or to maintain it at least, is that the answer to the question?
Mr. Charlie McCreevy
Well, I think the second part of your question about ... to maintain it-----
To maintain the construction industry. Okay, Professor John FitzGerald of the ESRI was very critical of the changes you made, the fact that the 60% capital gains tax on zoned land along with the changes you made to the Bacon proposals. He told the inquiry on the 11 February, and this is evidence that he's given, he said:
The fiscal policy was most unwise, and it fuelled the programme. If we had a sensible fiscal policy, we would not be where we are now.
Do you agree with him?
Mr. Charlie McCreevy
I do not agree. But then this wouldn't be the first time I disagreed with either FitzGerald junior, or late FitzGerald senior. I don't think I've ever found an occasion to agree with any of them ever. So, I certainly ... I read what he said and I didn't agree with it then, and I don't agree with it now.
Okay ... like, is it just personal or is there anything of substance that you can give us-----
Mr. Charlie McCreevy
No, no, no ... it's not personal I don't know the gentleman at all but I do not agree what he said then and I looked at it, he said it again in the committee. In fact, I think he said to the committee that he took great pleasure in it ... in saying it was wrong-----
In terms of the-----
Mr. Charlie McCreevy
-----or words to that effect.
In terms of the property taxes, and you've mentioned a number of them there, urban renewal scheme, the rural renewal scheme. How many times did you extend those property taxes?
Mr. Charlie McCreevy
I haven't looked it up quite recently but they have been ... you must remember property tax incentives had been ... the deadline for completion had been extended by many Governments over a long period of years, and as has been outlined during early inquiries of the committee with other witnesses, there were often very good rules in that. Some people start off a venture, there are a lot of hold ups, usually with planning permission, financing, etc., and we have to ... it comes to a stage when money ... a lot of money is being expended and you're going to call off that ... and most have been transitional arrangements which we have done and, on a few occasions-----
Did you extend them in the Finance Bill 2004?
Mr. Charlie McCreevy
In the Finance Bill 2004 actually, I did the opposite. In Finance Bill 2004 ... was I ... bear with me and you could accuse me of a little bit of contradiction of what I had done in previous finance Bills. In Finance Bill 2004 I proposed the ending, and brought forward the dates to the end of 2004. That was the main change in Finance Bill 2004. If you look at what I said then I brought forward the closing dates to 31 December 2004, and that actually was against what ... would have been against the spirit and the commitment that people had entered into, because I think the dates originally were 31 December 2006, I think if not later, and I decided to cut off a number of reliefs. And as I said in my opening statement, I brought back the dates to 31 December 2004. So actually I did the opposite.
And you didn't extend any at all in that finance Bill?
Mr. Charlie McCreevy
We did ... If you look, I-----
Like many of these reliefs continued right up until 2008, Minister.
Mr. Charlie McCreevy
Yes, because the Government subsequently decided, and since I'm going now after my term in office - and we had a little bit of a disagreement about that earlier - the Government subsequently decided, as I understand looking at the Finance Bill, to extend the closing dates of some of those particular schemes, that I had in budget and Finance Bill 2004 ... ceased, extended the closing date. It wasn't me that did that. I'm sure the Government were convinced that they had a reason to do it.
Did you extend the transitional arrangements in those measures?
Mr. Charlie McCreevy
I think we had ... I think there was ... I'd have to look up the ... I haven't had a chance nor would it be possible for me to so do ... of what all the details were, but, as far as I can recall, in 2004, what I did was that I brought forward the closing dates for a various schemes at the time. I mentioned in the speech what are the ones-----
Okay. If you don't have them at the minute-----
Mr. Charlie McCreevy
If you look at the budget speech, you'll see it.
Yes. For budget 2006, Indecon took on a review of property-based tax incentives and, on page 32 of the report, it said, "The options of financial institutions, auctioneers, and accountancy tax professionals regarding the effect of the property-based tax incentives as well as other analysis undertaken by Indecon suggest that, in addition to increasing investment and projects, the tax incentives had led to an increase in site prices, financial returns to promoters and property prices." Do you accept that outcome ... that finding of the Indecon report?
Mr. Charlie McCreevy
I certainly ... I was aware that the Government subsequently done a report that you’re referring to there but I certainly had never read the report, so I’m not too sure as to what they said. But the Government and the Department of Finance would at all times, even in my time, be assessing the validity of various schemes. So, I understand, in 2006, as you said, they got a big report done on all of those schemes. But it’s hard to like ... since I haven’t read the report, I can’t comment on the specifics of it, but it’s hard to make such a sweeping statement that all the property tax reliefs in all of that period contributed to house price inflation, in particular. Like, since the schemes to which I were responsible for introducing, were such like for nursing homes, rural renewal ... I certainly would ... I can argue the toss about rural renewal; it’s a fairly ... But it’s hard to think how the nursing homes relief escalated the property price of housing - child care facilities in the 1999 Finance Act, student accommodation I did in the ’99 Act, park and ride, which, I think, there was a very little uptake on it.
There wasn't ... as far as I know, in my time, from answering questions in the Dáil, I'm not too sure whether really did anybody take it up, up certainly to the end of 2002 in any event, maybe someone did. We brought in town renewal ... and actually town renewal ... the number of towns that took it up, were a lot less then we had envisaged at the outset ... there was a list of a couple of hundred. Private hospitals ... there was a relief brought in in 2000, sports reliefs in 2002-----
Mr. McCreevy, I just have to interrupt you one second.
Mr. Charlie McCreevy
-----so it's hard to know how they would go to-----
Sorry, Mr. McCreevy, I'll just interrupt you on that. I'm getting phone interference there, please, and I don't want to reading out a second legal warning this afternoon to somebody but will they turn off their phone please? Sorry, Mr. McCreevy.
Mr. Charlie McCreevy
So, I just ... I can see what the Deputy is getting at but it's hard to relate that to some of these reliefs there that I had brought in as my time as Minister. Now there were, you must remember ... prior to my time as Minister, you must remember there were urban renewal which is being ... which came in in ... urban renewal actually started in 1986 Finance Act-----
Yes, we're aware of that------
Mr. Charlie McCreevy
-----so, it is ... so but I'm saying that some of those reliefs there-----
Yes, but you were Minister for seven years. You'd brought in seven Finance Bills during ... where those urban renewals continued through that period. I want to move on to another question.
Mr. Charlie McCreevy
I ... just a small correction, I brought in nine Finance Bills.
Nine Finance Bills. Well, there you go. One of the statutory objectives of the Financial Regulator was the promotion of the financial services industry in Ireland. To what extent did Government encourage the Central Bank to pursue this role internationally? And in your view, did the ... this objective compromise the prudential role of the Financial Regulator?
Mr. Charlie McCreevy
I don't think ... I couldn't see for a moment how it would've compromised the role of the regulator in terms of the prudential supervision of Irish banks. And I'll tell you why I would believe that. There are many reasons why financial services have come to locate in Dublin or, now, in any part of the country. The main ... but the main reason for so doing, for the respectable funds, is to be ... is to be in an area, in a country, which they had ... is regarded as well regulated. That's what these firms and banks and institutions want to locate in Dublin for. You can make other cases about tax, etc., etc., but one of the primary reasons is to be located and regulated from a jurisdiction that's recognised as having good prudential rules and regulations. So it would be a negative, in the medium to longer term, for the regulator to not go about doing his job in a sufficiently robust way because the ... it would then get out that Ireland was not the place of proper regulation and, therefore, we would lose our cachet in attracting firms there. So, I do not believe that was the case.
Okay. In your view, were the regulatory institutions of the State focused on the non-labelling of the IFSC as an offshore haven, instead of ensuring that the domestic banks were regulated in a sufficient robust manner to mitigate against the financial stability risks arising from the domestic sector?
Mr. Charlie McCreevy
Well, during my time in Finance we were always grossly offended by anyone in the international press referring to us as a tax haven. In fact, we ... it was the one thing that concerned the Irish Government, the Department of Finance and the Department of the Taoiseach and they were exercised any time there was ever a hint in an article that Ireland was a tax haven. There were strict definitions of what a tax haven was by the OECD and others and we certainly were not then, or since, a tax haven. And so, therefore, we never ever ... Ireland would vigorously object in all of those years, including to the present day - I'm sure, the current Minister would say the very same - we do not regard ourselves as a tax haven. We have a low rate of corporation tax which-----
No, sorry, I am aware of that. The question was-----
Mr. Charlie McCreevy
But not a tax haven.
The question was, were the authorities overly concerned with making sure that the IFSC was not labelled as a tax haven to the detriment of prudential regulation? That was the question.
Mr. Charlie McCreevy
Well, I wouldn't know as to how they divided their resources in the regulatory office. I wouldn't be aware of that at all-----
Okay.
Mr. Charlie McCreevy
-----but I would regard it as, if the ... it would be a very short-sighted policy if they so do. But I didn't have any evidence, in my time, that that was done.
Okay. Can I ask you, you were responsible as Minister of Finance for appointing the majority of the board members to the central board and Financial Services Authority of Ireland board and the board of IFSRA. Can I ask you, how did you come about ... how did you decide on who to appoint to the board? And it seems, you know, your appointments to the board of the Financial Regulator included, besides others, a senior counsel, a former member of the Independent Radio and TV Commission, a journalist, a former CEO of the beef trading company and chairperson of the IDA - who was also former director general of the Irish Business Employers Confederation, IBEC, the former chairman of a large estate agency. And Brian Patterson, the former chairperson of the Financial Regulator, told this inquiry that he made you aware of his lack of experience in financial regulation at the time of his appointment. So, can I ask you, how did you come to deciding who to appoint and what were your reasons to appoint persons with very limited regulatory or banking experience to the board of the Financial Regulator?
Mr. Charlie McCreevy
Well, I did see in the reports of the committee where Mr. Patterson had said ... referred to some discussion we'd had when he was appointed the chairperson of IFSRA. I don't recall the particular discussion but I know ... if Mr. Patterson said that, that's what he said. I take it that's what did occur. And, as I said in my opening statement and in my witness statement as well, all the ... in setting up the new structure, you can look at all of the Dáil debates and all of the Seanad debates and all of the commentary and you'll see all this concentration on consumer issues to the exclusion of nearly everything else. And bar myself and, once or twice the Front Bench spokesperson of Fine Gael, referring to the prudential area of things, that was about the only discussion you'll read at all about prudential in all of the debates on two Bills ... not alone the two Bills but all the four years that went by before we actually set up the bodies at all and all of the controversy there was about the difference between us and the Department of Enterprise, Trade and Employment, about where the location of new bodies should be.
When it came to the appointment, I actually ... I can't remember how Mr. Patterson came to be appointed. I certainly never knew him. I never knew him in any walk of life. So I assume he must've came up through a process that maybe the Department of Finance or the Department of Enterprise, Trade and Employment pursued at that time. We did try to ensure when we set up the body CBFSAI, the Central Bank of Ireland and Financial Services Regulatory Authority, we had them ... IFSRA here ... and we had the broader body then. We did have, I think, about six members of the IFSRA on all - including the chief executive chairman - on the board of the larger body as well. And that was done in order to accommodate and to meld the two organisations together because there'd be a lot of controversy about setting up this in the first place. But regarding the individual appointments, some of these people that ... if I can recall, were appointed to the board of the Central Bank by non-Fianna Fáil-led Governments. Exactly one person-----
Yes, I'm asking about you-----
Mr. Charlie McCreevy
But I appointed those people ... most of those people that I appointed, we did it in a small process. We put forward a few names, we put a journalist on that ... a journalist and novelist, I'd call the person-----
Mr. Charlie McCreevy
-----for ... to really give an emphasis on, say, really talking about consumer, so that other people had been, in all walks of life, had different experiences. And when you're appointing a board, you appoint people to a board that you think bring different experiences to the area. We ... at that particular time ... Deputy Doherty mentions why not some people with regulatory experience? Well, I don't know what people were around ... looking for ... with regulatory experience that we would've picked from but, in any event ... the board of a central bank, you'll need a broad range of experiences------
Okay. Okay-----
Mr. Charlie McCreevy
-----so, I wouldn't make much of that.
Can I ask you ... when I asked Kevin Cardiff, who was here, of who lobbied for the guarantee, your name popped up. He mentioned that at a meeting on 23 May, you suggested to him that a broad statement would be made. Can you enlighten the committee as to, first of all, your recollection of that conversation with Kevin Cardiff? What was your motivation for saying that to Kevin Cardiff? Had anybody spoken to you prior to that or subsequent to that? And in your opening statement you talk about the engagement you had with senior bankers, which was more at an authority level, but can you also discuss some of the private engagements you had, particularly in August 2008, with the very senior bankers in Anglo Irish Bank?
Mr. Charlie McCreevy
Well none-----
Was there any lobbying done-----
Mr. Charlie McCreevy
No-----
-----in relation to any of this?
Mr. Charlie McCreevy
No, I read what Kevin said to the inquiry. I have no recollection of the meeting or the conversation. He said he attended an event at which I was presumably the guest speaker, I'm presuming it took place in Dublin. And I don't know whether ... after the event, whether sitting around and having a cup of tea, whether I asked him ... I told him or he asked me for an opinion. But, so I've no recollection of what I said then. But I would have a clear view as to what I would've been thinking around that particular time.
I was in Brussels as EU Commissioner for Internal Market and Services and financial services had come to dominate the latter half of my term there as Commissioner and most of my cabinet would have been Irish members and we would have been reading the Irish newspapers, listening to Irish media outlets and all the debate was going on about Ireland and you certainly, we were very concerned just as Irish people, as to what was happening back home - as anyone would be - and it's probably, members of the committee know, your nationalistic fervour grows exponentially particularly when you're abroad in another country because you don't want other people saying bad things about your country. So there was all this emphasis on Ireland, so, as Kevin said at the .. the thing, and I'd say it's very accurate what he said, I said more or less to him "I think it's time", I probably said "Someone should make a broad statement about the situation." Now that is a long time, that was six months or so away before ever there was-----
You think you said that because your statement-----
Mr. Charlie McCreevy
Well I don't know what I said, but Kevin said in his statement, this is what he said and Kevin said ... I think you were querying or someone was querying whether ... querying whether it was a, a legal guarantee or a political guarantee and so Kevin said, in my situation, he just said casually that-----
So was that the sum total? The other part of the question was, was that the sum total of all your conversations-----
Mr. Charlie McCreevy
Yes.
-----like, and I mentioned the meeting that you had with Seanie FitzPatrick in August 2008. Was there any lobbying done?
Mr. Charlie McCreevy
No, well, I don't ... where'd I meet Seanie FitzPatrick in 2008?
Well, sorry, it's reported that you met with a senior banker in 2008, in August 2008. That right?
Mr. Charlie McCreevy
I don't ... I don't get ... I ... I have no recollection-----
My apologies if that's incorrect.
Mr. Charlie McCreevy
I have no recollection of ever meeting ... in fact, I, I can speak of Seán FitzPatrick ... he-----
My ... my apologies if that ... if that's incorrect.
You are now going over matters that are taking place outside of this committee room Deputy.
Yes, but the question is that you never discussed a guarantee with anybody else outside of Kevin Cardiff?
Mr. Charlie McCreevy
No, no, I ... can I just point out at that particular time ... I ... we would ... I would have thought that, and I'd say others thought as well, there was a lot of commentary, a lot of articles written with the Irish situation and many Irish people of all types of backgrounds were writing and sending in opinions to everybody as to what should be done. But can I just put it; at that particular time I don't think there was ... it was just talking about broad support of the banks and I think that they subsequently to the guarantee, this legal thing about what was guaranteed became an issue. But I'll nearly wager most people here that around that time, and that would be September, there was no much talk ... there was no ... when you're talking about supporting the Irish banks, it wasn't talked about ... these wonderful terms like subordinated bondholders etc. etc. I doubt that there was any much comment at all about that because most people, most people were warning something will have to be done. And my view, just as a concerned Irish citizen and someone who had been in the Department of Finance and would have known the pressure the guys in finance would have been over, and knowing Kevin Cardiff I'd probably just say-----
You have my apologies to Mr. ... my apologies to Mr. ... my apologies to Mr. McCreevy by stating as a fact, which I didn't determine what it was - it arises out of the fact that there's a chapter in this book called The FitzPatrick Tapes called "Drinks with McCreevy [and] Dinner with Cowen" which gives, in great detail, a suggestion that there was a meeting between yourself and Seanie FitzPatrick in all this business-----
Mr. Charlie McCreevy
Well I can even ... you did say it was Seán FitzPatrick, we'd better clear this up for a start. I know Seán FitzPatrick since 1973. He's a bit older than me but we qualified at the same time. We worked in Craig Gardner accountants - now PricewaterhouseCoopers - we were there as seniors for a year and a half or so, together with the leader of the Labour Party, Joan Burton, who was a classmate of mine in UCD. So I know Seán FitzPatrick for that length of time but my only thing is with Seán FitzPatrick as a banker was that at one stage he was chairman, I think, of the Irish Bankers Federation and so I think they had a lunch or a meeting one time where they met us around the big table. This is back in my time in finance. I ran into him many ... a few times socially. I never played golf with him even though he's quite a ... he's a very good golfer, people might like to know that, but I actually never played with him, as far as I know. And I know him that length of time, but like I've no communication with Seán FitzPatrick. And by the way, for the record, I haven't drank for over 20 years.
Thank you very much Mr. McCreevy. Deputy Eoghan Murphy. Deputy 25 minutes.
Thank you Chairman and thank you Mr. McCreevy, you are very welcome. I want to go right back if I may just prior to you becoming Minister for Finance. In opposition you expressed a number of reservations about our entry into the euro and just two months before you were made Minister for Finance you said in an interview with Jane Suiter, "It will be interesting to see if you can have monetary union without an integrated process". So upon your appointment as Minister what did you do to protect Ireland from our entry into the euro, in terms of the shortcomings that you had seen?
Mr. Charlie McCreevy
Well, one of the better committees that I was involved in in my political life, and that includes Ireland and Europe, there was a committee chaired by the late Jim Mitchell, set up in 1995 I would say, and I was spokesperson ... I was the finance spokesperson for Fianna Fáil to look at the whole area of our possible entry into the euro. And the late Deputy Mitchell brought all types of views before the committee; people who were very for joining it, people who were against. So we had a very robust discussion and no one ... we learnt a lot, all of us there, and it worked. We got very little headlines but actually it was very keen, so therefore all of the issues were thought about then. When I, as Deputy Murphy has alluded to, I would have had concerns about us joining the euro, as most ... as a lot of people did. Interesting enough, to show how ridiculous the economics profession is, our biggest, one of our biggest concerns at the time was that when we join the euro and our nearest neighbour wasn't joining. That was the big issue at the time, that we were going to join the euro and knowing that the United Kingdom wasn't going to join. Now it shows the development of the Irish economy since we joined the EU in 1973 that we were able to take that decision and consider it, knowing that our nearest neighbour, our biggest market, were not going to join. And one of the biggest issues that we had at the committee was the fear that we would join the euro, that the rate for the Irish ... the euro versus sterling would go totally in the wrong direction for us. And if you read some of the expert views we got done by many eminent economists who predicted that the Irish rate might go to €1.10 - €1.09, €1.10. Deputy Murphy will be aware that the total opposite occurred and we went in the other direction to as low as €0.66, €0.67. So it goes to show what all the experts ... but when we ... when we ... when I became Minister for Finance then in 1997, I actually was the Minister responsible then for making the formal decision and it took place ... or the euro notes and coins didn't start till '02 but we joined from 1999. And the major decision I had to make was at what rate we were going to join vis-à-vis the Deutsche mark and if I remember correctly, Ireland, when we devalued in '92, '93, we went to a rate, off the top of my head, the Deutsche mark from DM2.67 to DM2.41. It was then that the Irish pound kept appreciating against the Deutsche mark in '96, '97 and '98 up along, and the rate was when we were going to join and I said ... we kept our counsel very ... our cards very close to our chest and I finally made the call and we joined I think at the rate was DM2.48667. Why I can remember these figures I just don't know but I think they are fairly accurate.
Mr. McCreevy-----
Mr. Charlie McCreevy
So the answer was, we had taken in the period of time, we had decided that it was in the best interests of the Irish economy knowing that ... knowing the difficulties of the UK not joining. Plus the difficulties of that we were joining a currency union without ... without central budgetary and fiscal policy, because take the United States for example. Well if there was a big crisis in Minnesota, the Federal Government can make a decision to put resources in Minnesota. You don't have that with the euro, we don't have a central government to decide. So we knew all those downsides but we decided that it was in our best interests that we would join, knowing the downsides.
Now, one of the downsides was that we gave up control over our interest rate policies and that, that, if I was to make any ... if I was to ask one thing that the ... would have lessened the economic impact of the housing crash that Deputy Doherty referred to I would say ... I would say the loss of interest rate control was the biggest, because without any shadow of a doubt if we'd been there, if we had our own interest rate setting policy outside of the euro we'd have had higher interest rates.
Yes, I want to ask you about this though because this was predicted in 1998 that once you fixed the exchange rate mechanism, that there would be a push for a fall in interest rates following which a wall of money would hit the Irish economy. So that was being written about in The Irish Times in 1998, on the Monday just after you fixed the exchange rate mechanism, so what did you do to prepare the economy for that?
Mr. Charlie McCreevy
Well, if you think you look back on the figures Deputy Murphy you'll find that the wall of money didn't hit the Irish economy immediately-----
But it was predicted.
Mr. Charlie McCreevy
No, but walls of money started hitting the Irish economy when the international banks and investors decided that you'd get a great return for investing in the paper that Irish banks were putting forward because Irish banks were making colossal profits etc. etc. and it was far better to do that. That's what happened subsequently.
But in the immediate aftermath that didn't happen - I think the figures will justify that.
But did you foresee the problem coming?
Mr. Charlie McCreevy
Well, we, if you look at the committee of Deputy Mitchell, you ... I haven't looked at it for years ... God, that's 18, 19 years ago and I certainly, I wouldn't know where to find it, but I would be fairly, I think it would have been referred to, that particular report. But you must remember, we all decided, I mean all the political parties, Fianna Fáil, Fine Gael, Labour, I'm not too sure about any smaller, were there any other smaller parties then, we all decided it was in the best interests of our country to join. And by the way, I was often criticised when my nomination was put to go to Europe as Commissioner, I didn't always sing from the same hymn sheet as everybody about the greatness of having the euro project. I always knew that there were downsides to it. I would have signalled it as well, but it was in the, our overall best interests. We all thought we'd join the euro, and I still believe that to this day.
Okay, just coming back to this idea of preparing for consequences of that decision, and the reduction in interest rates, and what that would mean for the Irish economy, and your time as Minister, not going back to the committee before you were Minister, what were you and your officials doing to prepare the economy for this new money coming in?
Mr. Charlie McCreevy
Well, what we did was to, I think, I would have maintained anyway, Deputy Doherty might disagree, a pretty successful economic and budgetary policy for our period in office. You must remember, it was ... I know, I've said about high interest rates could have lessened the impact of the subsequent property crash but remember also that high, that low interest rates gave an opportunity for Irish businesses in the non-construction sector to actually try to make a bob, because we had been paying for years colossal interest rates and it was hard. How some businesses survived over the previous 40, 50 years is a great tribute to them, so there were benefits to having the low interest rates and the Irish economy had become very, very, very competitive over a period of time. And another thing may I say, if you look back at commentators when I was in government as Minister for Tourism and Trade when we had to devalue the Irish currency, we were forced to devalue the Irish currency, it wasn't working, and 19 out of 20 economists predicted that it would be a disaster and it would lead to rampant inflation. In fact, it was the makings of the economy-----
Mr. McCreevy, could you just stick to the questions that I am asking, please? I mean, I appreciate that you have, you know, a right to answer the questions but I'm trying to pursue a particular line of evidence. Now you mention in your reply there about the success of your budgetary policy as part of you preparing for the dangers of, the risks associated with euro entry. But, in 2001, at the beginning of 2001, we see the censure from the Commission, and it states:
Given that the monetary policy is now set for the Euro area as a whole and no longer available as an instrument at national level, other policies, including budgetary policies, must be used more actively. ... The Council recalls that it has repeatedly urged the Irish authorities, most recently in its 2000 broad guidelines of the economic policies, to ensure economic stability by means of fiscal policy. The Council regrets that this advice was not reflected in the budget for 2001-----
Can you cite the document Deputy please, in fairness?
Thank you, Chair, it's Vol. 1, page 13, "The Council regrets that this advice was not reflected in the budget for 2001, despite developments in the course of 2000 indicating an increasing extent of overheating." That's a censure that came from the Commission in 2001, which you have alluded to in your opening statement. So that's what the Commission is saying about Irish budgetary policy and fiscal policy, in 2001.
Mr. Charlie McCreevy
Yes, and I've said earlier in my statement, and other times as well, we disagreed entirely with the Commission's assessment at that time and less than one year later, the Commission lifted the reprimand because it turned out the Irish ... it turned out that actually, the stimulus that they were complaining about being given in my budget of 2001 was actually what was, could be deemed to be, anti-cyclical by the end of 2001 so they lifted the reprimand.
Exactly. By the end of 2001; but this is the beginning of 2001. So, it was an accident.
Mr. Charlie McCreevy
Hold on, Deputy, but as I said in other parts of my statement, nearly all, it looks like to me, at the end of my statement, like predicting things with certitude in terms of economics is a very futile exercise. It usually doesn't turn out that way and I've given many, many examples, and there are many other examples as well.
This wasn't a prediction, this was looking back, at previous budgets. I'm not talking about their recommendations for the coming budget, that they would make recommendations together with the opinion, I'm talking about them regretting that the advice was not reflected in the budget for 2001, "despite developments in the course of 2000 indicating an increasing extent of overheating". They're looking back, in that judgment.
Mr. Charlie McCreevy
No, they gave the reprimand in February, March 2001, the budget was in the previous December right? That was when the budget ... the budget was the previous December 2000, they gave a reprimand about the 2001 budget in February-----
Based on overheating in 2000.
Mr. Charlie McCreevy
Yes, but they had been, they were proved to be wrong.
In relation to the recommendation for the future, because of what happened subsequently in the course of 2001.
Mr. Charlie McCreevy
But, Deputy, we would have believed, and most other outside commentators would also believe, that the Irish economic situation, which was generating large budgetary surpluses, which was enabling us to reduce the national debt from the figure that it used to be, that all this was in the best interests of the long-term sustainability of the Irish economy.
Okay, let us accept that on the Commission side. The Central Bank pre-budget letters, the pre-budget letter in 2000 - this is coming in at the end of 2000 for 2001- talks about commercial property prices as a source of concern, this is page 83 in Vol. 2, it warns about competitiveness in the economy and the heightened "risk of a hard landing for the economy", because of decisions taken. So you're getting this from the Central Bank as well.
Mr. Charlie McCreevy
But Deputy, like-----
Are they both wrong?
Mr. Charlie McCreevy
But you see, Deputy, in 2001, if you refer to when a hard landing occurring, okay, we'll say a hard landing occurred in 2008, 2009. This is maybe a decade before the hard landing took place and I noted that in subsequent Central Bank reports and in subsequent ESRI reports, as late as 2006 and 2007 and 2008, they were predicting a hard landing was not going to occur at all. So they were considerably wrong, in 2001 and 2002, because a hard landing certainly didn't occur in my time in office; in fact they changed their minds later in the decade and then it turned out there was a hard landing.
So the Central Bank and the Commission were wrong?
Mr. Charlie McCreevy
Yes, they were, yes, and I think the proof of the pudding is in the eating. They were.
And did you pay any attention to the pre-budget letters that came from the Central Bank, in your time as Minister?
Mr. Charlie McCreevy
I think I would have read the ... most commentary that was about the Irish economy during my time in Finance or someone having read it for me and they gave me a summary of it. I spent an awful number of hours per day in the Department of Finance and that's what I did a lot of the time, so therefore I certainly did take account and read what these commentators had to say. But as I said, in my opening Budget Statement, I then, we then decided and I recommended to the Government we do certain things, sometimes we did something that they were in agreement with, sometimes we didn't, but that's, as I said, what we do always with advice.
Okay, I want to move on to the McDowell report concerning regulation of the banking sector and the financial sector. We know that the report argued for a different model, excuse me, of a fully independent and autonomous financial regulator but the Central Bank and the Department of Finance were both against that recommendation. So what were your views on the model that was eventually agreed? Was it your model?
Mr. Charlie McCreevy
No, it was a compromise that we came up with in the end, which more or less could be termed "the McCarthy compromise". That's named after the Secretary General of the Department of the Taoiseach, Dermot McCarthy. Can I just go back a little bit about this? We decided in 1998 that we should have a single regulatory authority. We set up the McDowell report to decide how this would be implemented. Why did we want a single regulatory authority? Well, I think if you read the early chapters of the McDowell report, it summarises very well the reasons for having a single regulatory authority, having it all in the one place, bringing all the supervision from different quarters. Up until that, you had the Central Bank involved, the Department of Enterprise, Trade and Employment, you had the Department of Environment ... Local Government, now the Department of the Environment, you had different regulations to do with credit unions, you had all this all over the place. So we thought the single regulatory authority was a good idea. Mr. McDowell was asked to chair an implementation group that had nine people on it, from the Department of Finance, the Central Bank, the Department of the Taoiseach and others as well. They came up with two reports, or two and a half reports; the majority came up with the single regulatory authority outside as an autonomous unit, outside of the Central Bank. The minority alternative model, supported by the Finance person - Tom Considine I think it was at the time - and the representative of the Central Bank, I think it was Mr. Barron, came up with the alternative model to keep it located within the Central Bank. And Dermot McCarthy, then subsequently had a slightly ... a variation of all that. There were differences of opinion as to its location, there was not a difference of opinion about having a single regulatory authority. The differences of opinion regarded where it should be located and constituted and that's what caused all the difficulty between us all. And the Dáil debates are very, very interesting.
Not alone was there a difference between the Department of Enterprise, Trade and Employment, namely, the Tánaiste, Mary Harney, and myself, but there was also a difference between the political parties. Deputy Derek McDowell, who represented the Labour Party, was for the independent model advocated by McDowell. Michael Noonan, who was then the spokesperson for Fine Gael, was for the model that we were for in Finance, keep it within the Central Bank. In fact, if you look at one of the Dáil parliamentary question debates, you see where Michael Noonan has a funny aside with Derek McDowell and he says, "So, you're a PD at heart", or something like that. You can look up the Dáil debate to see that.
So therefore, it wasn't anybody was coming at this from mala fides but there was a difference of opinion and as I said in my witness statement, over Europe and further afield, there was not a universal way of doing this. Other countries had different ways of doing this. So finally, we came around and we came up with this compromise solution which I would term more "the Dermot McCarthy kind of solution" which had this overarching body, the Central Bank of Ireland self-regulatory authority and within that, we had the regulatory authority known as IFSRA, and we combined the two bodies together.
Now, subsequent to the economic collapse, as I said also in my opening statement, people have gone back to having it all within the Central Bank. And by the way, the United Kingdom, in 1997, were also in the process of diversifying out as well and reverting and they also have gone back, more or less, to a single model as well. So, it's not that anybody came this from mala fides including the politicians, it's just that there was an agreement on all this and how to reach it. So, that's how we came about it.
Thank you for that. I want to move on now to the budgetary process when you were Minister and just again in that interview that I quoted from Jane Suiter, two months before you were made Minister you said, "No matter what the Minister says at the Cabinet table, they [and you are inferring the Cabinet] will not listen in the year of an election." Now, in Vol. 1, page 33, we have an excerpt from the Wright report and what it shows is a table displaying the June fiscal framework proposal each year and the income and social welfare package adopted on budget day of the same year. I'm not sure if you are familiar with that table, it's-----
Mr. Charlie McCreevy
I'm sure I've seen it in documentation sent to me. I can't-----
It's on page 32, I think, 22, sorry, of Vol. 1.
Mr. Charlie McCreevy
I'm sorry ... I can't ... I have it somewhere.
It's on the screen Mr. McCreevy, anyway, it will save you a few issues.
Mr. Charlie McCreevy
I know. Yes and I'll tell you something very interesting.
Well, before ... if I could just ask the question.
Mr. Charlie McCreevy
By the way, the colours are not coming up too good here, Mr. Chairman, but however.
Okay. Well, the table on the left is the June fiscal framework.
Mr. Charlie McCreevy
Yes, I know what you mean.
Is the budget packages spreadsheet showing there, Deputy?
Yes. Can you describe if and in what way the election in 2002 impacted on budget decisions in December 2000 and December 2001?
Mr. Charlie McCreevy
Well, as has been explained to the committee previously, in the middle of year, in June every year, a memorandum would be agreed with the Government and that would assess the starting of the budgetary process. It really started in the Estimates campaign and then over the course of the summer and into September-October, you would have bilateral meetings with ... officials would have bilateral meetings and then finally, you would have bilateral meetings with individual Ministers about outstanding issues. That's the process that went through. In all of those years that you show there, you'll see that the memorandum in June was ... and compared that with the tax and welfare package in the budget, that the memorandum in June is a higher figure except one year and that was the budget for 2003.
I asked about 2000 and 2001.
Mr. Charlie McCreevy
No, no, hold on, we ... but we want to have an overview of all this. It's a whole chart you've given me, Deputy Murphy, so-----
Oh, no, I see but-----
Mr. Charlie McCreevy
-----and I'm entitled to look at it.
Yes.
Mr. Charlie McCreevy
So, and 2003 is the first ... and I understand it might be in the history of the State that the budgetary package, as agreed ... as done by the budget, is less than what the memorandum is in June. It has never happened before. What happens in those particular stages, is that negotiations take place-----
We know the process, Mr. McCreevy, it has been explained.
Mr. Charlie McCreevy
-----then the Government comes and arrives at the decision and we produce the budget and that what's happened in all of these years.
Can you describe if, and in what way the election in 2002 impacted on the budget decisions of December 2000 and December 2001?
Mr. Charlie McCreevy
Well, Deputy, I'm sure I wish you well in the next election but I'm sure if that when you make to Government, I'm sure that when an election is coming up, that you will be very, very conscious in the previous year to 18 months, as the same as this Government is very, very conscious, of not trying to do something which is going to antagonise the electorate. And certainly all Governments of which I have been a member and all Governments when I wasn't a member, have always borne that very much in mind.
So the answer to your question is, yes, of course, the upcoming election has always influenced measures which the Government do at election time. We are politicians, don't forget, and we actually like to be re-elected.
Sorry, but is that a responsible way to run the national finances?
Mr. Charlie McCreevy
But that is ... like when we ... in all my time there, in all those years, Deputy, we were the most ... I have given the figures for our spending as a percentage of GNP in my address earlier to the committee. And you can see even in terms of gross current spending, which is the most legitimate one to look at, that the percentage is in or around 30%. We did all of that, reduced the national debt and still had budget surpluses. So, I would contend - you could have a different opinion - I would contend that we were most responsible than any other Government in the history of the State. No other Government in the history of the State ever had budgetary surpluses and we had budgetary surpluses after large increases in spending, after large capital expenditure and that was the success of our economic policy. So, therefore, I think there was ... we .... the things that we did in terms of expenditure were all justifiable. I'm not saying that every euro or pound that was spent in every corner of the country was maxed to the maximum effect. But, in general, what we did, I believe, was correct.
Evidence has been put to us that pro-cyclical taxation from 2000 to 2006 rose from 12% to 30%. So were those revenues sustainable?
Mr. Charlie McCreevy
Well, I have seen ... there's a chart somewhere else about pro-cyclical taxes which came to me some day before the committee. Like, I would ... some what are regarded as pro-cyclical taxes, I'm not too sure they are pro-cyclical taxes. For example, capital acquisitions tax, I'm not too sure whether you call that pro-cyclical tax. I don't know whether you should call corporation tax as a pro-cyclical tax.
Well, was the tax revenue taxation model sustainable that you built up? And you used that money to spend then prior to elections. Was it sustainable?
Mr. Charlie McCreevy
Well, can I just ... hold on. Just for the ... what we did ... the Government of which I was the member, did all this tax cutting in the first three budgets, as we had promised in our election manifesto and our programme for Government in 1997. And in the last two budgets where I was responsible, the ... in the 2003 budget, the tax package ... as it may interest you, the tax and PRSI changes cost €95 million and we had a social welfare package of €530 million. And, in 2004, our tax package cost €296 million and our social welfare package was €630 million. And, interestingly, if you want to know, for the budgets where I was responsible from '97 to 2004, our income tax and PRSI package total came to €5,607 million. And our social welfare package at that period came to €4,507 million, meaning a ratio of about 1.25:1. Funnily enough, for the three budgets previous to my term, '95, '96 and '97, led by the previous Government, the income tax package and social welfare came to €1,171 million as against a social welfare package of only €750 million. So I would certainly say, given that the surpluses that we were generating, and also put the money aside to the ... and the pension reserve fund that our overall taxation and welfare packages and spending packages during my seven years were totally justifiable and I have no hesitation in defending it.
In the 2002 election campaign, you stated that, "No cutbacks whatsoever had been planned, secretly or otherwise", and in 2003, spending was halved.
Mr. Charlie McCreevy
You see-----
So did you get the 2002 budget wrong?
Mr. Charlie McCreevy
I don't believe we got the 2002 budget wrong, but I'm saying that it means it was fairly obvious later in the year of 2003 that we had to cut our cloth according to our then new measure. The barrier the whole time that I used, for what it's worth, was the total trying to balance the budget - that we wouldn't run a deficit. That was the barrier. It's very hard to do anything else and that was a fair barrier to try and keep up the whole time. So, therefore, it was obvious that from 2003 that there ... the tax that we were expecting to ... we were judging to come in, wasn't going to be anything like the previous years.
The taxes for 2003?
Mr. Charlie McCreevy
So ... for 2003. So, therefore, we made ... I made decisions at that time that, even though I produced a memorandum in June to say X level of the spending, when I got around to doing the budget, I forced on Departments a lower level of spending, much, of course, to annoyance of my Cabinet colleagues, much also to ... even in the Department of Finance didn't believe it could be done and we did it.
And we did ... we, then in ... for the 2004 budget we kept spending to a relatively low level again and did a very small, as I told you, very small tax package in both of those particular budgets so, therefore, we got ... what I would term ... we had got over the difficulties and we had still a balanced budget. And that was the intention.
At what point in 2002 did you foresee this crisis in revenues coming in 2003?
Last question now, Deputy, I'll be bringing you in again.
Because in the first half of 2002, spending was 22% up on the previous year but by the end of the year it was only 14% up, so-----
Mr. Charlie McCreevy
Well, there was ... well, sorry for going on a bit but there was ... there was a big ... there was a level of controversy later in that year as a result of documents that came to be inadvertently given out under a freedom of information request from another Department, which seemed to indicate that for 2002 we're having these big cutbacks as well. Can I just explain? And there was ... this, actually, was never corrected, despite various efforts by me at the time to try and get the right impression ... the actual facts. At the start of every year we had the budgetary process ... we used to have the spending Estimates process. About three weeks before the budget, I'd announce the spending for each Department. Then in about February of every year we produced what's called the REV, the Revised Estimates Volume, which was the final figures for the Department. During the course of any year ... and it happened in '97, in '98 and '99, during the course of any year, around June, you find that different Departments are overrunning their budgetary allocation. And up until '99 we used to have a mid-term ... a mid-term adjustment and we used to make an announcement about it and it used to cause some difficulties, and ... because in order to make sure that for the end of year that the budgetary spend would come in at a figure that was given in the REV, Revised Estimate Volume. We didn't do it in 2000 and 2001 because no one was noticing what we did. We did it internally each of the times with different Departments. In 2002, after the election, it was obvious that we were going to have to take measures to make sure that the part ... that the overall REV, the overall spend I announced in February, that it was going to come in on budget, and what we did immediately after was make pretty severe adjustments to some of the spends to ensure that we'll come in at the Revised Estimate Volume figure. And that was stage 1 of the budgetary process. And then stage 2 then, were the Estimates for 2003 that we started the process for-----
Did-----
Okay, final question, Deputy, and then I'll come back to you later.
Did the REV in 2002-----
Mr. Charlie McCreevy
Pardon?
Did the REV in 2002, did that happen in February or after the election?
Mr. Charlie McCreevy
Always, always in February. It's a ... just to go through the process again-----
Yes. You don't need to go over it again, I just wanted to clarify that.
Mr. Charlie McCreevy
Always in February, and I think it's still done in February. Anyway, it's the Revised Estimates Volume is the book. The abridged ... in my time we called the ... we used to announce the Estimates in November, three weeks before the budget, and that was called the Abridged Estimates Volume. Then when we got all the figures by the end of the year, and the outturn for the year - the previous year - if you look then we published the Revised Estimates Volume, which shows the outturn for each ... departmental levels of spending for the previous year, and beside that you have then the Estimates Volume for the following year. Sometimes there would be small adjustments from the Abridged Estimates Volume to the Revised Estimates Volume, mostly relating to changes that the Minister might have announced in the budget in terms of spending, that would be that figure. And then we would produce a Revised Estimates Volume. And that was the process.
Okay. Thank you.
Mr. Charlie McCreevy
I'm sure that still is the process.
Thank you, Deputy, I'll come back to you in the wrap-up. Mr. McCreevy, I just want to deal with one or two matters before I bring in the next questioner, who is Deputy O'Donnell, and then we'll break for a coffee break at that stage. If I can maybe just return to the Bacon report, which was discussed earlier.
Mr. Charlie McCreevy
Yes.
And Mr. Bacon wrote three reports for the Government on the housing market. His measures ... and we have engaged with Mr. Bacon in the earlier part of this inquiry, his measures resulted in the pace ... in the pace of price growth halving from the first quarter of 1998 to the same period of 2000. This was largely undone in 2001 when the measure to exclude interest deductibility was reversed. In your view, can you explain the rationale behind the decision, and were there any influencers, lobbyists, or anybody else behind that decision?
Mr. Charlie McCreevy
Well, there were. If you look at the lobbying document ... annual document from the Construction Industry Federation, the Irish House Builders Association, various chambers of commerce, Dublin Chamber of Commerce, you will see in those particular documents that there was lobbying from them about the interest issue in particular. That's ... you can go back and get those documents out, I'm sure they're all here in the committee somewhere. So there was considerable lobbying from the CIF and other bodies as well.
Yes.
Mr. Charlie McCreevy
On the ... for the reasons they have along there, is that housing output and construction output had dropped back dramatically in the end of 2001.
So, yes, there was lobbying to have that changed. Now, there's lobbying all the time, and before the budget, you have hundreds of lobbying going on and we had a process in my time, and pre my time, of how we met all those particular groups. We didn't meet the same groups every year, we met the people in large groups, for about two weeks, for about ... every hour, from 9 in the morning 'til 9 and 10 at night and, some of them used to come before a committee as well, in the House. I remember that also. So, we would have had all of that. But like, as I've said previously, whether there was lobbying or not, the Government would have taken the decision ... would have taken into account the ... well, we would have deemed, anyway, that the massive fallback that we'd had in construction activity, which, more or less, proved Michael Noonan's point about unintended consequences. And I ... I think that the Dáil record will show, during the debate of Finance ... the first Bacon report on Finance (No. 2) Bill 1998, that I also said, there, or in another Dáil debate, that one never knows when one is interfering in the market, particularly to do with housing or property, as you might have------
Okay. Just to summarise the response you gave to me, Mr. McCreevy, yes, there was lobbying going on at the time, and, as you said in your earlier questioning, that the Minister, the politician is independent of officials, they stand over decision, and, of course, they're independent, the lobbyists. So, can you explain to us the reason why you took the decision?
Mr. Charlie McCreevy
Because, as I said earlier, in the witness statement as well, the construction activity had fallen off dramatically.
Okay.
Mr. Charlie McCreevy
And, I know Peter Bacon said in his evidence before this committee, when he was asked the question whether we moved too quickly to restore activity. I don't know whether Mr. Bacon said that he ... he did or he didn't, but ... whether was a good idea or not, but I can definitely recall the reasoning for the Government so doing. And I certainly don't ... it wasn't for a moment as a result of any particular lobbying from any particular quarter, it was what ... we had seen the figures and we didn't like what we were looking at.
Okay, Mr. McCreevy, I need to come back in again. So, during 2001 there was also a measure in place which recommended in the third Bacon report, to limit mortgage relief for investment properties. In the 2001 budget, you withdrew these measures in order to encourage what would seem to be more rental properties. Can you explain why you done that?
Mr. Charlie McCreevy
Well, as I said, I ... it was the Finance (No. 2) Bill of 1998, that the ... we had done that particular non-deductibility of interest for residential property, and then we restored it, because we felt, as I said, in my earlier reply to this in my debate with Deputy Doherty, lots of things happened, including rents going upwards. We had rents ... I gave figures there of rents going up by 25% in that particular period there. So, we felt at the time, for better or worse, that the thing to do was to allow the investor more or less back into the market. It should not also be forgotten that we made considerable changes to the stamp duty regime in all of those years, and I started off with quite a simple stamp duty regime and ended up ... with a desperately complicated one.
Okay. And, I'll afford you plenty of time at the end of today's hearing, Mr. McCreevy, for anything you want to add, but I want to particularly come back to the graph that's in front of you, and it's the lower graph, and it's "Residential House Prices Quarterly". And, if you can look at the portion of the graph that is between 2001, quarter 1, and 2002, quarter 1. Well, this would-----
Mr. Charlie McCreevy
Will the machine operate by itself or are there-----
It should ... no, no, it should be up in front of you there at the moment. If the graph is not, there I can get you a copy down there but it should be up in front of you at the moment.
Mr. Charlie McCreevy
Go ahead, sorry, Chairman.
Yes, okay. And, if you look-----
Mr. Charlie McCreevy
Is this figure 32?
This is ... it's "Residential House Prices Quarterly". It's the lower graph ... yes, figure 32, my apologies.
Mr. Charlie McCreevy
Yes.
Right. And, if you look there at quarter 1, 2001, and quarter 1, 2002, this is the period I'm talking about. And, what we see in the graph there is that residential new house prices and second-hand house prices are kind of flat-lined going back to '92, then they're rising, then the impact of the Bacon report is beginning to kick in, and we see a modest reduction in house prices, and then we see the removal of ... just, on the same timeline, we see the removal of the Bacon holding measures, if they were described as that, and a significant increase, right up until 2007 or so, in house price property values. In hindsight, were the decisions that you made ... did they prevent or create the soft or hard landing that was going to come in the property market?
In hindsight the decisions that you made, did they create or prevent the soft or hard landing that was going to come in the property market?
Mr. Charlie McCreevy
I don't think so, Chairman. Because I think we what did on foot of the first Bacon report was, it stopped the upward slant of prices. We then as I gave reasons as to why we reversed that some years later, and I think if you look from 2002 right on to 2007 or 2008 or whatever it says here ... I think it was up to 2007 when the peak occurred, I think there were other factors at play regarding the house price spiral at that time.
Can I talk about one of the other factors that's at play actually during that time and I bring up the next graph? This is the ratio of average new house price to average industrial wage. If you look at both graphs one is new house price and the other is average second hand house price. What we see here is that the ratio is in and around '96 or '97, is about four times the income of a household in terms of wages in both the new house and the second house market, and in the period I am talking about again, we see that becoming stabilised. If somebody was trying to buy a home for themselves between 2000 and 2002 - in and around that period - there is a stabilisation in the market. Following the removal of those Bacon measures, we then see the graph going up quite significantly, up to 12 times or ten times, respectively, of a person's capacity to earn. Have you any view on that?
Mr. Charlie McCreevy
I do not think you can relate the change of the very steep rise in this graph of 2003 to 2007 say, related solely to anything to do with Bacon. I would not agree with that.
That would be your view?
Mr. Charlie McCreevy
That would be my view. By the way I will just say this graph figure 36 relates to average industrial wage. Maybe you have another graph to show what was the net take-home pay levels in those particular years as well. Because a lot of the reason that people were able to buy houses and buy other houses relates to the affordability relating to their take-home salary rather than actually their gross industrial or gross any other wage, as you well know yourself from paying your own bills every month.
Indeed. Just to get that on the record Mr. McCreevy, the graphs I have shown you this afternoon, the relationship with the cost of trying to buy a home after 2002, and the relationship of that the cost of buying a home was actually having on a person's earning capacity, you don't see any relationship of the pullback on the measures by Bacon to those two outcomes?
Mr. Charlie McCreevy
I don't. For me it is too big a step to say that the change of Bacon was resulting in the upward spiral of that particular graph. I am sure that you may have-----
Would you recognise that the Bacon measures are reflected or not reflected in the graphs?
Mr. Charlie McCreevy
Well it looks like the Bacon ... Sorry I said in my earlier evidence that the effect of the Finance Act 1998 that did the non-deductibility and other changes, that certainly had an effect but it also had an effect in kind of shooting down the level of constructive activity, the level of employment in the construction area and that's why we changed it. Yes it certainly did, you could make that correlation.
Thank you. Deputy Kieran O'Donnell.
Thank you. Welcome Mr. McCreevy. Just to clarify one point on the single regulatory authority, did you personally support what was actually eventually set up?
Mr. Charlie McCreevy
Yes because that was the compromise we arrived at. That compromise was acceptable to all sides so as you know in politics or in any negotiation, we all had to make concessions about it so it was acceptable to me. You must remember there was a ... After the particular compromise let's call it, some of the commentary and some of the asides in the Dáil were that the Department of Finance had got its way and that the Minister of Finance had got its way.
Did you get your way?
Mr. Charlie McCreevy
Look it located within the Central Bank, as a constituent part of the Central Bank which was I think was a very important thing for us.
In hindsight, did it give rise to a situation where confusion rose between the Central Bank and Financial Regulator?
Mr. Charlie McCreevy
I don't think so, Deputy O'Donnell. I've read some interesting commentary on this in the past while this committee sat. I am not for one moment saying that it was a very elegant structure that we came up with, I wouldn't say that for one moment, but I have to say that I don't think it contributed to the financial collapse.
And now since I am post my 2004 period, I can ... I say ... I think, I ... you must remember the Financial Regulator in Ireland was to regulate banks to the same capital requirements directive that applied in all other European countries-----
Can I-----
Mr. Charlie McCreevy
-----and so therefore ... and as a result of the Basel recommendations that begat the capital requirements directive, so therefore the Central Bank of Ireland, the regulator was to do that.
That's fine. Can I ... the last budget you brought in was the 2004 budget; am I correct on that?
Mr. Charlie McCreevy
Yes.
December.
Mr. Charlie McCreevy
December 2003.
Okay. Your announcement of decentralisation, do you now believe it was a failure?
Mr. Charlie McCreevy
No, I don't.
Why not?
Mr. Charlie McCreevy
I see many great offices all over the country with decentralised civil servants from Dublin there and they're doing very well and people ... it's rejuvenated some areas, people are very happy. I think the ... the system and efficiency hasn't deteriorated at all. I'm very ... I'd be very sad that the total decentralisation wasn't completed as we, as we had envisaged.
And how did you ... how did it come about? Because it doesn't appear to have been discussed any time before the budget or in terms of-----
Mr. Charlie McCreevy
Oh, well, Deputy ... Deputy, you're very much wrong about that.
Well, enlighten us, Mr. McCreevy.
Mr. Charlie McCreevy
I might as well, I might as well take the opportunity of doing it now, since ... of correcting the record, both then and now, because I'm gone and this is not breaking any Cabinet secrets, may I say.
When did you first bring it up with Cabinet?
Mr. Charlie McCreevy
Sorry, we announced in 1999, decentralisation, that we were going to have ... decentralise a whole plethora of offices, full Departments etc. etc. And I didn't do it 'til December 2003.
Why not?
Mr. Charlie McCreevy
Because of the time I announced it, every week and every day of every week, we had representations, parliamentary questions, Order of Business debates. Every local authority in the country, every chamber of commerce, every TD of all parties meeting there ... meeting me in the Department of Finance in corridors asking "When were you going to do decentralisation?"
Well, let's-----
Mr. Charlie McCreevy
So-----
Let's bring you up to 2003-----
Mr. Charlie McCreevy
Hold on.
-----because I'm running out of time here.
Mr. Charlie McCreevy
And then we asked, then we asked ... early on, I asked the Department of Finance, I said we wanted to decentralise 5,000 civil servants.
When was this?
Mr. Charlie McCreevy
Some time ... must be after '99, maybe early 2000. And, lo and behold, and I was most surprised - I wasn't surprised - they came up with a number of 300. So, I knew from early then, is that it was no hope in the wide, earthly world of any of the civil servants agreeing to anything like the numbers we were talking about and we were talking about 10,000 people. So therefore-----
But in the ... all I really want to know really is the decision-making process.
Mr. Charlie McCreevy
Yes.
When you come forward to 2003, what due diligence was done in terms of the announcement? When did you first bring it to Cabinet-----
Mr. Charlie McCreevy
Oh yes.
-----because you announce it on budget day, so enlighten us as to when you first brought it to Cabinet with due ... and what due diligence was done prior to the announcement?
Mr. Charlie McCreevy
Well, we had ... there was ... if you look back, there was a group set up in the Department of Finance which reported, about maybe 2000, 2001, about decentralisation and about these numbers and had been forgotten about. And we were ... every time I was thinking of doing something about it, about doing the project-----
When did you first bring it to Cabinet?
Mr. Charlie McCreevy
Well, we discussed it in Cabinet. I'll tell you-----
When?
Mr. Charlie McCreevy
In about September 2003 and we discussed it either towards the end of a Cabinet meeting and it kind of was asked when was I ever going to do this and I had decided myself that I was going to do it when everyone believed I wasn't going to do anything and after four years, it was nearly time to do something. So, we made an agreement between myself and the other members of the Government, right, at that time that I would do it in the following budget on one condition and one condition only: that if there was a hint of a leak from that to budget day about this being done, I wouldn't do it. And that we would negotiate individually with the Minister, on a one-to-one basis and Ministers were not to go back and tell their great advisers or press people or anyone else what we were going to do and if there was one hint we were going to do it ... because at this stage everyone thought we're never going to do it anyway. And what we did was, I did-----
So, you had the approval of Cabinet-----
Mr. Charlie McCreevy
Yes.
-----when you announced it?
Mr. Charlie McCreevy
Yes, I want to clear ... be clear about this anyway, and whether we did at the end of the Cabinet meeting or what, but this is how we did it.
So, therefore, I'm not breaking the Cabinet confidentiality about this, and that's what we did. And two officials of my Department of Finance individually went over that two-month period and got all the lists of one thing and another, kept it totally within themselves and the Department of Finance, went straight to Department ... no Department knew we were talking to anybody else and this is how it was done. And then, the night before, the secretary started ringing other Secretaries General and assistant secretaries ... I'm not saying some Ministers-----
Well------
Mr. Charlie McCreevy
------I think, probably did say it to their Secretary General, but it hadn't leaked out, and ... otherwise, and I assure you, Deputy O'Donnell, I never would have been able to do it unless I did it like that.
Can I move onto in your last budget, in 2004? In your 2003 budget, you said about the tax allowances and all the various reliefs, "All of these schemes, without exception, are to end on the 31 December 2004". You said there was no justification. You came along then to your 2004 budget and you said:
Last year I announced the termination of a series of major tax reliefs from the end of 2004. Since then I have been bombarded by demands to revisit that policy, especially in the case of one particular relief.
So what I want to know is-----
Mr. Charlie McCreevy
What budget is that, Deputy?
That's the 2004 budget.
Mr. Charlie McCreevy
But you said it was ... 2004 budget------
No, that you ... that you announced in December 2003.
2003, Deputy-----
No, 2004 budget announced in December 2003.
Mr. Charlie McCreevy
But I didn't do the budget in December 2004.
No, 2003.
It's the preparation for 2004
No, it's called the budget. It's for the year 2004, which was announced in December 2003.
Mr. Charlie McCreevy
Yes, but I said earlier what I said there, yes.
No, no, it's you ... you announced in your budget in December 2002 that there would be no exceptions for reliefs on capital allowances for all these various schemes beyond December 2004. You then came along in your budget, two thousand and ... December 2003, which is for the following year, you said that "I have been bombarded by demands...". And, within that budget, you extended all the schemes to 31 December 2006. Why was that?
Mr. Charlie McCreevy
No, Deputy, I think you have wrong dates there, for somewhat ... I couldn't do ... I think the dates are wrong. In the December 2003 budget, I said what I said about the thing and I've read that earlier to the committee. You seem to be reading from a ... maybe it's a Budget Statement of another year, but it's not the same budget anyway.
No, no, no, the December ... the budget that you announced in December 2002, which was for the '03 year, you stated categorically that you were not going to extend the reliefs beyond the termination date that was coming up, which was the end of 2004-----
Mr. Charlie McCreevy
And that's-----
-----and then came along the following year and you stated:
Last year I announced the termination of a series of major tax reliefs from the end of 2004. Since then I have been bombarded by demands to revisit that policy, especially in the case of one particular relief.
Now I looked back on the committees, the meetings you had with various groups - and, Chairman, if I could refer you to Vol. 1 - it's basically dealing with ... it's page 170, and for the month of ... from 1 October 2003 to 3 November 2003, you met with various interest bodies: Construction Industry Federation, the Irish Builders Association, Irish Property Association. You had ... and then you had the Irish Auctioneers and Valuers. So the question I'm asking is, Mr. McCreevy, what changed in that year where you extended the tax reliefs for a further two years?
Mr. Charlie McCreevy
But, Deputy, in my Budget Statement in 2003, which is for the 2004 budget, I read into the record already today, where-----
That's the previous budget, Mr. McCreevy.
Mr. Charlie McCreevy
No, it's not.
It is.
Mr. Charlie McCreevy
But sure ... the last budget I did was December 2003.
Which was the 2004 budget-----
Mr. Charlie McCreevy
Yes, and I-----
-----which is the one I'm reading from.
Mr. Charlie McCreevy
Yes, and I announced the termination on that date.
No. You announced the termination of budget '03.
Mr. Charlie McCreevy
No. I announced the termination of these particular reliefs in the December 2003, which were to come in the 2004 budget. I think your colleague has told you something there. I think you're talking about an earlier budget.
No, no, I'm not. No, no, I'm ... I'm categorical on this, Mr. McCreevy.
Mr. Charlie McCreevy
But which budget is it?
The budget that you ... I can refer you to ... The budget was, your budget that you announced in December 2002 would be known as the budget for 2003, and you were a seasoned Minister for Finance. And in that budget 2003, you stated that-----
Deputy, to assist you here - I'll give you a bit of time on this. If there's an ambiguity, kind of with the datelines and everything else, we can deal with this over the coffee break, and maybe just come back to it at that moment.
So if you could maybe make the question and you'll have a couple of minutes when people are having their coffee break.
The question is ... I suppose, in the time break, Mr. McCreevy, you might just check the-----
Mr. Charlie McCreevy
I'll do it now.
-----the last two budgets you brought in. One ... the first ... the second last budget, you announced in December 2002, which was for the 2003 year, which you stated that you would be terminating all the reliefs at the end of December 2004, which was the signal date. And then in your final budget, which was December 2003, which was for 2004, you stated that your intention was to terminate the series of major tax reliefs but, "Since then I have been bombarded by demands." Now, within that budget you extended the reliefs for a further two years and, I suppose, I'm asking why and who were you bombarded by?
Mr. Charlie McCreevy
Well, I ... in my last budget, I actually brought forward those particular dates to an earlier end date, making it 31 December 2004, for one year.
That was in your second last budget, for one or ... for one or two of the schemes you brought them forward.
Mr. Charlie McCreevy
That was my last budget, Deputy.
Yes. I'll leave it with you for the break, Mr. McCreevy.
Mr. Charlie McCreevy
No, that was my last budget, Deputy.
All right, we can sort out the dates and maybe if Deputy-----
Mr. Charlie McCreevy
What was causing the confusion, and I'm not surprised in any way, even for myself, the budget that we brought ... pre my time as Minister for Finance, the budget was always done in the year for which it related to, so the 1995 budget was done in 1995-----
Yes.
Mr. Charlie McCreevy
'96 was ... I brought back to the budget, which has been continued since, to the year ... to the calendar months preceding 1 January and it was the first time in the history of the State it was done and it has been continued. So, therefore, the State ... and this is causing some of the confusion.
Okay. It's in that regard now, Mr. McCreevy, I'd like to give you a document as well during the break. It's a document from your own Department. I think it's come out in July there under a freedom of information request and I just want to deal with that after the break, but it comes from your own Department and it's from the Office of the Minister for Finance and it relates to the pre-budget Estimates in and around the same period. The document's dated 19 June 2003 and it relates about going into 2004. So I'll just ask legal to give you a copy of that before we go for a break and I'd also ask just to get a clarification on the chronological kind of dates that Deputy O'Donnell is referring to.
So, with that said, I now propose that we take a break. The witness is reminded that once he begins giving evidence, he should not confer with any person other than his legal team in relation to his evidence on matters that are being discussed before the committee. With that in mind, I now suspend the meeting until ... if I can say 17.25, if that's agreeable, and remind the witness that he's still under oath until we resume. Is that agreed? Agreed.
We are back into public session. So there's just a bit of chronology and datelines with regard to a question there, that I would ask both Deputy O'Donnell and Mr. McCreevy to deal with and then I'll move on to Senator D'Arcy.
Thanks, Chairman.
Mr. Charlie McCreevy
I can't actually find where, if I said what you said, I take it that I said it but I actually can't find it in the notes of the budget that I said in December 2003. I did make ... sorry, in case there's any confusion, I'm getting a bit mixed up myself between these particular years also. Well, it was in December 2002 that I made the announcement that the deadlines between these and 31 December 2000. Well that's correct. I can't find the other one but-----
I'll hand it to you here that you can read it and I'll read from the Dáil record as well for you.
Mr. Charlie McCreevy
I just can't locate it.
Is the thing highlighted in yellow?
Mr. Charlie McCreevy
Yes.
So, from the Dáil record on 3 December which is the date you delivered the budget. You say:
On tax reliefs, last year I announced the termination of a series of major tax reliefs from the end of 2004. Since then, I have been bombarded by demands to revisit that policy, especially in the case of one particular relief.
And that's what is there. So the question I'm asking, you extended every relief that was to be concluded by 31 December '04 by a further two years to 31 December 2006. And the question I'm asking you is why did you do that? Certainly, from the Dáil ... from the records we have when I made reference to it earlier, over a month between 1 October 2003 and 3 November 2003, you met once with the Construction Industry Federation, you met twice with the Irish Home Builders Association, you met twice with Irish Auctioneers and Valuers Institute and you met once with the Irish Property Owners Association. So, you might just elaborate.
Mr. Charlie McCreevy
Well, I'm sure that I met with them and they were all making representations about different things. What they were making representations about at this particular stage, I can't remember. I actually ... I tried to look at this in your document ... I wasn't ... I just couldn't find it in my own budget documentation there.
Do you accept ... do you now accept that in your last budget in December 2003, you extended the period for tax relief schemes by a further two years to the end of December 2006?
Mr. Charlie McCreevy
Well, I assume I did it in the Finance Bill which came up subsequently in 2004.
But you announced it in the budget.
Mr. Charlie McCreevy
Yes, well it looks like that I did.
So why did you do that against a backdrop of that?
Mr. Charlie McCreevy
Well, as I said earlier, Deputy O'Donnell, regarding all these reliefs and successive Governments of different persuasions have always extended the deadlines to make ... because of the ... make reasonable transitional arrangements.
But you were categorical in your-----
Mr. Charlie McCreevy
Yes, because-----
-----December 2002 budget that all schemes were being concluded and there was no justification. You had property prices rising at a rapid rate. Professor Honohan has been in here and has gone on record as saying that '05 was where the major peaks arose. So the question I'm asking is who were you bombarded by?
Mr. Charlie McCreevy
Well, these ... these ... I'm sure I was bombarded by everybody including Deputies probably from your own party but at the time, anyway, I was always very conscious of the fact that people who had committed themselves to various schemes or whatever and the deadlines were coming up, is that we had to have reasonable transitional arrangements. Furthermore, I would always ... I would take the view that if you don't make strong announcements as we're going to close these down sometime, then you keep extending and extending-----
But you made that announcement in the previous budget, Mr. McCreevy, so why-----
You can wrap up now shortly, Deputy.
So finally, why did you extend it and, in hindsight, should you have extended it by a further two years?
Mr. Charlie McCreevy
I changed my mind.
What do you mean, you changed my mind?
Mr. Charlie McCreevy
I changed my mind.
But sure why did ... we're ... people are entitled to know why you changed your mind?
Mr. Charlie McCreevy
Well, I can't remember at this stage, the strength of the representations from the various bodies or whatever but I obviously must have been convinced that there was a further period of time necessary to allow these to stay.
And finally, do you believe that extending that by a further two years fuelled ... continued to fuel the property bubble?
Mr. Charlie McCreevy
I don't think that it did because I think some of the schemes which were announced there, had very little to do with house property.
Thank you.
I gave you a document there before the break Mr. McCreevy.
Mr. Charlie McCreevy
Your good clerk gave me it.
I'll put it on the screen in front of you there, if you don't mind, okay, and we may need to come back to it again as we kind of wrap up but to just kind of familiarise yourself again with it once more. This is of 19 June 2013 and it's the Office of the Minister for Finance and I'll just be asking the investigation team to be putting this in as an evidence document for further hearings coming down the tracks as well. It's 2003, sorry, my apologies. Yes, 2003. And if you just look at the first two Roman numericals on page 1, it references a general Government deficit and then on II it says, "Ministers should prepare their pre-Budget Estimates proposals for 20[1]4, 2005 and 2006 on the basis of an overall reduction of [a half a million euros] in the costs of the Existing Level of Current Supply Services."
Now, this was in and around the time of the decentralisation and forth ... so forth. I just want to move on to one, two, three, four pages later. It's to the item, Background to Budget 2004.8. It's at the very end of the page, yes, it's actually circled there. All right. And there it says:
The 2004 budget will be prepared against a continuation of [a] more difficult international and domestic economic climate which has been present since the second half of 2001. The period of exceptional economic growth enjoyed by Ireland is over.
Do you recall that sentence because when I read that it actually, kind of, came off the page quite loudly to me? Do you recall this document?
Mr. Charlie McCreevy
Well, it's the ... what I will ... that's the budget ... that document in June 2003 is the normal starting of the Estimates campaign. It's the memorandum for Government that we produce every year in and around that time which starts the budgetary process. So, I actually can't ... I've just been shown the document now but if you show me the other documents over the years I wouldn't remember them either-----
And I-----
Mr. Charlie McCreevy
-----but I know the generality-----
-----and I am aware of that, like, and that's why I am not ... but, first of all, just are you familiar with it or, more importantly, I suppose, was there a belief by yourself and your senior officials that, "The period of exceptional economic growth enjoyed by Ireland is over", and was that the belief present in your Department by the middle of June 2003?
Mr. Charlie McCreevy
Well, the facts speak for themselves. Like, if one ... I haven't got them here but I'm sure if one looks at the percentage growth figures for GNP, GDP, for all the years since 2001, I'm sure that statement there as well that the exceptional economic growth that we had prior to that had lessened off. But that was always going to be the situation. There was no surprise about that.
Okay, coming back to the earlier question I had to you this ... with regard to Mr. Wright's report, where he talks about the cyclical nature of the budgets and that the surpluses were very much based on cyclical expenditure. Was this the culmination of that budget strategy, that from 2004 onwards, the surpluses were going to be based upon extraordinary cyclical measures, particularly those related with the property market, and that what is called 'the real economy' was no longer going to be able to sustain the expenditure that the Department of Finance would require?
Mr. Charlie McCreevy
Well, we, at all times in the Department of Finance, would have been saying, is that, we had ... have had a great period of economic growth resulting in budget surpluses, etc., etc., etc. But that was never going to continue at that pace for ever and everybody recognised that, including myself and other members of the Government. So what we were trying to do in 2004 was to ... in that ... for June 2003, setting out the parameters for the next three budgets, to say, "Look, this is the background to the upcoming budget. Growth has slowed down, we're not going to have these exceptional revenues that we had in the past, so we have to cut our expenditure cloth to meet these new circumstances." That would have been the overall ... in fact there ... now in the Department of Finance and everybody else, we wouldn't ... we didn't have a big crystal ball and, like, so we could say what was going to happen in 2006. And, by the way, everybody was understating the amount of housing that was being constructed. Every time we were told from '98 onwards that we'll meet the housing target if we build, say, 25,000 houses a year and then 32,000, the figures kept exceeding that. So, therefore, we were at all times saying, "Yes, anyway, well, the exceptional economic growth that's in a whole variety of areas - not just in construction - is going to slow down somewhat", and then we had the general economic background and a slowdown in the world economy in 2001 relating to the dotcom bubble collapse etc. etc. etc.
But the ... I'll just repeat the question again just to focus it for you, Mr. McCreevy. Is the surpluses were based upon cyclical measures that-----
Mr. Charlie McCreevy
No-----
-----I will let you come back in. That ... by 2004 - and you're dead right - there was ... production in property and property investment continued and home ownership and all the rest continued afterwards. But Mr. Wright, in his report, is very critical of there being no counter-cyclical measures as far back as 2000 and 2001 and in his physical presence and ... when he gave his testimony before this inquiry when the analogy of the red button being pressed, he said the red button should have been pressed at 2004 because the crisis was now commencing. It wasn't the night of the guarantee was the crisis, it was the measures that came afterwards.
So given this information that you had to hand at that time, do you believe that anything extraordinary was required, or was it that there should just be a modest adjustment going into next year of €500 million?
Mr. Charlie McCreevy
I would have thought only a ... that that particular modest adjustment would be worthwhile. But actually the outturn, which I wasn't there for, the outturn of the budgetary surplus was very large in that particular year, 2004, and bigger, I think, again, in 2005 and 2006.
From cyclical taxes?
Mr. Charlie McCreevy
Well, from all taxes, including the ones that you designate as cyclical taxes, which resulted in large budget surpluses. What Mr. Wright and maybe other commentators seem to be suggesting, that in those years a big economic, big budgetary surpluses, that the Government should have been saying to the people, "Oh no, instead of giving you rises in social welfare, child benefit, tax reductions, etc., etc., we want to be cutting back on you." And as I said in my opening statement, does anyone think that that would be possible? Or does anyone think it would be desirable either? Either it would be certainly unacceptable politically, but I suggest it was unacceptably morally as well. We have to ... imagine me standing up in the middle of Dáil Éireann on budget night and saying, "We're going to have an enormous surplus this year, and a bigger one next year, and I'm going to cut back social welfare and I'm going to cut back tax reliefs, etc., etc., and I'm going to impose a whole lot of stringency measures." And then some Opposition person would rightly say, "But you're putting aside an enormous amount of money to the pension reserve fund and you intend on putting forward more and reduce the debt even further." Like, that type of reality is, like ... and if Mr. Wright or anybody else is suggesting that that is in the realms of political reality, he's wrong.
Well, I'll try and explain to people, because it's a big learning curve for us all, and certainly for myself, what cyclical taxes actually mean. Cyclical taxes are in, kind of, layperson's term, a bit like overtime. This is extra money you're earning, but you don't plan your household budget on overtime. You might go out and buy a refrigerator, buy a Chinese on a Saturday night, or take a holiday on it, but you don't plan your week to week current expenditure upon overtime. This is the difficulty with cyclical taxes. So do you actually go in and say, "I've a load of overtime," to take your, kind of comparison, there, and say, "Well, I'm going to have this overtime forever"?
Mr. Charlie McCreevy
But, Chairman, I recognise where you're coming from, and I understand your bona fides in this particular regard, and I don't malign them at all. But I have outlined to you is that we were having considerable economic success, which gave us the resources to do certain things, which we could only dream about in previous decades. I think the ... Professor Wright, or anybody else, who's ... when he's talking about counter-cyclical measures, what is he actually talking about? What did he or other people want you to do? Well, the only other thing that I can suggest to you is that you impose more taxation, lessen the amount you're spending on public services, withdraw thousands of people from the public service, and, like, what would that do? And, by the way, other studies have been done which say if you were to have counter-cyclical measures that would maybe have an effect of maybe of a quarter of a percent on the harmonised inflationary index, you'd have to take about the best order of €5 billion out of the economy. That's not realistic in those years. What we did in my last two budgets, I lessened considerably, as I gave my figures earlier, to the amount of tax change ... the tax package. The social welfare package continued fairly good, but the tax package was very, very small. And I think that was the reasonable, the politically correct thing to do, and the morally correct thing to do.
Thank you very much. Senator D'Arcy.
Thank you, Chairman. Mr. McCreevy, you were, I suppose, you were talking realities. Is it acceptable that a Government attempts to buy an election?
Be careful of value judgments now, Deputy.
It's a question I'm asking-----
I'd ask a question rather than something that's conclusionary, okay?
Well, I've asked the question.
Mr. Charlie McCreevy
Which budget are you talking about?
Well, if I could put it to you that the SSIAs were an attempt, potentially, some might say, to buy two elections?
Mr. Charlie McCreevy
Well, they definitely ... can I just say I'm very pleased that you brought up about the SSIAs. Like----
No, I've asked ... I asked a question-----
Mr. Charlie McCreevy
Yes, I ... about ... and the question about the SSIAs. Well, now, let's look at it like this now, about buying an election with that. I announced that for 2001. And people could sign up from I think 1 May 2001 to 30 April 2002. Now, I like credit as much as the next man, and to be given great credit for winning elections, I wouldn't be adverse to great commentary about this. But, since 1969, the same Government had not been re-elected on any occasion.
So, this brilliance of mine, of the SSIA ... I was going to be able to ... even though I was taking the money out of people's pockets for putting aside, it was going to win the 2002 election for us, which ... and bring back the same Administration, which hadn't been done for the previous 30 odd years, and I was going to be able to look forward into my crystal ball to see we'll win the following election as well, because the following election people will be getting this particular money in their back pocket. Now, much and all ... and, great and all, as I am, Deputy, and the great sage which I know I am, and which I ... well, I'm sure you'll give testament to yourself, I didn't plan it like that. It just wasn't like that. And any sane, sensible person that looks forward and says, we'll bring it in a budget, asking for the savings, before an election, which was going to come up anyway, he was going to win that election ... he was sure he was going to win that one, but not alone was he going to win that one after 33 years for the first time, he was going to win in five years' time as well. I'm not that much of a genius.
Okay, thank you. Are you aware how much the SSIA, the 25% from the State, cost?
Mr. Charlie McCreevy
I think it would have cost ... I think ... I'm just ... I went ... I'm gone since '04, but I was costing an average ... I think I was dealing around €500 million a year. So, it was over five years, so, that's €2.5 billion, €3 billion less ... there would have been ... there was an ... I constructed the scheme in such a way that there was an exit tax ... so less the exit tax, which I presume came to €500 million or €600 million. I don't know what it was.
So the maximum amount potential liability for the State was €2.5 billion.
Mr. Charlie McCreevy
Yes. And, is that the net figure after the exit tax?
That was actually just €2.47 billion, I think, just under-----
Okay. Can I ask ... did you hear Mr. Donal McNally's evidence this morning?
Mr. Charlie McCreevy
No.
No, okay. Well, he said there was no analysis done on the benefit of the SSIAs, and I'm asking you, as a former Minister for Finance, how you would make the State available for a liability, with no analysis, for an amount of €2.5 billion?
Mr. Charlie McCreevy
Well, we didn't actually know at the time whether it would be half a billion, a billion, €2.5 billion or €3.5 billion; it depended on the uptake. That was the ... at the time. And we ... I answered repeated questions in the Dáil and said is that ... I didn't know what the uptake was going to be, but I hoped it was going to be the maximum amount possible. In the end of the day, the first few months with ... many people didn't apply. And, as usual, in Ireland, other places probably as well, everybody registered in the last two months or so. If I remember correctly, there was about 1.17 million people originally signed up for it. And, I think over the period of the five years, maybe 70,000 dropped off, or thereabouts. I ... the scheme was ... it was an incentive scheme to get people to come back and save in very, very good times, the same as the State had been saving in the good times. I'd been reducing the budget ... the overall national debt to a figure in the 30s, I set up the pension reserve fund, and ... so we were saving on behalf of the State, so, therefore, I think it was important ... people were getting used to all this money in their pockets and I decided that we'd have an incentive scheme to encourage people to save. By the way, if you want to talk about counter-cyclical policies, Chairman, actually, that was a counter-cyclical policy because it took the order ... it must have taken in the order, over the five years ... if it cost €2.5 billion, it must have taken in the order of €10 or €11 billion out of the economy over the five years. So, therefore, I rest my case. By the way-----
Mr. McCreevy, have you ... I've only got a couple of minutes. You're talking for ages.
Sorry, Deputy, you have to allow fair time.
Yes, I do, but I mean, I think there has to be some-----
There is, and I'm monitoring it.
Good, good. Did you monitor the FSR reports, the financial stability reports, Mr. McCreevy?
Mr. Charlie McCreevy
Well, I ... the financial stability reports are the ones that came from the Central Bank.
Mr. Charlie McCreevy
Yes, I think before we set up the-----
I just ... I-----
Mr. Charlie McCreevy
Before we set up IFSRA, I think the Governor used to send a statement and, after that, they became formal stability reports.
You did, good. One of the issues that came very clearly from the FSR reports was the household indebtedness. From 1995, 71% of GDP, to '07 - you had left at that stage - to 248% of GDP ... of GNP. During your period, there was enormous growth of household indebtedness, primarily from mortgage lending. Were you aware of that? Were you aware of the massive increase of the mortgage loan book by the Irish banks?
Mr. Charlie McCreevy
Well, as I said in an earlier reply ... I think Deputy Doherty was asking these questions ... is that, up until the end of 2003, I think you'd have the figures to show what the total amount of lending by the Irish institutions were, to the housing sector, and on residential mortgages. The big explosion took place between 2003 and 2007, 2008.
Were you aware?
Mr. Charlie McCreevy
Well, in 2003 ... in ... I can't remember if we got ... aware of what the figures were in 2003.
But what I was aware of that in our period of office, the affordability of people to meet mortgages, together with low interest rates, which lessened than the amount of repayments per month, increased.
Were you aware in your discussions with Governor Hurley or anybody within the Central Bank or IFSRA in relation to the commercial real estate sector's level of indebtedness?
Mr. Charlie McCreevy
No, I was not.
Were you aware about the Anglo Irish Bank loan book? Did anybody make you aware of the extent of it?
Mr. Charlie McCreevy
Just let's be clear about this, Deputy, in all of my time there - and I'm sure I speak for previous Ministers for Finance as well - the Minister for Finance is never involved of the situation relating to any difficulties or whatever that relate to an individual institution. That's a matter for previously the Central Bank, then the Financial Regulator and that's the way it always has been.
I'm talking about financial stability for the sector.
Mr. Charlie McCreevy
There was no mention at any time that there was any danger to financial stability in my time.
You said earlier about Dr. Garrett FitzGerald, that you didn't believe ... didn't agree with anything he said or his son.
Mr. Charlie McCreevy
Or very little.
Very little, okay.
Mr. Charlie McCreevy
I'm sure he didn't agree with much of what I said either.
You've no idea, Mr. McCreevy. He was, for a long time, in his articles in The Irish Times writing about the narrowing of the tax base, most of which happened upon your period in Finance.
Mr. Charlie McCreevy
What specifically way did I narrow it?
The narrowing of the tax base. The Chairman spoke about the cyclical taxes. Now you can count whichever taxes you wish to be cyclical or counter-cyclical. The narrowing of the tax base, the reduction in the wealth taxes, the capital gains taxes, the transaction taxes and then the decreasing of the income tax. Was he correct then and were you wrong?
Mr. Charlie McCreevy
Well, let's just deal with it one by one: the transaction taxes. The biggest transaction tax was stamp duty. There was 0% stamp duty for first-time buyers of new houses, zero. Regarding capital gains tax, I certainly reduced the rate of capital gains tax from 40% and we quintupled the amount of revenue coming in to the State. The same happened to do with capital acquisitions tax as well. And narrowing of the tax base, I didn't. What I did was that I reduced an unfair burden at both rates of tax. When I became Minister for Finance, the rates of tax were 26% and 48% and various other levies in between. Well, anyway, I reduced it, as we said in our election programme from 26% to 20% and from 48% to 40% over my time as Minister of Finance. I did most of that in the first three years. I ... and from then on, in the last two budgets, all I did was increase the exemption limit to take the people on the minimum wage out of the tax net. And if you look at the 2002 agreed programme for Government, you will notice that our programme for the next five years didn't specifically mention any more change in rates of taxation but said our goal was to have 80% of all taxpayers paying on the standard rate. So we certainly reduced the rates of taxation, we widened the bands, we brought in the revolutionary concept of tax credits, which allowed a lot of different things to be done in the meantime, which hadn't been done previously and we made these particular ... So I don't for a moment accept that we narrowed the tax base. And some of those transaction taxes, the biggest one being stamp duty, we had a 0% stamp duty on new house purchases for first-time people.
Can I ask you in relation to your period in Finance about expenditure. In 1997, the expenditure, total capital and current, was €18.8 billion. Seven years later, it was almost €41 billion. Again the Chairman touched upon it but I'm touching upon it now. A lot of it was based upon taxes that were going to come from the property sector, so long as the property sector kept going. Deputy O'Donnell touched upon your change of mind in relation to the property-based taxes. Had you any knowledge that when the property sector slowed down that there could only be a collapse in terms of because we had... the money had been given out on an annualised basis and had you any knowledge how difficult it is to reduce these numbers when the money is not available?
One supplementary, then Mr. McCreevy and then back to Senator and then moving on. Mr. McCreevy.
Mr. Charlie McCreevy
We did in the 2003 budget, as has been ... and I've given evidence on and, as per the chart given earlier ... put up there, actually the amount of money in Government current spending that we had for 2003 was less than actually had been recommended by the Department in June of the previous year.
And yet ... and you said ... when the property sector ... no one anticipating the property sector collapsing. What I was taught the whole time, for years, that there was going to be, what became the famous phrase, "a soft landing", so there was no one in the Department of Finance, the Central Bank, or anywhere else, saying, "There's going to be a total collapse in the property sector." Not just housing, but in all other sectors as well. Nobody came along with that ... look, even the ESRI weren't predicting that as late as 2007, I think, never mind predicting it in 2003, 2004.
Mr. McCreevy, at the ECOFIN meetings, which you attended monthly, and your semi-annual meetings with the Governor, can you recall if you were ever challenged on the economy or the possibility of the property market overheating?
Mr. Charlie McCreevy
No, the only time we ever had any big discussion with the Irish economy in Brussels was, as I spoke about earlier, was on the 2001 reprimand from the EU Commission ... or from the Council, sorry, to be quite correct, on the recommendation of the EU Commission, as enforced by the Council of Ministers. That was the only time that I can remember that ever there was any great, detailed discussion. In fact, I remember, in all other years, that the stability update of the Commission and their comments, if you look, was very complimentary on Ireland vis-à-vis what they said about other countries so the answer to that question is "No".
Thank you, Senator. Senator Sean Barrett.
Thank you, Chairman, and welcome, Mr. McCreevy. Going back to the financial arrangements, you call it the Dermot McCarthy compromise. The memorandum of understanding between the Central Bank and the Financial Regulator dealt with the responsibilities being divided between the Central Bank and the IFSRA. Was there clarity on what should be dealt with by the regulator and was there an expectation that the Governor could exercise his rights under the memorandum of understanding and intervene with the regulator?
Mr. Charlie McCreevy
Well, the structure that was set up would have allowed great interaction between the regulator and the Governor of the Central Bank. The ECB insisted that the Governor of the Central Bank had to be totally independent and they were ... they were only anxious at that time about that particular matter, more than anything else. Mr. ... the structure that was set up would have ... the Governor to produce financial stability reports and I'm sure that there could have been interaction, as per the law, between him and the Financial Regulator, if the Financial Regulator brought to his attention any matters that he thought would compromise financial stability because the Act itself allowed that prudence was to be exercised and I'm sure there were sufficient powers there for the Governor to intervene if he thought so fit.
And-----
Mr. Charlie McCreevy
But it certainly was not a matter for the Minister for Finance.
Yes. But you were trying to run a fiscal policy where credit was expanding at 25% a year. Was there not a need to tell the guys in Dame Street, "Hey, we can't continue like this"?
Mr. Charlie McCreevy
But the ... as I said in reply to earlier questions, I think the ... I think the key figure to look at is the explosion in credit from 2003 to, say, 2007, 2008. Nobody ... certainly ... maybe had a peremptory discussion at some stage, maybe with some of the officials about the increase in credit, but nobody was overtly concerned at that time because the Central Bank structure, including the regulator and the Governor, weren't saying, "There is a great danger of a desperate situation occurring here", at that time. Perhaps later, in the time after the structure that came about, but certainly I don't remember-----
Mr. Charlie McCreevy
-----any debate like that in my term.
Because in your introductory remarks, you referred to the "wall of money" coming in and that the downside was the loss of the interest rate as a method of control.
Mr. Charlie McCreevy
I said that in reply to a question, yes.
You did indeed, yes, yes. So, was there any mechanism to deal with your concerns, the wall of money-----
Mr. Charlie McCreevy
Well ... well, that's-----
-----and the loss of the interest rate?
Mr. Charlie McCreevy
Well that's why, that the ... that's the purpose of having a Central Bank and having a Financial Regulator, to look at those particular issues. In extremis, I'm sure as happened in the recent past when the financial crisis occurred, when there was a threat to the financial stability of the State arising from the difficulties that the banking sector got themselves into, I'm sure then the Governor would report then to the Government and Minister for Finance on that situation but that was long, long, long after my term.
But were the design faults there from the beginning?
Mr. Charlie McCreevy
Well, I suppose, I ... I ... the answer is I don't know, but I don't know what would extra we could have added into the Bill to give more powers to the regulator or the Central Bank Governor that would have prevented it happening, but unfortunately it occurred in '08, '09, '10.
I know it's the realm of speculation, but supposing we had at the separate regulator, and supposing we were looking to have a body which has the prestige, which say the IDA has, would that not have helped to say, "Look-----
Mr. Charlie McCreevy
But-----
-----this rate of credit expansion and this rate of concentration on construction will end in tears?"
Mr. Charlie McCreevy
But, Senator, it's quite a good point and we could talk about it for a long time. I'm not too certain about that, and I'll tell you why, for a number of reasons. One of the reasons for the ... I would suggest that the banks here went very loose with their credit policy, were a number of factors, but one certainly was competition, and competition not just from the ... what we call the Irish banks but from outside as well. And remember that, say, the Royal Bank of Scotland was involved here through their wholly-owned subsidiary. The Bank of Scotland was also involved here, Rabo was also involved here. And incidentally ... but they were regulated from their home base, and they ... Royal Bank of Scotland on their Irish operation, I read in the very recent past - you can correct me if I'm wrong - even though they never have announced fully the figures, have ... I think they've estimated that they lost something in the order of ... it's many, many billions, I've a figure ... I've ideas in the 20, in excess of 20. Bank of Scotland probably the same. Rabo who took over the ACC, very, very big figures as well. And the regulator in their home jurisdiction didn't spot this collapse in the Irish economy as well, and a massive credit growth. So I am not ... I can argue, I ... we can debate it, and you might be correct in some things could be put in place, but I actually don't see it like that because it was missed by there. And by the way, in the United States, they missed AIG, Bear Sterns, Wachovia and a few others as well, you know what I mean?
Yes, and------
Mr. Charlie McCreevy
So they were ... they were ... I think it is ... I think it is ... I don't ... I'm going outside the terms of my writ now, I think it's a little unfair, from the evidence I've heard at the committee and some of the commentary to lay all the blame at a certain door of a certain regulator. I'm not saying that the ... answers not to give ... but I just think to my book of fairness - and I don't know the individual at all.
It was more or less the model ... rather than the individual. You say on page 7 of your statement, "I cannot recall [reports from the statutory auditors at the banks] ever being discussed in the department."
Mr. Charlie McCreevy
I don't remember it ever happening, Deputy, because actually I don't see why it would be because that'll be a matter wholly for the Financial Regulator.
But we know from some of those accounts in June 2008, that they were putting banks as solvent which were into your successor within a matter of months looking for money. So did the accountants play a proper role in this, in retrospect, and as an accountant yourself?
Mr. Charlie McCreevy
Well, I refer to in my statement, as I thought for completeness, and showed ... in my witness statement, not the opening statement.
Mr. Charlie McCreevy
I think in the last page of it.
The last sentence, I think, yes, yes.
Mr. Charlie McCreevy
I refer to the ... some people over the world have stated that the accounting rules may have exacerbated the financial crisis. I can go into it if you like as to what occurred there, but some people ... if you want me to talk about it.
I'm on a time constraint, thank you.
Mr. Charlie McCreevy
Well, what happened was that back since the mid-1960s there's been a move to have international accounting standards. It's a desire that is very well worthwhile, that we'd have the same principles for accounting worldwide. Americans use US GAAP, that's general accounting accepted principles. Irish and UK used to use Irish GAAP. And there always has been a move since the '60s to try and have an internationally accepted standard the way we look at accounts, whether it be in Australia, America, Ireland, whatever, you'd be interpreting the same thing. The IASB, the International Accounting Standards Board, was set up in the '60s and it's funded from a variety of independent sources. They started to produce then IAS standards over the years. The European Commission decided in 2002 that they would endorse IFRS the new standards - International Financial Reporting Standards. And the European Commission, even though not a member of the IASB, which is totally independent, adopted all these particular standards, and public companies had to apply these IFRS standards as and from, I think the accounts starting January 2007.
Those particular standards, some people ... those particular standards generally use mark-to-market. They all said there were some difficulties over standards, IAS2 and 39. And all these difficulties, some people would say, is that ... contributed somewhat to the financial crisis internationally but Ireland ... Ireland was ... Ireland was the one country, the same as all the other member states, bar one, who had ... who implemented exactly what the new regulation was. So the accounting professionals have been before the ... before the committee here, but they were doing their accounts on the basis of IFRS and there are certainly some anomalies in the IFRS standards which may have contributed globally to some of the financial problems and particularly in the EU. But that's a matter you can discuss with some accountants rather than me.
On the wrap-up question then, well how did so many accountants and central bankers and, indeed, the bankers themselves, land us in so much trouble?
Mr. Charlie McCreevy
I think, Deputy, we ... Senator, we could have a discussion maybe another day over this. There'll be a whole variety of reasons. I said ... I mentioned earlier about low interest rate policies but if I can say one thing about ... I said competition among the banks, which we all thought, in Ireland, was a very good thing. And, as you rightly have ... over your long career as an academic have advocated competition, and competition is a good thing, but in certain areas, too much competition can be a very bad thing because you can't compete to the lower base, financial products being one of them. Auditing on price can be a bad thing as well because you can compete all the time on price for auditing ... you may end up with a very, very low base. So, therefore, competition has been recognised as being a very good thing and, as you well know, all of my political career I have been pro-competition, but in certain areas it can lead to these problems and, as I said earlier, the competition, not alone among Irish banks, but banks from the outside contributed to the lessening of credit standards being applied by banks.
And one final thing, may I say, if I was to ... from my experience in Brussels, and looking across what happened in the financial sector throughout Europe and throughout the world, the remuneration policies of financial institutions have led, in my view, to a lot of these difficulties. Very ... we'll make it very simple, here is bank A over here, led by a very conservative chairman, chief executive, lending officers etc., in business for 60 years, doing a nice ... doing a nice dividend at the end of the year for their shareholders. Along comes bank B over here, bright new sparks, new chief executive, incentivisation and bonus shares etc. etc. Profits keep going up and up and up. Every year at their annual meeting, old Mr. Fogey over here, "Why aren't your profits going up and up compared to bank B over here?" What happens, out is turfed conservative Mr. A and his team. In come a whole lot of new whizz kids anyway and they're going to compete for more and more business, because they are being remunerated on results. And everybody's being remunerated on results, including the Government. The Government is being remunerated because they're going to get increased taxation and corporate taxation plus PAYE etc. etc. The shareholders are going to get more and more dividends. The employees are going to get more wages and more salaries and more bonuses baked in share schemes. And this cycle keeps going. And if you were to look across the world, not just Ireland, you will see that is one common denominator. Now, I'm making a comment, which I probably didn't intend to do, because it's post my time as Minister for Finance.
We'll accommodate it. You're okay. Okay.
Thank you. And thank you, Chair.
I was hoping to raise this question actually later with you in the day but Senator Barrett has actually touched upon the IFSRA and the accounting standards. Just a supplementary that I was going to kind of delve into it - in your witness statement, you mention the introduction of the SRA accounting standards added to the banking crisis and you had-----
Mr. Charlie McCreevy
Well, there are people contend that, Chairman.
And you've elaborated quite extensively there with Senator Barrett. So before asking you ... you've given your opinion and so on but what kind of struck me when I was reading your statement is that you described it as an independent body funded from a variety of sources. Do you know what the sources are?
Mr. Charlie McCreevy
Well, they're ... they got money from various independent bodies around the world because they were ... they didn't take any money from the EU Commission, for example, or any government organisation. They had very eminent people involved with them, such as Mr. Paul Volcker and people like that, because they want to be seen to be clearly independent because, you see, they would see it and rightly so that, you know ... that you shouldn't have influence in setting accounting standards from anybody, that it should speak definitively, coldly, etc., etc.
So they fund themselves. They got ... you see they don't need an awful lot of money to keep going. But the small amount of money, so they've always guarded their independence jealously. But ... and they have a wide consultation process, they don't come up in the middle of the night and say "We're having a standard here." They go through an exhausting operation that might go on two or three years. And bodies from all over the world are represented in various fora there. And the process they go through is exhaustive, could go on for three or four years and everybody gets a chance to comment about it. But, I just ... some people have commented that some of the IFRS standards have contributed to this.
Okay, it's about the independence, I just want to stick with the independence of the body. Are you aware that their biggest funders are the four biggest accountancy firms, PwC, KPMG, E and Y, and Deloitte, who last year contributed $2.5 million each. Ireland's Central Bank and Financial Services Authority gave £6,000 sterling. So how independent are they actually, given that the agencies that are carrying out the tasks are funding the structure that does the regulation? So, given your statement that you're saying they are independent, given that funding structure-----
Mr. Charlie McCreevy
Well you see ... well ... well I'm not ... I'm only commenting on it because ... I, for completeness, I was asked in my ... direction as to influence of outside bodies from Europe etc. etc. And I thought I should mention it because there are people that have this view. You'd have to ask the IASB, but you must remember, this whole accounting standards thing is not something that was ever run by a government. No government came along to ... like in the 1960s, '70s, '80s, '90s to say, "We want independent accounting standards." This body came ... was a body that came about itself from the accountancy bodies from day 1 ... that they say, "Look, worldwide we should have the same accounting standards."
But what gave it great momentum was, in Europe, was the EU decided that we will recognise this, the independence of this body, and we will put this into effect by issuing a directive and regulation and that's what gave them their strength. They didn't come along to us in Europe and say, "You have to do this."
Now by the way, the United States had signed up to do this as well, but until the time that I left office in Brussels, they hadn't actually put all of it into effect. So they were, it's not ... to be fair to this body, this IASB, it's not ... it was never a government that said "We'll have an independent accounting standards body." This body grew up itself from, there was a, quite a famous individual in the '60s who had this idea for years and he kept pushing it and pushing it, and ... it is a very, very good idea that there would be one international set of accounting standards. But ... therefore it's an idea that came from the professions and the accountancy bodies, it's not an idea that came from any government.
All right, Mr. McCreevy I don't know if Senator Barrett touched on this or not but I just want to come back to it as well, that the memorandum of understanding between the Central Bank and the Financial Regulator dealt with the responsibilities of both the ECB, CBFSAI and IFSRA, and this was the structure that you were discussing earlier. Was there clarity in what should be dealt with by the regulator and was there an expectation that the Governor would invoke his rights under the memorandum of understanding and intervene with the Financial Regulator, and did this ever happen?
Mr. Charlie McCreevy
Well, I'm trying to recall as best I can the sequence of this. I think the memorandum of understanding was agreed by ... was ... came about due to Europe intervening. For a long number of years, in ECOFIN Councils, there had been debates about a cross-border banking crisis, and finally in the middle 2000s they agreed anyway we'd have memorandums of understanding for cross-border financial institutions, and that's were the memorandums of understanding came from. Then in Ireland, I think in 2005, 2006, but you can check this record, but post my time in any event ... the domestic standing group was set up, which incorporated the Central Bank, the Financial Regulator, the Department of Finance and-----
But apart ... just on the very short question Mr. McCreevy, was there an expectation when the architecture of legislation was being put in place, we were going to have this very elaborate structure, with two big pillars there; one dealing with regulation, and as you said earlier in your discussions, to be examining consumer affairs matters and consumer protection; Central Bank dealing with stability and the macroeconomics. Was there an expectation, when you were putting this architecture together that the Governor would, at some stage if required, invoke his rights under the memorandum of understanding?
Mr. Charlie McCreevy
Well it was always understood by me, and I'm sure my officials, that if there was a danger to the financial stability of the country that the Governor would act, but together with the people on ... with the body, that it was regarded as, you know, like, something that would be done.
Okay, thank you-----
Mr. Charlie McCreevy
And I'm sure the legislation ... I can't remember the exact detail of the legislation ... it was a very complicated piece of legislation ... it encapsulated that as well.
Thank you. Senator Susan O'Keeffe.
Thanks, Chair. Mr. McCreevy, during your tenure as Minister, there were obviously the difficulties that arose around Ansbacher and also the DIRT inquiry and in 2001-2002, the problems with Allfirst, the AIB subsidiary. I'm not asking you to elaborate on any of those matters; what I am asking you to do, is to say ... is to tell us why, in your own statement to us today, you said, "It was never contemplated as to the remotest possibility that any Irish bank could fail."
Mr. Charlie McCreevy
Well, I don't remember any commentator, Senator, ever, in that particular time ... ever thinking that an Irish bank could fall under. The only time, in my political career, that I can think of when that danger was about was around 1985 or so when the Insurance Corporation of Ireland, a subsidiary of Allied Irish Banks, had run into some difficulty and the ICI, or AIB, came to the then Government and asked them to take some measures because they, if I remember correctly, thought that the financial stability of AIB could be put at risk. I don't remember, since that time, and certainly not during my period, that anybody ever had the remotest possibility of thinking that any Irish financial institution, like mainly the major banks, was going to collapse. In fact the ... in fact, it was totally the opposite. Both of the major banks were having ... announcing enormous profits every year and enormous dividends and accordingly going from strength to strength.
So it was just ... it was never discussed even though, clearly, there were problems at some banks. You already had that experience-----
Mr. Charlie McCreevy
Well-----
-----from a previous time. You're just saying it wasn't-----
Mr. Charlie McCreevy
Now you see ... you're very good. You raise a good point. You've mentioned about Ansbacher and those three things, and the one ... from another angle, that did impinge upon the thinking leading up to the financial ... the single regulator and the structure. Because there was ... if I ... we had National Irish Bank and the overcharging scandal there; we had the Ansbacher issue regarding tax issues; we had the Allfirst thing somewhat later with the ... that was outside of the State so it's probably unfair to mention that in the same area; and there were some other ones as well. And all of that, the criticism the whole time, both in the Dáil and in the commentary was that the Central Bank, as constituted, was not up to the mark. And also there was an all-party committee sat back in those days as well and they, more or less, said the same thing. And out of that, the idea came then, we'll have a single regulatory authority and out of that then came this great debate that went on as to where it should be located. And from that also the whole debate was about consumer protection ... in fact, if you read the commentary at the time and including the McDowell report, there was nothing but praise for the prudential regulatory section of the Central Bank. All of the discourse was on the consumer angle which all of those things are. And they are very important. And I think ... I haven't been able to find it before I came to this committee, but you'll find, I think, at the committee, where I said, when I was being harangued by certain Deputies who are still in the House, about not doing anything about this ... I think I did make the comment, saying, "Well, I think actually Mary Jones would be actually more worried about her deposit in the bank and keeping the bank from going under than the extra €3 that she might have been charged incorrectly."
Okay. That's fine-----
Mr. Charlie McCreevy
----but I might as well-----
That's the answer to the question-----
Mr. Charlie McCreevy
I might as well have been whistling on Carrauntoohill.
Okay. On page 8 of your own statement, you say, "In regard to the relationship with the property sector, we would've received representations from bodies such as the CIF, Irish Home Builders Association, IBEC, ISME and various other groupings." You didn't take the opportunity there to tell us that in your own diary in 2003, which was sought under freedom of information, not by us, but by a journalist, and it showed that you had met Treasury Holdings, Bernard McNamara, Seán Quinn, Jed Pierse, Miles Byrne, Bernard McNamara and so on. So, you just said that they were ... that was the relationship-----
Mr. Charlie McCreevy
But they ... well, I-----
I'm just wondering, Mr. McCreevy, why did you not take that opportunity to engage with us and tell us that you had actually made ... had formal meetings in at least just that one year, 2003?
The timeline is 2003.
Mr. Charlie McCreevy
Well , I don't know in what context I met them, was it in the Department-----
It's from your diary, Mr.-----
Mr. Charlie McCreevy
No, no, I have no ... I have no problem with the diary because I am aware that my diaries were accessed under freedom of information many times many years ago-----
Mr. Charlie McCreevy
-----by a certain journalist who has been getting them all of the time and all of the Ministers in between. But, I can't remember ... I didn't bother even looking it up ... I don't know whether I met them in a group, partnered with somebody else or whatever-----
Well, it didn't appear so from the way it's listed. What I'm asking you though, Mr. McCreevy, is, these were people who were fairly important in that sector.
You didn't take the opportunity to tell us in your statement, so perhaps you might tell us now, why were you meeting them?
Mr. Charlie McCreevy
Well ... well ... I assume-----
And why were you meeting them so often?
Allow time please Senator for Mr. McCreevy to reply.
Mr. Charlie McCreevy
Well I'm sure ... I would have met them in the context probably were ... part of the delegation from the CIF or the house builders or whatever.
No, they don't appear to have been as delegates ... sorry-----
Senator I'll bring you back in a moment. Mr. McCreevy.
Well there's no ... there's no ... they didn't ... they weren't as part of a delegation Mr.-----
Mr. Charlie McCreevy
Well, I can't ... I actually can't recall actually meeting those people in formal delegations at all but I'm-----
Do you recall meeting them as individuals?
Sorry Senator. See, I have to allow Mr. McCreevy to respond.
Okay, I'm sorry.
Mr. Charlie McCreevy
But I just answered the question, Senator O'Keeffe, I have no recollection of meeting them formally at all. But I certainly ... those people that you mentioned, I certainly would have run into them in various other fora as well, everything from social occasions such as football matches to race meetings, etc., but actually I don't recall meetings. But it was in my diary, so if it's in ... I don't know whether they were part of a delegation or whatever. But I'm sure if you access the Department of Finance records you'll be able to see that, I've no problem with it.
That's ... that's what I'm saying, Mr. McCreevy, that is the Department record and I'm asking you ... it doesn't say that they ... that they came in a delegation. They are in the diary as one ... or you know ... by themselves. Why would you have been meeting those people-----
Mr. Charlie McCreevy
Well I-----
-----in your office, as Minister for Finance?
Mr. Charlie McCreevy
Well it looks like I met them all in the one day is it?
No, no, this is over the whole year between January to December.
Mr. Charlie McCreevy
And what year was that?
2003.
Mr. Charlie McCreevy
Well they must have come in to see me about something, I don't know.
You don't know?
Mr. Charlie McCreevy
I can't remember.
Okay.
Mr. Charlie McCreevy
I can't remember anything in particular at that time ... when ... people would be coming in like that but I'd always be ... I would always be conscious is ... no matter where you go in Ireland, whether it was off to a social event or a political event-----
Of course.
Mr. Charlie McCreevy
-----you'd always certainly have a number of developers or builders at it and I'm sure they wouldn't - like everybody else who's ever been in politics here - they don't miss the opportunity of advising you and giving you their views about things.
Mr. McCreevy how long were you the Minister for Finance for?
Mr. Charlie McCreevy
26 June '97 to 29 September 2004.
Okay, so do you think that you - obviously in that time as you've said you met a lot of people both in the property sector and the banking sector and so on - did you use your knowledge and your contacts and your connections at that time to apply for and receive the €1.6 million loan that you got from INBS in 2006?
Mr. Charlie McCreevy
Well I don't know if this comes within the remit of the committee, I was a banking customer-----
I will allow you a bit of space here, as accountable as you want to be Mr. McCreevy, and then you can withdraw.
Mr. Charlie McCreevy
Yes. I want to point out ... first of all it took place in 2006 when it was long after my time as Minister for Finance. I haven't said this before but I actually was a normal residential property loan with Irish Nationwide since December '84 or January '85, a loan which I paid off sometime in the 90s, I think anyway. I applied for a loan in the normal way and gave the normal documentation and it was got nothing to do with my time in finance or anything else.
Well in fairness ... that ... the reason I ask the question was that it was reported that the loan had been 100% plus and that INBS's loans didn't have that regulation at the time. Otherwise, in fairness, we wouldn't be interested in-----
You don't have to answer these questions.
-----whether you'd borrowed the money.
Mr. Charlie McCreevy
Well, like-----
We are talking about the closeness between banks and-----
Mr. Charlie McCreevy
I was-----
If you will allow me for a second, you can answer away, like I would ... the nature of that kind of movement, kind of personal loans and transactions I would ask people to talk to the legal team beforehand, but you are free to speak at your own will Mr. McCreevy.
Mr. Charlie McCreevy
Well it's ... like ... it's like ... I'll have to speak even though I didn't intend to because I think it's quite unfair then to throw for ... for the questioner to throw in the ... throw in the allegation, then throw it up there, and I say I'm not going to answer that question. I accept ... I thank you, Chairman, for advising me that I don't have to answer it but I know what the implication that the Senator is sneakily trying to throw in.
I ... would ask you to withdraw the word "sneakily" because I try to ask members here to not do value judgments.
Mr. Charlie McCreevy
Well I withdraw the word "sneakily" and put in "innuendo". So ... like so, the innuendo from the Senator-----
Okay.
Mr. Charlie McCreevy
----- is somewhat else. I applied to Irish Nationwide Building Society, sorry myself and my wife applied for Irish Nationwide Building Society, for a loan. In all, I got many loans personally over the years from many people, and I only got one ever before for Irish Nationwide in 1984 - 1985 when I neither was a Minister or had been a Minister at that particular time. I was elected in '77, I just applied for it in the normal way and in 2006 I applied for it in the normal way because I had a relationship with that particular institution. It was got nothing to do with ... I could do.
I was out of Finance at the time. I was in the European Commission and there was nothing to do with Irish Nationwide or anything else. In all my years getting loans, some for myself, but mostly during my time as a partner in an accountancy firm, I would have got hundreds of loans or facilities for clients of mine from all types of institutions, and individuals, I never, ever, in all those years, ever knew it to be the job of the borrower to know what the processes were of the lender as to how he was going to get the loan. All I ever did, for either clients or myself, was to apply, and we received the loan.
Thank you. In relation to the cost of tax expenditures, and I know you've discussed this with other members, according to the OECD, by 2005 the cost of tax expenditures had become larger than the remaining income tax receipts. This is in the Regling and Watson report, page 27:
As a percentage of total tax revenue, tax expenditures in Ireland are more than three times larger than on average in the EU. Again, this excessive reliance on tax relief narrowed the tax base. In addition, it contributed - again - to the property bubble, as some of the tax relief was directed to the property sector.
So, I just want to know, because you said earlier on, Mr. McCreevy, that there had been tax breaks, if you like, in Ireland for 50 years. And I've no doubt that that's true. All I'm saying is that the OECD's observation was that by 2005, they were way higher than in any other country, and they were narrowing the tax base and they led to a property bubble.
Mr. Charlie McCreevy
Well, I stated in my opening statement, and I gave some ideas as to what the purpose of tax incentives are. It's not primarily to give a tax break to individuals, but to stimulate investment in the area, which is lacking such investment, and I referred to it quite considerably during my opening statement. Now much of the commentary in recent years, and I note that during the inquiry, the little I've looked at, that the Senator seems to concentrate totally on the tax foregone and very little credit is given for the economic activity created. There were tens and tens and tens of thousands of jobs created in the construction and other ancillary jobs. There were hundreds and billions collected in PAYE-PRSI, etc., etc. Now, there seems to be just an over-concentration in all of those years as to, "What is the tax foregone?" And also, a, kind of, belief, well it's tax foregone, but it really isn't tax foregone because if the incentive wasn't there-----
Mr. McCreevy, I asked you a question-----
Hold on. Allow him to answer and then I'll allow you have a supplementary on it, okay?
Mr. Charlie McCreevy
The activity mightn't have taken place in the first instance at all, if there hadn't been the incentive. So, therefore, there wouldn't be any tax foregone in any particular thing. It's a tax break, to give to ... in order to allow activity to take place, as I said in my opening address, in areas where it wouldn't take place, or if it did take place, it would be too little, too late. Yes, like when the more uptake there is, the more tax there'll be foregone. But yes, there'll be more and more people employed and yes there'll be more and more taxation. Like the question to Deputy, or Senator D'Arcy about the SSIAs; the more people took them up, the greater the income tax foregone was going to be, but the benefit to the people who took up the SSIAs have lasted until the present day. So on your question, Deputy, there is certainly tax foregone, the greater the activity there would be in any sector. By the way ... but there seems to be an ideological bias against some type of tax incentive related to the construction sector.
Could I bring you ... Sorry Mr. MacSharry, or Mr. McCreevy, could I reframe the question for you? The question has been put that there was over-stimulation of tax incentives in the property sector; it wasn't that there was an incentive here to get something going, the broader sector, residential, commercial, above the shop, parking schemes, student accommodation, there was a litany of stimulation taking place there. So there was a menu of numbers. The question has been put to you, if I can come back to Senator O'Keeffe ... it's in that context that the question has been made. There's a plethora of tax incentivisations, all property-related.
With respect, Chair, from the OECD, it's not Senator O'Keeffe saying this.
Mr. Charlie McCreevy
Oh no, no.
I'm quoting to you from the OECD and their observations and I would add that the Indecon-Goodbody report that was done put a cost of €6.8 billion-----
Mr. Charlie McCreevy
Yes, and the thing-----
So I'm saying to you-----
Mr. Charlie McCreevy
Yes, and the bigger the success there would have been in these schemes, the greater the tax cost would have been. In fact, you needn't go to the OECD. If you put down the parliamentary question to Michael Noonan, he'll give you the figures going back all of these years of what the tax foregone was, like, because they're all there.
But there were a number of schemes which I've outlined and I outlined a whole plethora of them earlier on, introduced by my Administration and by the previous Administrations as well which have been ... we had some exotic reliefs brought in such as the seaside resort relief, not to mention the designated islands regime. But actually I didn't bring them in. I just thought I'd mention it.
So just finally-----
Senator, just to wrap up please and we can move on.
Finally, yes, the fact that they were three times larger than the average in the EU, you are saying ultimately, you were happy with that? That there was a contribution made, is that correct? Have I understood you correctly?
Mr. Charlie McCreevy
Of course it was because we had an infrastructural deficit in places such as private nursing homes, all these others areas which I mentioned, and it stimulated the economy and yes, there was a cost, as there would be. And as I said, the greater the take-up, the greater it would have been the cost. But the greater the benefit there was as well. There comes a time, Deputy, unquestionably I agree with you, there comes a time, as we had a debate earlier with Deputy O'Donnell, when you have to cut off these particular reliefs and say, "Well, we've done enough now at this area, so it can get on by itself." And there is a debate, and you can have an argument about whether you should do it, whether it's too late or whatever. I accept that as a kind of general kind of point. But that is a point of view and you must take an opinion at a particular time and a view at a particular time when it is time to close them off.
Thank you very much. Deputy Joe Higgins.
Mr. McCreevy, we've had evidence to the tribunal or the inquiry here and statistics to show that between 1996 and 2006, the price of a home each year increased for ten years in succession by the equivalent of the average industrial wage. That's the equivalent of the average industrial wage in an increase every year. Eight out of those ten years, Mr. McCreevy, you were Minister for Finance. Were you aware of the growing virtual economic crucifixion?
Deputy, be mindful now of judgmental language. Just stay with the maths.
Were you aware of the huge pressure that this put on the young generation of first-time buyers faced with those demands from developers and builders and having to go to mortgages of 35 and 40 years at very onerous rates? Were you aware of this?
Mr. Charlie McCreevy
Yes, Deputy, and I recognise also that you, in particular, have been highlighting this for a long number of years, much to your credit may I say. And the Government of which I was member ... all of the initiatives that we took place before Bacon, post Bacon was to try and increase the supply in the belief that in any other area when you increase supply, the price of the product falls down. That was ... various measures that we took place were all intended to increase the supply in that, maybe somewhat mistaken belief, which maybe proves that in this particular sector, the normal laws of supply and demand did not take place and the reason that my colleague, the then Minister for housing, I think it was Deputy Robert Molloy, initiated the first Bacon study. I think there might have been studies by Goodbody Economic Consultants as well but someone else can check that ... is that was on this belief is that the first-time buyer and the ordinary person on the average industrial wage and people starting off with young families or whatever, couldn't get on the housing ladder. We may not have ... Deputy, you're correct, we definitely did not succeed for a lot of that period, but that was the intention, you can take it from me.
But, Mr. McCreevy, is it the case that a huge part of that massive increase was due to the speculation and profiteering in the building land on which the houses were built? And for example, an 11-acre site in Stillorgan was bought in 2000 by a group of very wealthy individuals, sat on for four years and sold for €85 million in 2004. A €53 million speculative gain on which apartments were to be built which would cost each young person buying, maybe €120,000 extra, just as a result of that gain. Mr. McCreevy, can I ask you, is it fair to describe that as inordinate greed and can you justify doing nothing to curb that profiteering and how do you justify the fact that your cuts in capital gains tax put an extra €10.5 million into the pockets of those speculators?
Mr. Charlie McCreevy
Well, Deputy, it was the market that decided the price of that particular piece of land, together with all other pieces of land as well. It was the market ... in the ... I know Deputy Higgins doesn't accept the principles of the free market. He has another view, which I have always respected. I don't ... I am a free marketeer and I make no secret about it. It was the market that decided those particular issues. I certainly ... but I want to tell you the modus vivendi of all Government initiatives in the housing area and all these other matters was to increase supply in the belief - mistaken as you might contend it was - that the more supply that we put in place, that the price of housing would stabilise and come down. And if you go back and see all of the studies from '97 onwards predicting what the proper number of houses that would be completed the following year and what was the proper number to take account of the population of the country, they were understating it by zillions. Like, there was ... I think the number of units completed in the last year before the crash was something like 90,000 or whatever. But you would have thought a long time earlier - due to the measures we put in place to increase supply - that some sync would have occurred between the price of property ... the price of housing and the market would take account of that, which would've allowed the people that you represent get their foot in the housing ladder.
Well, it may have been due to the fact that the banks were shovelling out billions to speculators-----
Mr. Charlie McCreevy
Yes-----
-----but let's move forward a little bit, Mr. McCreevy, because property developers, many of whom were among the biggest loans that were transferred to NAMA at an enormous cost to society ... and I am asking this under the relationship between Government, Oireachtas, banking and property sectors, many of those biggest property developers that went to NAMA funded your party, Fianna Fáil, including some who gave serious donations to two politicians found by tribunals to be corrupt. Every year Fianna Fáil had a marquee at the Galway Races which became notorious in media circles, etc., for the property interests, speculators, etc., who assembled there to fund Fianna Fáil. Did this close relationship between property developers, speculators and Fianna Fáil affect the policy of your Government in relation to not taking measures to curb-----
That's a point of view, the question's made, Deputy-----
-----the property levels-----
-----and you're becoming judgmental.
-----that were happening?
Mr. Charlie McCreevy
No and certainly not. I actually ... I think it is common knowledge that developers are close both ... to the major political parties. That's very obvious. Like, the major political parties, until the recent election, represented maybe upwards of 75% to 80% of the electorate since more or less 1930. So, therefore, it would be expected that developers and the builders would come from that large constituency from both parties. I personally am not close to any of the builders. I know lots of builders and know lots of tradesmen and I know lots of accountants, I know lots of punters, I know lots of other kinds of people. I know lots of politicians, or I used to in any event.
And in regarding the Galway tent, I find the whole thing about the Galway tent a bit disingenuous and I think so ... I've always thought so about through the years. It was a big social event, right. There were not just builders in the Galway tent. In fact, I didn't attend that often because I found it a terrible pain in the backside because I'm a punter and people know I am a punter and like a bet and I used to have to put in my time and decide one day to go into this bloody tent. And most of the people ... what ... the biggest thing I remember of the Galway tent was, if people want to know ... was one thing anyway, you would be inundated for about three weeks previously, or my office would be, with loads of journalists wanting a freebie into the Galway tent in order to get plenty of drink and food. That's the more thing I remember about it and that definitely was a pain in the backside to me as well.
Bring it back to Deputy Higgins's question.
Mr. Charlie McCreevy
But is ... I never ... most of the people I met in the Galway tent the few days I went into it when I wasn't able to have a few quid and lose or win a few quid with the bookmakers, was mostly ... were all types of people from all walks of life in Ireland and not just big builders.
So I don't ... and, by the way, I don't think ever, for the few times I was in the Galway tent, and I only spent ... I didn't spend a lot of time there up and down the ... when I was inside anyway, I don't actually remember anybody in their drunken stupor ever asking me any, kind of, a simple question at all.
All right. Okay. Back to Deputy Higgins.
Mr. McCreevy, even after the Ansbacher and the DIRT controversies, penalties for banks and their senior management were minor and difficult to enforce. Do you ever remember discussing this with the Central Bank Governor or measures that might be taken to increase penalties to stop-----
Mr. Charlie McCreevy
Well, the Central Bank Bill, the number, the 2000 ... the first Bill in 2002 and the second Bill in 2003 did two separate things. The first Bill in 2002, the Central Bank Financial Services [Regulatory] Authority [of Ireland] Bill in 2002 set up the structure and all things relating thereto. During the course of that debate, I signalled that I would be bringing forward a second Bill that was going to do other things. The second Bill we did in 2003. That second Bill dealt with things like administrative sanctions, penalties, set up the Financial Services Ombudsman, did a whole lot of things like that. So, in the second Bill in 2003, there were adequate legislative measures put in place to do all of things to do with penalties, sanctions, etc., etc., and that's what the purpose of the second Bill was in 2003, and that was done.
I can't ... I'm not in a position to know as to how that was implemented post my leaving the Department of Finance. There always would have been, even pre the old Acts, before we had a new structure ... there would have been provision in the Central Bank Act of 1942, as amended on many occasions, for that type of sanctions and penalties. Panels have to be set up, and the lawyers around here will know it, and you had to, the minute ... one of the jobs of the Minister for Finance was to publish a list of ... the panel lists that would be ... banks could appeal some of the decisions of the regulator. So, therefore, there were always provisions for sanctions and penalties in the old Central Bank Act, and in the new Acts as well.
And, Mr. McCreevy-----
Mr. Charlie McCreevy
But it would be a matter for the regulator or the Governor, not me.
Second last question on a different theme.
I'd ask you to combine the two of them, Deputy, if you can, if you're able to.
Right, okay, I'll do that. First then, that ... contributors to the Wright report, which you're familiar with, indicate that there was a lack of leadership and direction in the Department of Finance during 2000-2010. Do you agree with the comments that were made in the Wright report, and what was done, or what should have been done, in your view, looking back in relation to that? And the last one is just of a more general-----
Mr. Charlie McCreevy
Well, I could answer that question. I replied to it earlier, and I said the answer, my answer was "No."
Okay. Just one last thing then, Mr. McCreevy, is this. You regard yourself, I think it's true to say, as a champion of the swashbuckling capitalist markets.
Mr. Charlie McCreevy
Well, no, no, I never said that-----
Let the ... let Mr McCreevy make his own definition with regard to his own character, please, Deputy Higgins.
Mr. Charlie McCreevy
That's totally a pejorative term. I don't mind being regarded as a personal champion, as a free-marketeer but swashbuckling, like, where I come from in County Kildare we wouldn't recognise a swashbuckler.
Leave it outside the door now, Deputy.
Okay, well a champion-----
Mr. Charlie McCreevy
Probably in Kerry now you'd have a fair lot of them, I can think of, all right.
All right.
Mr. Charlie McCreevy
One was actually a Deputy in this House for a long time. And I liked him a lot.
Mr. McCreevy, Deputy ... sorry, Mr. McCreevy, Deputy Higgins, question. You can have a chat later on.
Yes, you would portray yourself definitely as a champion of the free capitalist markets, right?
Mr. Charlie McCreevy
Yes. I've no problem with that.
Now, Mr. McCreevy, in view of what happened in Ireland, with those markets delivering this massive bubble and horrific crash, with all the awful austerity and suffering for ordinary people and, internationally, the toxic debts that also inflicted devastation on communities around the world, do you still believe in those markets and the way they operate?
Mr. Charlie McCreevy
Well, I certainly accept your contention, Deputy, and the facts speak for themselves, is that there has been a terrible devastation on ordinary people the length and breadth of Ireland, and the length and breadth of many other countries as well. It certainly has, and I agree with you on this, brought the whole way of how the capitalist system works, in particular, how the financial institutions work or didn't work, how regulation works or didn't work, but, having said all that, I'm not a believer ... is that the alternative of ... solutions that you've advocated since we were both students a long, long time ago, I don't think that is a solution either. I certainly would agree with you that the capitalist system, and what happened to the free market certainly caused a lot of devastation, but I am not giving up on it yet.
Thank you very much-----
Mr. Charlie McCreevy
And neither, of course, have you given up on your ideas either, Deputy Higgins.
All right. Good man. Thank you very much. Deputy John Paul Phelan.
Thank you, Chairman. Good afternoon, Mr. McCreevy. I have a lot of questions so I'll be brief and I hope you can ... you can be as brief as you can, too. I want to start, maybe continuing on from Deputy Higgins's earlier question in Galway. Core documents, Vol. 2, page 92, if you can find it there. Page 92 of Vol. 2. It's a letter to you from the then chief executive officer of EBS, signed by the then head of lending with EBS, Mr. Martin Walsh. It's 2 August 2000.
Mr. Charlie McCreevy
I ... my page 92 says a letter on 29 August.
Yes, it refers to a conversation, sorry, a conversation from 2 August.
Mr. Charlie McCreevy
Oh yes, sorry.
It's on the opening line. 2 August 2000 was the Wednesday of ... of race week in Galway. It must be one of ... it might be one of the years that you were at the races in Galway-----
Mr. Charlie McCreevy
Well, I'd say, Deputy, I was at the races most years in Galway throughout my lifetime, where I had some pleasant punting experiences.
Okay. I want to refer to the contents of the letter. And it's, as I said, signed by the head of lending with EBS, it's in relation to the SSIA scheme. And in it, Mr. Walsh appears to state that the origin of the SSIA scheme came from that conversation that he had with you at the Galway races on 2 August 2000. Is that how you remember the genesis?
Mr. Charlie McCreevy
Well, actually, I don't ... either ... I remember Mr. Pat O'Reilly being chief executive, I don't know who Mr. Martin Walsh is. I can't even remember who he is. Maybe someone I know very well but it doesn't spring to mind. I ... in 2002, leading up to that, the EBS had an idea about the scheme, which is outlined in-----
This is 2000 now.
Mr. Charlie McCreevy
Sorry in 2000 and it set out there the bones of their particular scheme-----
The following pages-----
Mr. Charlie McCreevy
Yes, it's quite complicated, as you're probably ... can see.
Yes. It's the first ... and I'm not trying to cut you short, but I'm down to seven minutes. It's the first document that I have found relating to the SSIAs. Now, many people might wonder what impact the SSIAs might have had on the ... the banking collapse but, I just want to ask you, what analysis ... like, cost benefit analysis was done, either by yourself or by officials or by anybody who was advising you at the time, as to the impact on ... on the property market in particular, of the potential impact of the establishment of an SSIA scheme?
Mr. Charlie McCreevy
Well, can I say this anyway, not alone did the EBS have the guts of a scheme to give some tax incentive for people to save, and Mr. O'Reilly sets it out there, which is quite a complicated scheme, other people came forward with some ideas as well. They were ... the general idea was floating about, and then I came along with what became the SSIA scheme. As I said, in reply to an earlier question a long ... some hours ago, is that, we ... we decide ... decided to having the ... an incentive scheme for savers for the reasons I so outlined, to encourage people, in the very good times, to do what the State was doing, put money aside for an essential day.
Okay-----
Mr. Charlie McCreevy
And, I said, on many occasions ... the more people save, the more costs will be, and the better it'll be. I would think, Deputy, and I think our ... you probably can get this ... I haven't seen any analysis since the ... the end of the ... in 2006, or 2007, when the money flowed back, as to-----
Sorry, I've asked you what analysis did you do or did your officials do, before-----
Mr. Charlie McCreevy
Sorry, Deputy, I'd said very clear with this, I didn't do any.
And that's fair enough. And I'm not asking you about post-----
Mr. Charlie McCreevy
And there was no intention because, like-----
I'm not asking you about post.
Mr. Charlie McCreevy
How would you do an analysis about it, anyway? I just didn't ... leave it, and it worked very well, and I'd say it's the one scheme that, you go around the country, that people remember, and most people have still kept money from the SSIA scheme. You probably have yourself, Deputy, as well.
No, I haven't.
Mr. Charlie McCreevy
Has your wife?
I'm not even sure where it is. Probably spent it on an election. Can I ask you, Mr. McCreevy-----
Mr. Charlie McCreevy
And by the way, I don't think it had any effect on the property market.
You see, this is ... this is the kernel of the questions that I want to ask. You said, at your own admission, you were calculating how much it cost the Exchequer, it would have resulted in €11 billion to €12 billion being saved.
Mr. Charlie McCreevy
Being saved, yes.
But that was core tier 1 capital for the banks, that they were able to then lend multiples of into the economy. Most of which, we've had evidence from several witnesses, at that time was being lent to property. Whether to developers to build property or to individuals or businesses to buy either commercial or residential property. And I just want, no ... and the question I want to ask you is, how could you make a decision based on a conversation at the Galway Races in 2000-----
Mr. Charlie McCreevy
No, I didn't make my decision based on a conversation at the Galway Races.
Well, I want to ask the question first ... and not have any analysis as to the impact that it would have on lending? This is the SSIA ... you can have daring views as to its impact. You said it had a counter-cyclical impact. It might have had in the short term, in the longer term, because it was a five-year scheme, it arguably didn't have a counter-cyclical impact because there was an increase in expenditure. We've had evidence from David Doyle, from John FitzGerald, from other witnesses that the major increase in lending to property took place in or around the years just preceding or just following when the SSIAs came to fruition. And I'm asking you about why you didn't do that analysis.
Mr. Charlie McCreevy
Sorry, but Deputy, you can't ... you're counter-arguing against yourself there. Is that, when the money became available to the SSIA person in 2006-2007, my ... I would think that most of the money was ... people didn't rush off and start buying houses with it. Some did; some used it as a deposit which ... I remember saying in the Dáil at the time that would be a good thing, whatever they were going to do, maybe some did. My own view is that the majority of people spent a little of it, did whatever they wanted to do, maybe send children to school, tuition, holiday or whatever. A lot of them kept a good bulk of the money there. But it can't ... so, and it was counter-cyclical, if you want to argue about that, because they were taking at least €2.5 billion out of the economy every year, so we can't ... the two ends of this thing.
I am not disputing the short-term effects. But what I am arguing is that this put €11 billion into the banks.
Just ask the question.
No, I'm asking the question. €11 billion was saved that the banks could then lend multiples of in the years ... in the years preceding the maturity of the SSIAs, which were the key years-----
Mr. Charlie McCreevy
Hold on now, Deputy, hold on. The money was in '01, '02, '03, '04, '05 and '06. The fruition of them came in 2007. Most people held on to their money. In the years where the banks had it deposited ... by the way, don't get me wrong now, it wasn't only banks that were entitled to have SSIAs.
I know that.
Mr. Charlie McCreevy
There were every ... all types, including credit unions-----
Building societies.
Mr. Charlie McCreevy
-----funds, all these type ... they all played in this particular area, they all competed for the market ... so, therefore, it'd be a big jump of logic plus mathematics to link the amount of money that was saved, say, €2 billion a year to the money that the banks ... that went into ... that was in deposits in the bank to the tier 1 or other capital that banks would have been ... based their lending on. It would have some effect but nothing like ... you couldn't possibly explain the amount of money that banks started to lend from 2003 to 2007 based on what went into deposits from SSIAs. At least I wouldn't anyway.
Okay. In November 2000 your own officials, according to a memo revealed to The Irish Times on 6 May 2002, stated the following about the scheme, and I want to quite it directly, "Given the uncertain effectiveness of tax incentives for savings, the potential cost and significant deadweight, the provision of tax relief for capital investment in medium-term savings schemes is not recommended." Now, that's a very strong statement from your officials at the time. Why ... why, on the basis of what you've said here to us today that there was no analysis carried out, did you ignore that advice from the officials?
Mr. Charlie McCreevy
Sure I've ignored hundreds of advices from the officials in the Department.
No, but I'm talking on the basis of no analysis. Who was advising you?
Mr. Charlie McCreevy
But who was proved correct about the SSIAs? I think I was because the amount of money that was put into the SSIAs accounts, it gave a nest egg for ordinary ... ordinary decent people such as you represent in Carlow-Kilkenny and Deputy Higgins represents in Dublin. To go into an SSIA, all you had to do was €10 per month ... per month, which wasn't a pint of stout per week extra and people participated because they saw it as a simple, good scheme. And that applies from Mulhuddart all the way to Graiguenamanagh and all the way to Letterkenny as well. And it worked out well and people appreciated it more than any other issue that was done over the last 15 years - ordinary people. I don't actually expect that most of the big financiers were ... actually participated in the SSIAs but the ordinary Joe Soap and Mary Jones definitely did.
We know from evidence today, by the way, that one of the senior officials in your Department at the time, Mr. McNally, said that he didn't take one out. Were there any senior officials who advised you to introduce the scheme at the time, yes or no?
Mr. Charlie McCreevy
Oh, absolutely no. I did it myself.
Okay. I have a question that I must ask you before I finish.
Final question.
In your view, did the macro-prudential fiscal strategy agreed by Government reflect the emerging risks and challenges to the economy between 2000 and 2004?
Mr. Charlie McCreevy
I do.
Thank you very much. If you don't mind, Mr. McCreevy, if I could maybe just propose, just for a couple of minutes, a short comfort break and it's 16.55; we will return on the first Angelus bell at 6 o'clock, okay?
Mr. Charlie McCreevy
You're well gone along the Angelus bell because-----
Oh, sorry, we're gone well ... it must be the +1 channel. Sorry, it must be the +1 channel, Deputy. Oh, sorry, at 7 o'clock. Just literally if we can come back within five minutes. My apologies, I'm having so much fun, 'tis flying. Thank you very much.
Okay, with that said, if I can ... I'll go back into public session. Is that agreed? Agreed. And we'll finalise the line of questioning there now, about half an hour maybe or so left, and just remind members that some documentation has come in as well that they may just pick up when they're leaving at the conclusion of this meeting.
So with that said, if I can now invite Deputy Michael McGrath. Deputy McGrath.
Thank you, Chair. You're very welcome Mr. McCreevy. Mr. McCreevy, during your time as Minister for Finance, did you get anything wrong?
Mr. Charlie McCreevy
I think I'll quote what Patrick Honohan said last week when he was asked that question, that any mistakes he made were of the tactical nature rather than the strategic. If it's good enough for him, it's good enough for me.
Well it's not good enough for me. Can you go into a bit more detail?
Mr. Charlie McCreevy
I think, I think we didn't ... I think we did a very good job. I'm inclined ... spent most of this afternoon speaking about the very good job that we did. I think we put Ireland, in terms of everything, from infrastructure to a social structure to better public services, the increasing populace. I ... I've outlined all these things anyway, and I think that we did a very, very respectable job. Of course I would say that, wouldn't I?
But can I ask you again, in your time as Minister for Finance, do you think you got anything wrong?
Mr. Charlie McCreevy
I've answered that question, Deputy.
Specifically.
Mr. Charlie McCreevy
That's what I've said. I said "No." I said I've ... I-----
Nothing?
Mr. Charlie McCreevy
Well, I'm sure like, they're certain things it was ... that I might like to, if it was there again, maybe I would, perhaps, I don't know. But like ... Mr. Hindsight is a luxury that busy people cannot afford.
Well you have the benefit of hindsight today. So with the benefit of hindsight even, is there anything you would like to allude to that you feel you could have done better?
Mr. Charlie McCreevy
Look, every politician of any persuasion and anyone who's been in public office for any period of time would always say, "Ah there was a few other things I should have done." I don't operate like that, Deputy. I spent 15 years on the backbenches of Fianna Fáil. I thought I'd be continuous to stay on the backbenches of Fianna Fáil. I got my chance at government given to me by Albert Reynolds and more or less I was on the Front Bench and Minister for the second half of my career. I enjoyed my time in the backbenches as well but probably caused a fair amount of mischief to my own party more than anything else. Certainly, the late Mr. Haughey would think like that anyway, but ... and I got my chance as Minister for Finance, and I always thought if I ever got the chance at being a Government Minister that I was going to approach every day as if it was going to be my last day there.
Okay.
Mr. Charlie McCreevy
And I wasn't going to come to the end of my period and say, "Well maybe I should have done this, and did that and the other." I went about doing it and I-----
Okay.
Mr. Charlie McCreevy
-----don't regret one moment of it.
And do you believe, Mr. McCreevy, in any sense that you should take any share of the responsibility for the crisis that emerged four years later?
Mr. Charlie McCreevy
Well, I suppose what you're asking me to do there is to apologise for certain things, but you ... you would only apologise for things that you think you got very much wrong or you made a mistake, or a big mistake or a series of large mistakes. I don't believe that I did.
Okay. Can I put an assertion to you, Mr. McCreevy, that the ingredients of what would eventually become a major crisis were very much in place by the autumn of 2004. For example, there was a rapid expansion of the balance sheets of the banks in the two or three years leading up to the end of your tenure.
There was a growing dependence on property lending by the banks at that time, a growing dependence on wholesale funding from the international market. The states were becoming increasing dependent on transaction taxes and, from 2001, current expenditure was growing at a faster rate than nominal GDP every year and there was a distinct lack ... or, loss of competitiveness from 2000-2001. Now, all of those elements, it could be argued, certainly accelerated after your tenure but do you accept that those ingredients were in place when you departed Merrion Street in the autumn of 2004?
Mr. Charlie McCreevy
Well, who can say what would have happened or what I would have done if I had remained as Minister of Finance. I didn't and there's no point kind of speculating on it. I would have ... I certainly have recognised since I left, and looking at the figures from 2003, 2004 to 2007, that there was massive increases in the property lending area, which I alluded to earlier. I have dealt earlier with the questions of increases in Government expenditure, both capital and current, and given you the figures as a percentage spend on GNP. If you like, I can give you other figures relating to what the spend was in various years. So I think that, all in all, that what was ... in the time that I was Minister of Finance, I am quite happy that I dealt with the issues as presented to me. If it became very obvious some of the things that have occurred since my time there in Finance, I'm not too sure as to what actions I would have taken or whatever but there's no point ... there's no point ... you do what you do when you're there. There's no point in speculating what you would have done when you weren't there. So I regard that as a total futility for me to be speculating about that. I think that the changes that we brought about in the Irish economy, the things that we done, were all very, very worthwhile.
So on those issues that I highlighted there, did you not have any concerns about the trends that were emerging-----
Mr. Charlie McCreevy
Well, the trends-----
-----in the early 2000s?
Mr. Charlie McCreevy
Well, the trends that were emerging, Deputy ... like, if you look at the ... if you take expenditure, for example, over the period of my time, you will see you come out with an average figure of 6.1% or 6.2% or whatever the case may be.
Mr. Charlie McCreevy
As a result, GNP, which I think is the more relevant measure of expenditure than GDP, it more or less stayed the same and came over 30%. You must remember the economy was expanding at a very fast rate, the population was increasing, there was greater demand for services, which were going to cost more. You can't have a good medical service, a good education service without people, and people cost money. So, therefore, if you want to do things in the big areas of public expenditure ... do something worthwhile in those areas, then you have to put the resources, and that's what we did. At the same time, we ran ... the biggest thing we could have done was to keep reducing the national debt. I was in the House here, Deputy McGrath, when the national debt was 122% of GNP, when the country was practically bankrupt and we never thought we'd get out of it. And we did, and we saw the percentage debt-to-GDP ratio coming down, which freed up massive resources, because we didn't have interest payments to be paid to all the money that we had borrowed, and that allowed other ... that money to be used for worthwhile social purposes.
Okay.
Mr. Charlie McCreevy
So, therefore, I think our biggest thing that we done was to keep the economy moving, giving everybody a chance. By the way, there seems to be a body of opinion that seems to suggest, well, maybe we shouldn't have got unemployment down to 4%, maybe the safer rate for the economy was 6%, 7% or 8%. Maybe it was done too quickly. Well, I don't subscribe to that at all. So you're going to tell the ... the people that have that theory seem to advocate that Joe Smith, "Well, Joe, you should stay there - you're unemployed and stay unemployed." And "Mary Jones, you don't have to go to work, you stay in the home and don't come out to work, you could bury income," whatever the case may be. And we'll keep you at that level, 8% unemployment - that's better for the economy, because some whizz kid economist or some theoretician belonging to some think tanks-----
Okay.
Mr. Charlie McCreevy
-----you can't be too quick, too fast. I don't ... I don't subscribe-----
There's no one in this room has made that assertion, Mr. McCreevy, so-----
Mr. Charlie McCreevy
Well, hold on ... well, hold on, but the implication is that he should have been ... it was too quick too fast. You go tell that to the people in Glanmire or in Blackrock and say, "You stay out there, Mick, and stay unemployed." I'm telling you I don't subscribe to that and no proper socialist, like Deputy Higgins, would either.
Mr. Brian Patterson, the chairman of IFSRA, told this committee that it was the responsibility of the Minister for Finance to monitor the chairman of the financial regulatory board and to set goals for him. Would you accept this statement? Do you believe this role was carried out adequately for the period in which Mr. Patterson was chairman and which overlapped with your time as Minister?
Mr. Charlie McCreevy
Well, Mr. Patterson was appointed as the chairman of the interim authority early in 2002, and then the Bill went through in 2002, and then they were ... everything was set up and then the new Bill came in 2003. I'm afraid ... setting of the goals etc. etc., I went in September 2004, I wouldn't have had time to monitor what was being set there for the regulator because it was too early in the process. I do remember, and I think it's in some of the documentation, that we gave extended time during my last year in Finance, we gave until the end I think of 2004 to produce some of their programmes, plans etc. etc, so therefore I can't ... in my short time with Mr. Patterson, I can't really make any great judgment on that area.
Finally, Mr. McCreevy, going back to the budget strategy memos, which were signed off on each June and you would have signed off on those within the Department as the Minister, you would have signed off on the advice contained in the budget strategy memo, is that correct?
Mr. Charlie McCreevy
We would circulate the memorandum to the Government usually in June of every year where it sets out our intentions regarding spending, etc., and the general budgetary process for the coming year. That would have been brought to the Government by the Minister for Finance. So I would have been responsible for that document, bringing that document to the Government in all of those years.
And you would have endorsed it's contents-----
Mr. Charlie McCreevy
Yes, yes.
-----in so bringing, in bringing to Cabinet? And, can I ask then Minister ... Mr. McCreevy, in light of the fact that there was a lot of horse-trading from that memo in June to the announcement of the budget in December, did the advice of the Department change from June to December or how otherwise can you explain the fact that in 1999, 2000, 2001, 2002 the income tax and welfare package announced on budget day dramatically exceeded the recommendation made by the Department the previous June?
Mr. Charlie McCreevy
Well, because we were anticipating greater economic growth and greater economic growth was occurring. And I said in my first budget in December 1997, that I wanted my ... the first lines of my first budget were that they should ... that I want to be judged over the period of the five budgets that this Government was going to bring in, and that all those ... and in many interviews afterwards I said, it had to be judged in the totality. And as I said earlier, in my, in the five budgets that I introduced between '98, '99, 2000, 2001 and 2002 and then 2003, 2004, the total income tax and PRSI package came to €5,607 million-----
Yes, I have that.
Mr. Charlie McCreevy
And the figure for social welfare packages came for €4,507 million, which in the time of the previous Government of three years, the income tax package ... outstripped the social welfare package-----
My question is a pretty narrow one, and that is, when you got to your feet ... during the first week of December to introduce the budget for the following year, was the ... the Department's advice, as set out in the June budgetary strategy memo, was that still the most up-to-date advice from the Department or did their advice change from June to budget day?
Mr. Charlie McCreevy
Well in the budget documentation you will see various updates about economic stability, growth rates anticipated, etc. etc. What you do after ... and I'm sure it's the same now ... when the Minister for Public Expenditure will now set out his memorandum, there's a considerable amount of horse-trading in this on the spending side. The taxation ... decisions on the budget are made separately, or they were in my time. We made them but certainly in ... within ... I dealt with spending and culminating in the publication in November of the Abridged Estimates Volume setting out the Estimates for the following year. And then I dealt with the taxation package mostly on budget day. The Government has gone back ... or has for some years now to have a unified system, of announcing about tax and expenditure changes on the one day and it's all done together. That was actually done some previously ... all the years up until about, I think, my predecessor, Ruairí Quinn, might have got into the form I followed in 1996 ... having a separate process, or maybe I did it myself, I just can't remember that. So ... the ... we then went along then ... the memorandum was put to Government and you can note that all years bar the Estimates, bar the memorandum for 2003, that the spending figures for all years, except for 2003, the figure in the budget day or the Abridged Estimates Volume was less than ever and I think that's the first time, someone has told me, in the history of the State that has occurred.
Is that we didn't ... we must ... I'm sure it's ... I can't say it's the same now, but it I ... it may just be. When the Minister for Finance sets out in budgets in his memorandum in the middle of the year, he's trying to get the process started. He's trying to get some law and order on the figures because every Department will come back immediately with gigantic figures, so if you didn't start the process by putting some guidelines down what the totality will be, you'll always be beaten up by the various Departments, and that I'm sure has occurred long before my time and probably occurs to this day as well.
So is it the case that you would've viewed the June budgetary strategy memo as, not so much the Department's advice as to what to do for the following year, but as the starting point for negotiations?
Mr. Charlie McCreevy
Well, I'll tell you this, Deputy, and it will not be a surprise to you, that would've been ... if you get someone to fess up from the Department of Finance, that's the way they'll treat it as well.
So do you accept or not that your budget packages for each year, bar one, were in excess of what the Department recommended?
Mr. Charlie McCreevy
But sure the figures speak for themselves, Deputy, and I've read out the totality of the figures-----
Okay.
Mr. Charlie McCreevy
-----and I've also given the figures regarding expenditure as percentage of GNP. That speaks for itself. But I'm also saying quite openly, anyway, is the Department of Finance would say, "If we don't get this process started and put down some particular figures into these boxes we'll never get any type of order when it comes to the final Estimates." Because when ... the Estimates demands that come from Departments are usually ginormous and way above our ... the indicative allocations. And that was the situation every year during my term and pre my time and post my time and the only year where I got something different was in 2003 when I actually went lower than the figure that the Department wanted to. By the way, I know that in some of the earlier evidence of the committee is that the Department contended after my 2003, 2004 budgets, is that the line Departments were complaining that I had left them at least €2.1 billion short in the moneys that they needed to provide for existing services. I accept that as well because I went in 2003 and 2004 in very, very heavily on Departments in order to get back to a better baseline for the future. That's what I did.
Is that why you were sent to Brussels?
Mr. Charlie McCreevy
You're a member of my party, Deputy. I'm sure there'll be books written about that.
Well, I'm giving you an opportunity to answer the question.
Mr. Charlie McCreevy
I ... well, if that is your question, I don't think I should answer it.
Senator MacSharry.
Thanks very much and thanks, Mr. McCreevy. Last, but not least, hopefully. Can I ask you first, in your one-to-one meetings with the Governor of the Central Bank, did the Governor ever indicate that there was a difference of views expressed in the financial stability reports compared to members of the board themselves?
Mr. Charlie McCreevy
I would certainly remember that if it came up. I wouldn't ... there's no point in me telling you that I remember every time that the Governor came to see me regarding the pre-budget processes. He'd send a letter and then he'd come up and I dealt with two Governors of the Central Bank, Maurice O'Connell and John Hurley. I couldn't be able to tell you what they said when they came for the meeting. But I certainly would remember if they said to me that there's a difference of opinion between members of the board-----
So, it was always-----
Mr. Charlie McCreevy
-----it never happened.
-----on message and 100% this is what we believe?
Mr. Charlie McCreevy
Well, it was ... the Governor came ... it was the Governor's letter that came up and the Governor's report so I didn't anticipate they'd come into me and start telling me, "Well, there are lots of people around the table, now with some of them with different views about what's here." So no visit, no company, Senator-----
And in the one-to-one meetings the ... would he have said. It's just that we had-----
Mr. Charlie McCreevy
No, no, he didn't.
-----a senior staff member at the time and later chief economist in the bank who would've said that he had difficulty getting across views that were contrarian and, in particular, the fact that he contended that there were political and property interests on the board that prevented that. Would you have any comment on that?
Mr. Charlie McCreevy
Well, except to comment ... is that ... as far as I am concerned, I never had any discussion, good, bad or indifferent, with anybody in the Central Bank board as to what they should be doing or otherwise. I, somehow ... I don't like the ... maybe peoples' recall of these things are somewhat different, but I can't think that there was that type of activity going on with the Central Bank. But I'm sure the Governor and maybe other members of the Central Bank board can speak for themselves. But certainly, nothing like that ever came next or near my attention.
In fact, like the only kind .. of the first time I heard of it when you were questioning one of those officials, I think, quite recently. I had never heard it ever mentioned before by anybody. And, by the way, you must remember in Ireland nowadays if someone has a bad thought at the bottom of Grafton Street before they got to Stephen's Green, you'd read about it in the Sunday newspapers.
Indeed. Earlier on in your testimony, you said that you were aware that the single currency had downsides, so, presumably, what you mean by that is the lack of control of monetary policy in terms of interest rates. Is that correct?
Mr. Charlie McCreevy
Well, not just interest rates, Senator, and ... like there ... you see the structure of the euro is very, very unique in that you don't have a central government, you don't have a central fiscal authority. We used to have the broad economic policy guidelines which are, kind of, recommendations in a, kind of, a way. I know things will be slightly changed now in the last two years or so. You don't ... so, therefore, you don't have what you'd have in a normal, say, country like Ireland, the United Kingdom, America, Germany, whatever, where all those things are melded together. So, therefore, you have a currency; you have the individual member states running their own economic policies; you have various differences between cultures and everything else; and, yet, you're supposed to run a single currency.
Now, before we set up the euro ... for example, there were five criteria that countries or member states were supposed to meet before they joined. One was inflation; one was the 3% debt - the 3% debt every year; one was the total debt ratio which meant that every country was supposed to have a debt-to-GDP ratio of less than 60%. There were two others as well about that you had to ... your currency was supposed to have stayed within a band, I think, not greater than 2.25% of the central ... and I forget the last one. Incidentally, Ireland was one of the few countries to meet all of those criteria. Sorry, inflation was the last one. In the inflation one ... that you weren't supposed to be, I think, more than 2%, or less than 2%, outside the average of the three lowest countries and, actually, Ireland was one of the three lowest countries. Ireland had a debt ratio less than 60%.
Now, some countries that were allowed to join the euro, like a founding member state of the European Union like Italy, had a debt ratio of 100% where all ... the country where all the struck ... all the bodies are, Belgium, has a debt ratio of over 100 % as well, so that was a long way from 60%, but, lo and behold, mirabile dictu, the 60% absolute rule that the German Government had insisted upon in negotiations then came to be interpreted as "approaching 60%". So, therefore, the Italian Government was approaching 60% because I think the ratio came from 114% one year to 110% and the Belgian Government did something similar.
Time is ticking so-----
Mr. Charlie McCreevy
So, therefore, from day 1 it was a very unusual structure now, so therefore ... and there were difficulties there from day 1 which have been found out, which we are dealing with at the present day. But the Irish Government and the Irish political parties, after all considerations of everything, and we were a very small player picking up less than about 2% of the EU's GDP at the time, we decided, in our long-term best interests, it was better to be in. And the most worrying factor for us at the time was not actually all those other areas because we more or less thought we were doing very well in those other criteria. But our main worry at the time, both my party, the Fine Gael Party and the Labour Party, we were going to join knowing that the United Kingdom was staying out. So, therefore, from day 1 the structures were a bit less ... sorry, the foundations were less than certain.
Okay, that was a two and a half minute answer.
Mr. Charlie McCreevy
Thanks.
I have three and a half minutes left and 50 seconds. From 1997 on, exports were decreasing, so as a proportion of national income, it was transaction based taxes that were beginning to drive things. Did this worry you on the basis that we didn't have the same suite of tools post-euro to deal with cooling the economy?
Mr. Charlie McCreevy
Well, I would have had ... I would have debated with myself and with others the whole interest ... the tool of interest rate that a central bank has, and we're going to give that away. But I concluded, and I think rightly, that for a small country like Ireland, although we had the interest rate tool available to us since the foundation of the State, what difference ... what great thing did it do for us?
Effectively, for all that period of time, we followed... went along in the ... London. And up until 1979 or so we had a one-for-one exchange rate but, generally then, even in the interest rates after that, we more or less followed after London. So we ... so although we had the interest rate tool available to us for all these years, it didn't seem to have done an awful lot to grow the Irish economy, give or take, say the glorious period in the '60s. So, therefore, I kind of ... I came to the view that losing the interest rate tool at the time was not the worst thing that could happen. Subsequently, I would look back on, say, what happened from, say, 2003 to 2008 and I would've said, "Well, if we had the interest rate tool then, that it might have made a whole big difference." But like that's ... now I'm going back and I must chastise myself because I'm now doing Mr. Hindsight as well, the same as the rest of the country.
But, as others have said, it's important to get the benefit of expertise in judgment-----
Mr. Charlie McCreevy
That's just my view. Other people would differ.
That's good and thank you for that. We were talking about lobbying earlier and Senator O'Keeffe mentioned a list of developers, in particular, who your diary had shown that you had met with. Would it be reasonable to assume that they didn't meet with you to talk about racing, that it was likely to be something-----
Mr. Charlie McCreevy
I just ... I don't know what ... I'm sure if we looked up in the Department of Finance, I'm sure if all these people came around the one time, it was to do with some specific area or-----
It wasn't all at one time, it was over the course of a year. So, but would it be reasonable to assume that if there were developers, it was likely to be something to do with business-----
Mr. Charlie McCreevy
I'd say ... well, of course-----
-----the legislative aspect of what might affect their business?
Mr. Charlie McCreevy
No, I'd say ... most of the time that I would've met with people in the construction area, or other areas, related to the level of economic activity in their particular area. And that applied as equally to, say, construction people as it applied to other areas as well. You must remember - as you probably know in any event - Ministers are all the time being requested to meet various people, and you usually agree-----
Of course.
Mr. Charlie McCreevy
---to meet people who are in an area which is having considerable economic impact.
I agree and, indeed, we've all seen it and we've probably been all involved in it. Can I, just before ... we know there's a huge amount of lobbying goes on and all that kind of stuff. I just want to say, like, is it reasonable that if it's the Institute of Auctioneers, they want to talk about auctioneering or things to do with that, if it's the CIF, they want to talk about things that affect their register. I'm not saying that you might respond to them by doing anything, I'm just saying that tends to be what meetings tend to be about. Would that be fair?
Mr. Charlie McCreevy
Yes and, by the way, we'd meet with IBEC, meet with SIPTU, ICTU, and everybody else. I just ... this is the point I was going to make. There was one great thing ... there are many great things about Europe and there are many downsides about Europe, and there are certain pluses and minuses about being in the European Commission ... being the European Commissioner. But one of the great things in Europe, I'll have to say, is that as a Commissioner, you are encouraged to meet all types of lobbyists at all times. And it's all there to meet ... and you can bring in everyone you like or don't like, whatever the case may be, and there's never a comment in the wide earthly world. Whereas here in this country, it seems to be you must only meet with certain persons-----
Nobody's judging that at all.
Mr. Charlie McCreevy
I think it's a load of ... I think it's the greatest load of old nonsense ... one of the greatest loads of nonsense that I can think of.
Yes, no, I understand where you're coming from, Mr. McCreevy, but what I'm trying to say is, is it reasonable - yes or no - that people want to talk about-----
Mr. Charlie McCreevy
Yes.
It is, okay, that's fine. So, can I ask you to outline if anybody, as a political lobbyist or as a sectoral lobbyist, as a political representative or a political party, in your nine Finance Bills, can you recall anyone ever asking or lobbying for you to reduce expenditure and increase taxes?
Mr. Charlie McCreevy
Lobby to reduce expenditure and increase taxes?
Mr. Charlie McCreevy
Deputy, or Senator, I'll say this: in your long experience of being a politician, and you come from a very eminent political family, did you ever know a politician or a political party ever to go before the people and say "We're going to increase taxes and we're going to decrease public expenditure"?
It's important that we get the answer to this on the record because we've asked the secretaries of the Departments in the day-----
Mr. Charlie McCreevy
The answer to that ... was anyone asked me to increase taxes and decrease expenditure?
Did anybody ever?
Mr. Charlie McCreevy
You mean, outside of the public service?
Either a sectoral representative organisation-----
Mr. Charlie McCreevy
No.
-----a political party, a politician, an individual, the media, anybody.
Mr. Charlie McCreevy
Well maybe Deputy Higgins might have in the Dáil, done it anyway. But he might remember better than I do. But I don't remember actually any other Deputies ... maybe he didn't do it either-----
Corporation tax.
Mr. Charlie McCreevy
Oh, sorry, you did. I knew ... I knew, Deputy. But apart from anything else, does anyone else around this table, all being elected representatives-----
Is that a "No" then - apart from Deputy Higgins?
Mr. Charlie McCreevy
Well, apart from Deputy Higgins, who asked corporation tax, I can't remember anybody else. But sure I'm getting old and maybe my memory is going as well.
I have two further very last questions, is that okay?
Quickly, if you can, Senator, please.
Okay. One is, given everything that's happened and you said that coming into elections, we like to get re-elected, so decisions are made in terms of budgeting around that. Do we need a more mature approach to democracy in this country, in your opinion?
Mr. Charlie McCreevy
Well, I touched on it in an earlier reply there about a more mature approach to lobbying and representation.
But to budgeting? I mean, do we have to say "Look, it's about what we need to do rather than what's going to buy us the votes," for want of a better expression?
Mr. Charlie McCreevy
Well, I think to be fair to all Governments of all persuasions, I think, and all the politicians that I have known, whereas politicians naturally will always have at the back of their head "I'd like to be re-elected", I would definitely say that all the politicians I know want to do the right thing. But they're not against one another, the fact that a politician wants to be re-elected and doing the right thing. Like, I gave various examples earlier of things that we had done which couldn't have had the political impact in the short term of a positive nature. So, I think, look, a democracy such as Ireland is less, well, nearly 100 years now. I'm sure things ... the way we do things now are different to the way of doing 60 years ago and hopefully we learn all the time and do things somewhat differently and improve things. I think that's what we're all about. We might disagree about how doing it, we certainly disagree on economic philosophies ... the way of doing things. I don't have any difficulty with people that stand up for a strong view, such as Deputy Higgins, and I have said that publicly when I was a Member of Dáil Eireann. I would like to think the same right exists for people like me to have strong views, not of the same type.
Thank you, I'm going to-----
Mr. Charlie McCreevy
I think that's the essence of a liberal.
Okay. And I'm going to wrap up and then invite both Deputy Doherty and Deputy Murphy to come in and it's on that very point, as to what the essence of a liberal is, and on your earlier engagement with Deputy Higgins about the free market and so forth is where I maybe would like to begin the wrap-up. I maybe put the question to you, Mr. McCreevy, and it comes back to my earlier engagement with you today that was demonstrating the residential house prices and the period in which the Bacon report was most active and how that was actually playing out in the market. So, could I maybe begin by putting a question to you? Is the property market entirely free and neutral, given that when tax interventions take place, they do have an impact in the market in one capacity or another?
Mr. Charlie McCreevy
They certainly do but you can't anticipate what might happen in the longer term. I refer to what Deputy Noonan said back many years ago when I brought in that, there'll be an unintended consequences and there can be. So ... by the way, not just he said that, I said it subsequently some years later during the Dáil debates. There can be ... yes, you have an effect but you can have unintended effects also.
Okay. And do interventions through tax measures on that basis have potential to favour one side of the market over others? For example, investors/speculators versus home buyers?
Mr. Charlie McCreevy
Well, what we try ... yes, the answer to that question is again, yes and what we try to do, not alone by the interest deductibility issue, but the biggest thing was the stamp duty changes that we made. You must remember, we increased stamp duty dramatically and left it at zero, it went to zero for the first-time buyer and we increased stamp duty enormously, up to 9%, which is a fair old hike, anyway, and it had damn all effect on the housing market or very little.
Now, before I ... the kernel of this question is: do the measures have potential to favour one side of the market over others, which is investors and speculators on one side and people trying to buy a home on the other side?
Mr. Charlie McCreevy
Well, we tried in the changes I made regarding stamp duties. We tried to penalise, if that's the appropriate phrase I should use, the investors and benefit, by having lower rates of stamp duty, for the first-time buyer. That's what we attempted to do.
Who paid the stamp duty ultimately because we know from the majority of questions asked here that ultimately when the ... when the whole process was finished, it was the purchaser who had the stamp duty kind of stitched into the purchasing price?
Mr. Charlie McCreevy
Well, that's the same argument, Deputy, that you can make and justifiably so, with grants. Like, when you give grants to new houses or things like that over the years, in fact, it's built in, or new grants for anything in areas of construction, it's built in then to the price, it's taken up by the person that's doing the job or building the house or selling the house. There's always that particular difficulty.
What we tried to do with stamp duty and I made so many changes that we made ... I made quite a simple system that I started off with into a very complicated one and my goal all the time in all the years of taxation were to make things simple because I think that's the best way to get the maximum amount of money from any area. You'd have a very simple system and a very transparent one. But what happened in the stamp duty area to do with price we were trying give a benefit and trying to skew the market in favour of the first-time buyer. It just didn't work.
So that comes back to whether it was the first-time buyer or whether it was people trying to buy a home and trading up and trading down or whatever. And if I can bring up the next slide there. What we see in that slide is the ratio of new house prices to the average industrial wage and the ratio of average second hand prices to the average industrial wage. And we see it, they are the kind of more or less ... you can nearly put one on top of the other for both markets. In 1996, the purchasing range is in and around just over four times the national industrial wage for somebody trying to buy a home which would be in the Central Bank's sort of ratio levels, and likewise for the new market, it is just over 4%. And going into 2007, we are seeing ratios of 12 times or so the national industrial wage in trying to buy the average sort of house. In that regard, Mr. McCreevy, in reviewing your tenure as Minister for Finance and the property-related tax measures that you implemented or increased or elongated or put off by means of deferral, do you think that these actions benefitted one sector of society over the other and, if one, which?
Mr. Charlie McCreevy
Well, certainly the price of housing went up, there is no question - the facts speak for themselves and in the ratios to industrial wage. But there are other ratios that you can use as well, such as affordability. People had more money in their pockets due to less taxation, greater money, etc. So there are other ways of measuring that. But at the end of the day, Chair, whether we like it or we certainly ... and maybe we don't, it is the market that spoke. The price of houses went up, people were prepared to buy them at the prices they went up to. Banks were prepared to lend at ratios which turned out to be, later on, weren't so good for the banks either. So therefore, the ... now there are various-----
And that brings me right to my final question. The market spoke and from our earlier questioning, we know that the market is not neutral, that the market takes direction from the tax incentives put in place. The market was speaking loud and clear that affordability levels were running beyond the capacity of people in this country. To be able to buy a home in ratios of four to five and you are dead right, Mr. McCreevy, whenever we talk about affordability as well. Because what we have found since the crash, it's not actually people losing their jobs that has been the main difficulty in terms of them servicing their mortgages and the Keane report is very explicit in this, it has been their affordability to be able to service their mortgage. So I put the question to you again, do you think your actions as Minister for Finance either impacted on one section of society more than the other, favoured one side of society over the other or had legacy issues that related in terms of hardship or benefit to one side?
Mr. Charlie McCreevy
Well, during my time as Minister for Finance, I believe that the measures I took allowed everybody an opportunity to have a better standard of living and all the benefits that came with that. And it certainly allowed people to move up the property ladder if they so wish. What some of these issues about affordability relate to is the ratios which the lending institutions decided to operate. What the regulator was doing about same. I read interestingly enough, with the regulator that he seemed to, that he did increase as far as I can make out the ... their issues of risk-related assets of what he was imposing upon the banks. That didn't seem to have any effect either and I referred to earlier different things that I believe contributed to the whole chasing one another. But I don't ... I find it hard to believe that things such as that the park ... tax incentivisation ... regarding, say, things like park and ride schemes, small towns renewal, docklands relief, enterprise only, another, contributed say to housing-----
I'll say one example to you. It was in around the period I'm talking about. The tax relief that was given to investors of residential property gave a more favourable position to somebody who in terms of tax relief who was actually trying to buy a home or if they were trying to trade up or whatever.
So the mortgage for an investor in the buy-to-let sector was cheaper for a mortgage than a person who was trying to buy a home through the tax reliefs. Now, if somebody was competing in the market to buy a home, and you have a first-time buyer or an existing homeowner trying to trade up, they're competing with somebody who has an additional edge on them because their tax relief is actually greater.
Mr. Charlie McCreevy
Yes but, Deputy, the tax relief regarding property was-----
I'm talking about ... I'm talking about the investments. Forget now about the over-the-shop schemes and the student accommodation-----
Mr. Charlie McCreevy
Yes, but the-----
-----I'm talking strictly about residential accommodation where there was two agencies in the market, people trying to buy homes and investors, and the investors had, in the way the tax structure was created, a more favourable method to repay the mortgage. The mortgage was ultimately cheaper for them.
Mr. Charlie McCreevy
But, Deputy, I'm sure ... or Chair, I'm sure you're going to do this in any event. I say that you should go and, say, have an investigation or a study into, say, the housing ...the number of houses that were sold during that particular period on which there was any tax relief given at all. You must remember, and I should have referred to this earlier, the biggest change in doing the tax relief came about after the initiative I had in the 1998 Finance Bill when I restricted to a level of £25,000 - €31,000 and something subsequently - as to the amount of money that an investor could cross over from, say, his rental property area and set against his other income as well. That actually was the biggest disincentive and control of that particular time during tax reliefs. That's the ... in my first budget I did this. And it had more of an effect. So then because not every part of the country had tax ... had section 23 relief for ... you see, section 23 relief would have started in 1981 and we reintroduced it in 1984. So most of the houses built in the boom period, as you call it, didn't have section 23 relief at all. And I think if you get an independent study you will find that.
Thank you. I'm going to move to wrapping things up, so. Deputy Doherty, five minutes, and then Deputy Murphy, five minutes, and then we'll conclude.
Yes, can I just ... a couple of quick things. You say that you weren't personally close to any of the developers or builders, I think, in response to Deputy Joe Higgins. Is that a correct statement? There's-----
Mr. Charlie McCreevy
Well sure like I did-----
Just let me finish the question. There's reports, and you may want to correct the reports, that you were personally very close friends with Sean Dunne and indeed were invited to his wedding in the Riviera ... which would be deemed as one of the major developers, so-----
Mr. Charlie McCreevy
But sure I'm ... I haven't lived to the ripe old age that I am without meeting a large cross-section of people and some of them happened to be builders and developers. Now that you mention Sean Dunne, I would have met Sean Dunne in 1983-'84 when, I think, it might have been his first or second venture out on his own. He's a chartered ... he's a quantity surveyor. And Mr. Dunne was building, I think, about 40 or 50 houses under some type of licence for the National Building Agency. It was local authority housing he was building. So I know Mr. Dunne from about '83-'84 and he comes from Carlow. So that's the length of time I know Mr. Dunne. So he's a friend of mine, together with lots and lots of friends of mine. He ... by the way, the housing ... by the way, he's quite a good builder as well and I regard him as a long-standing friend of mine. And I ... it's common knowledge that I was invited to his wedding.
Yes. No, the only reason I ask you is because you've given evidence to this investigation to say, when you were on a line of questioning about the Galway tent and developers, you said, "I was not personally close to any builder." So, I just-----
Mr. Charlie McCreevy
Well I personally like I suppose, maybe ... maybe that particular bit ... I regard myself as not ... I don't go on holidays with Mr. Dunne, I never have. I go on holidays with other friends of mine which are not in the building business.
Mr. Charlie McCreevy
So I ... it's a ... look, it's totally judgmental as to whether it is a ... I have a deep personal relationship with many people. Like, I think it's a ridiculous question, by the way, Deputy, with respect.
Well, sorry, you're entitled to your opinion in terms of my line of questioning. I was actually just-----
Mr. Charlie McCreevy
No, no, that particular question.
No, I was actually ... can I just point this out? This is evidence that you're providing to this committee and it's important that ... we're relying on your testimony as evidence. When you said, and you opened this, that you were not personally friends with any builder, then I was offering you the opportunity to correct the record in relation to your evidence-----
Mr. Charlie McCreevy
Well, well, I would know-----
-----and, you know, whether that's ridiculous, allowing you that opportunity or not is different.
Mr. Charlie McCreevy
Well, okay, I take the ... I take the suggestion then, so if you want to-----
Yes. I'm sure many people watching this would ... would deem your interpretation of a friend, you know-----
That's ... that's a ... back.
-----they'll have different interpretations what a friend is, you know, and these days we have online friends and all the rest-----
Let's move on to questions, Deputy. Let's move on to questions.
-----and Facebook friends but having a definition of a friend that they ... you go on holidays with is a ... is another version of that.
Mr. Charlie McCreevy
No, well, I'm not saying ... look, look, I think this is quite a surreal conversation ... anyway, is that-----
Okay. Listen, can I ... can I ask you, in relation to ... can I ask you-----
Mr. Charlie McCreevy
-----all this about friends and categorise them, and-----
I'll allow ... Mr. McCreevy, when you're wrapping up I'll allow you as much freedom as you like, when you're wrapping up-----
I was only ... I was only giving you an opportunity to not-----
Mr. Charlie McCreevy
Maybe I'm not-----
Excuse me. Mr. McCreevy ... Mr. McCreevy-----
Mr. Charlie McCreevy
-----something like that, that seems to be the way we're going.
Sorry, Mr. McCreevy, please. Please.
Mr. Charlie McCreevy
Oh, sorry, Chair.
I don't want to be directing you again. And I've said to you on a couple of occasions, I just said it a moment ago, and ... just stop the clock ... I'll afford you as much time at the end of this session today to say whatever you wish. And if you believe that there's outstanding stuff and all the rest of it-----
Mr. Charlie McCreevy
Okay, Chairman.
-----but when you're making your comments, I do appreciate ... and you've done it with ... right up to now, that you get your comments directed to the Chair, and it's not an engagement to be having discussion ... you're more than welcome to do that when the ... when this hearing is over, to catch up with people and talk to them if you so wish and have a discussion with any member that you'd like to talk about. But I just want to keep things focussed upon the questions at the moment and bring things to an end. Deputy Doherty.
Thank you. You've also acknowledged that you, in your 2004 budget, which was delivered in 2003, extended many of the property tax reliefs to 2006. Can I ask you, in light of that, when you travel around the country, and particularly if you go to the Shannon region, if you go to Leitrim, if you go to Roscommon, what do you think when you see the ghost estates, some of them that were built as a result of the tax policies that you introduced and extended? What do you feel when you hear, for example, the fact that 40 ghost estates are to be demolished, and the fact that a report in 2006 showed that, during your tenure as Minister for Finance, that individuals who used these schemes were able to reduce their tax bill to zero? And they were ... those numbers were being increased year on year as a result of your measures.
Mr. Charlie McCreevy
Well I'd be very disappointed that the estates which were started upon weren't completed and I'm further disappointed that people didn't go to live in them. So, therefore, I'd prefer if that hadn't occurred, naturally, but it's the whole property market collapsed and I, of course, would be very pleased if some local authorities or public bodies would take over some of these estates and make them available to people who cannot own their own homes. But that's a matter for the Government of the day.
I would prefer ... I would prefer ... the idea of the incentivisation was to allow people to get on and do this particular type of work. There were lots of jobs and incomes created in that time. I'm also very pleased to go around the country and notice lots of facilities in the country which local business people and local developers kept ... did for the community, including sponsoring everything from football teams to everything else. That has been missed as well and I'm very glad of the economic activity that people in the more rural parts of Ireland who didn't get the same great benefits from ... say the Celtic tiger that occurred in Dublin, say, Cork, and say, Galway, that they got some benefit as well. I'm disappointed that it didn't end up to ... it didn't end up in a way that I would have envisaged. But I think it did generate a considerable amount of economic activity and there were spin-offs from it at that time.
Yes and that's all well acknowledged in terms of tax revenue and employment, and the impact it had on the ... on those communities at the time. But what is your view in relation to counties such as Leitrim, which would nearly have to double its population to occupy the houses that were built under schemes that you introduced and extended?
Mr. Charlie McCreevy
That was the market.
The market didn't sign the Finance Bill, with respect.
Mr. Charlie McCreevy
No, no-----
A Minister signed the Finance Bill and extended these schemes.
Mr. Charlie McCreevy
But, Deputy, you'll find references that I made on different Finance Bills about taxation matters. I always said, including some of the incentives I brought in, that any business person that makes a decision solely on the basis on a taxation incentive, without looking at the other aspects of the issue, will often be very, very disappointed. I said that at the time, so therefore, it was a matter for the developers and construction people and their financial institutions, to listen ... to look at all the aspects, were they going to be able to a) finance on this, could they sell them at an affordable price? And b) was the market there to buy it? That I'm afraid-----
Okay. Can I just finally ... can I finally say this, because I was-----
Mr. Charlie McCreevy
That's a job for-----
A wrap up question.
That's fine. It's all the market's fault, in your view, in that area. But can I put it to you, and I mentioned this here, a review of the 400 top earners in Ireland during 2002 and 2001 ... and they benefitted ... the review shows that the way that they were able to reduce their effective tax rate was through these schemes. These schemes that allowed you to have the schemes such as the Shannon Basin property-based capital allowance incentives. For example, there were six individuals of the top 400 earners that paid no tax in 2002, which was an increase from 2001. There was 37 of the 400 that paid between 0% and 5% effective tax rate. That was an increase from 25 the year before. Do you believe or can you agree that because of some of these schemes and because of how individuals were able to reduce their tax rates, houses were being built to effectively reduce your tax rate, not with the intention that somebody will live in it? If it worked out that you could you flip them in a couple of years' time, you would benefit on the double. But these individuals were able to reduce their tax rate, in some cases, to a level of zero as a result of the policies that you introduced.
Mr. Charlie McCreevy
Successive Finance Ministers, pre my period and during my period, have introduced changes into the taxation code to ensure that everyone is trying to .. that everyone is paying an adequate level of tax. As I referred to a few minutes ago about the change I made in the 1998 Finance Bill regarding the capping of the reliefs that could be carried across, that was the total amount you could bring across which was, I think, the most significant change I made. Subsequently over the years, my successor made changes regarding some of these reliefs as well and put in an overall threshold for them. All of that is a job that you review every couple of years to see, "Well, are we getting ... is there too much avoidance in this particular area and should we even it up?" That's the job of what a Finance Minister does previewing a Finance Bill. The Revenue Commissioners come along and say, "Well the figures show this and this relief has been overused or this relief has been abused or this particular section of a Finance Bill was never intended to give this particular type of relief." And we take anti-avoidance measures all of the time. That's what I did and my successor did as well.
Deputy Murphy.
Thank you, Chairman, and thank you, Mr. McCreevy. Just a couple of brief questions if I may and it's just in relation to your approach to budgets to try and understand the level of analysis done by the Department. Because throughout various points of your evidence today, it has not been clear what degree of analysis had been done prior to a budget proposal and what degree of analysis had been done after it is implemented. In your first budget, the budget for 1998, you proposed having the capital gains tax from 40% to 20%. I'm not interested in the actual proposal itself or its impact but was this proposal out of the blue for your officials or did it come from them?
Mr. Charlie McCreevy
I decided that it was going to do that.
Where did that idea come from?
Mr. Charlie McCreevy
I always intended to do it.
Okay. Did you have any analysis for it as to what the outcome might be?
Mr. Charlie McCreevy
No but I was proved right as to what would happen. Just a second now ... if you look at that particular budget, my officials insisted that I would put in a figure that the cost to the Exchequer would be €19 million. I said in the Dáil during a PQ subsequently - I didn't believe a word of it - but I put it in for good prudence because I knew from my own experience down through the years a rate of 40% capital gains tax - and it was higher in other years - that it was stifling a lot of people doing anything and that if we reduced the rate, a lot of people would sell everything from shares to property, etc., and we'd get a gigantic amount of money. My officials did not believe that but I did and we did it and I was proved correct.
Thank you, Mr. McCreevy. I'm not interested in the proposal itself, just in the approach is what I am asking about. Was it your usual practice to come up with a policy idea without informing your officials?
Mr. Charlie McCreevy
Some of the things we mentioned earlier today, we ... I told the officials I was going to do it. I remember about the SSIAs, for example, I remember informing them about this. That was a few weeks before the budget though.
This particular cut, you had informed your officials, I think, two weeks before the budget?
Mr. Charlie McCreevy
Before the budget? The SSIAs?
No. The CGT, capital gains tax------.
Mr. Charlie McCreevy
Probably so, I don't know.
Okay and they were ... I think their understanding was that you might be introducing it over a series of years but you wanted to go ahead and do it immediately. Is that correct?
Mr. Charlie McCreevy
Correct.
Okay.
Mr. Charlie McCreevy
Well, no sorry, I may be ... sorry ... wrong. When I told the officials I was going to do this, it was my intention to bring it from 40% to 20%. Perhaps some of them interpreted that maybe ... I think the day I said it, they thought I was going to bring it in gradually over a period and maybe it was later that day or the following week when they realised it was going to be all in one go.
And when did the Taoiseach first hear about this?
Mr. Charlie McCreevy
Well it would be ... the way all budgets were being decided in my day is that the Estimates were done in one particular box and then it is left ... there's a Government decision made that the taxation arrangements will be discussed between the Taoiseach, the Tánaiste and the Minister for Finance. I'm sure now it's done by the ... the council, the economic council this Government has. And that's how all budget taxation changes were made.
But that budget, two weeks beforehand you tell your officials.
Mr. Charlie McCreevy
Oh yes. Yes, yes.
So, when do the Cabinet and the Taoiseach find out about it?
Mr. Charlie McCreevy
Well ... oh, the Taoiseach and the Tánaiste would have been apprised of what I was going to do some considerable time in advance of it.
A considerable time being six months, being three weeks, being-----
Mr. Charlie McCreevy
No, sorry, oh no, sorry, well maybe the Taoiseach and the Tánaiste and I had some discussions about taxation probably throughout the year, I can't remember in any year, but we probably did. But there would have been no secret that that's what I was going to do. But we would have finalised and then, on the morning of the budget, you come along to the Cabinet and you tell them the taxation changes.
Okay. In Brian Cowen's first budget day speech as Minister, he said that the budget is the initiative of Government as a whole and not simply the work of the Minister for Finance. What did he mean by that?
Mr. Charlie McCreevy
What he said.
What ... is he implying something there?
Mr. Charlie McCreevy
I-----
Do you think he was implying something there, when he says that's an initiative of the Government as a whole and not simply the work of the Minister for Finance?
Mr. Charlie McCreevy
Well it is the Government as a whole, in this particular sense: the Estimates process is conducted between the Minister for Finance ... first of all, there's the memorandum in the middle of the summer, then we start the actual process-----
Yes, yes.
Mr. Charlie McCreevy
-----then we have individual line meetings, so the Government is involved at all stages. The Government under Bertie Ahern used to have a number of ... a series of meetings throughout the year, usually ... often on a Saturday, where we would discuss on the Estimates side as to what we would like to do in terms of public expenditure the following year - everything from social welfare packages, etc. The detail was never decided in those particular meetings. Then later on in the process we ... the decision was made that taxation changes will be discussed with the Taoiseach, the Tánaiste and the Minister for Finance. At some of those meetings that we had on the Saturdays, or different other times we had them, Ministers would come forward with various ideas that they might like done in the taxation area and they'd be taken on board and then we'd come ... so there was an ongoing process, so therefore Brian Cowen is correct. It's no different than the process I did.
So he wasn't implying a change-----
Mr. Charlie McCreevy
But-----
-----from how you-----
Mr. Charlie McCreevy
But-----
-----approached the budget?
Mr. Charlie McCreevy
But then no Minister for Finance that I know of and there'd be ... would discuss his taxation changes with his ... with ... up until the recent times, would discuss possible taxation changes with the wider Cabinet until he was going to ... except with the Tánaiste and Minister for Finance. That's been a Government decision going back ad nauseam over the years. It may be changed now because there's a-----
The EMC.
Mr. Charlie McCreevy
Yes the EMC. But that has been the way that it was always done in my time and, might I say, it was done in the previous Government as well. There may ... on account of the previous Government was a three-party Government, if I remember correctly, I'm sure there had to be more liaison between, say, the three parties with their programme managers in all these areas. But with us it was ourselves and the Progressive Democrats and it was done between the Taoiseach, Tánaiste on taxation matters. So all the Government at various stages was along. Now there were people who perhaps post all of that over the years sought maybe to give the impression that some changes, maybe taxation and some spending measures, were done without other Ministers knowing. That was not correct.
Not correct, okay. And just my final question then is why do you think Brian Cowen directed the Department and Revenue and outside consultants to undertake that review of all property-related tax breaks?
Mr. Charlie McCreevy
Well, for the obvious reason that you conduct a review of any scheme that you have for a particular period of time. It would be the sensible and logical thing to do. Like, if I was ... if I had been there, I probably would have done the same. So there was ... what the Department and the Minister would want would be some empirical evidence how ... what the effect of all these schemes were, what the effect now is and what we should do and the way you have a book of evidence. That's why you would consult ... why you generally commission a consultancy review. We did many of them in our time in a whole variety of areas. The Department also conducts its own review in these areas as well, or did.
Okay, thank you.
Okay? Thank you, Deputy.
Thank you, Chairman.
Mr. McCreevy, I'm going to bring things to a conclusion now. But as I said earlier, and with all witnesses, the purpose of this inquiry is not just to go back into the past and to see what happened and to give the fullest picture to the Irish public in terms of the full story as to the financial crisis and the aftermath that this country faced, but also an opportunity to draw lessons from that to apply into the future and which will inform the final report that we will be bringing forward to, to the best of our ability, ensure that a crisis of this type is not revisited upon the shoulders of the Irish public again.
In that regard, if I could invite you to make any closing comments that you may wish to make, the matters that may be outstanding this afternoon that you need ... that you feel that you can give somewhat further attention to, or anything, given your extensive experience as a senior politician here in Dáil Éireann with regard to suggestions going into the future?
Mr. Charlie McCreevy
Well I'm sure post the event in the weeks to come I'll think of various things I possibly should have said but that's always ... that's always in every situation.
Yes. Okay. So do you want to close on that statement, so-----
Mr. Charlie McCreevy
Yes.
-----Mr. MacSharry. Okay ... Mr. McCreevy. Okay, with that said, I'm going to bring concludings to a conclusion. I'd like to thank Mr. McCreevy for his participation today and for his engagement with the inquiry. The witness is now excused and I propose to adjourn the meeting until 9.30 a.m. tomorrow morning, 2 July 2015. Is that agreed? Agreed. Thank you.