Thank you, Chairman. Chairman, I make this statement on foot of your request to assist you and your colleagues in your deliberations inquiring into the banking crisis. You requested that I address certain issues from my position as Taoiseach during the 28th, 29th and 30th Dáileanna. For my record, my tenure as Taoiseach over the time extended over three Governments: from 16 June 1997 to 6 June 2002; from 6 June 2002 to 14 June 2007; and 14 June 2007 to 7 May 2008.
You requested I address a number of specific topics in my evidence which are of interest to the inquiry. The first one is the nature and effectiveness of the operational implementation of macroeconomic and prudential policy. The available evidence supports a strongly positive conclusion under this heading. The main economic problems facing Ireland in the mid-90s were high unemployment, net emigration, relatively low incomes and the need for increased productivity. A decade later these problems were substantially solved. GDP growth in real terms averaged about 7.25% in the decade or so to 2006, and the corresponding rate of growth in GNP was nearly 6.4%. Such rates of growth were substantially above those experienced in other EU member states, and indeed throughout the OECD area of the time.
The 2005 annual report of the National Competitiveness Council reported that Ireland’s rate of growth in this period was more than double that of the US and triple the average rate achieved by other eurozone countries. They also noted that labour productivity had been growing by 5% per annum and that the taxation and regulatory systems had developed to become key competitive strengths of the economy. Furthermore, with Government investment in infrastructure being significantly higher than in other developed economies and countries, a previously important and long-standing weaknesses was being addressed. As a result of these developments, employment in Ireland increased from 1.38 million in 1997 to over 2 million by 2006, and the unemployment rate declined from 10.3% to 4.3%. Net inward migration accelerated from 19,000 per annum in 1997 to 70,000 per annum a decade later.
A key indicator of the progress that was achieved in this period was that by 2007 the National Competitiveness Council would report that Ireland was ranked fourth in the world in the UN’s human development index, based on strong improvements in income per capita, life expectancy and educational levels. These achievements were made against an international background of a slowdown in growth in Ireland’s main export markets from 2001 to 2003, and ongoing fears of a steep decline developing in the United States.
Furthermore, at home the aggregate fiscal position was managed in a highly conservative, prudential way. Thus, total Government expenditure as a percentage of GNP actually declined from 39.8% in 1997 to 39.2% in 2007. Government gross current expenditure as a percentage of GNP fell from 36% to under 33%, facilitating expansion in capital spending from 3.6% to 6.3% of GNP in that decade. The overall Government balance rose to a surplus of over 6% of GNP, from 1.3% a decade earlier in 1997. And finally, to seal this point in relation to prudential financial management, it should be emphasised that the Exchequer debt/GDP ratio fell from 63.6% in 1997 to 25.1% in 2006.
Budgetary policy was successful also in addressing social inequality. For example, in the quarterly economic commentary of December 2004 the ESRI concluded:
In terms of income redistribution, Budget 2005 has been strongly progressive in terms of the direction of tax measures, social welfare payments and the absence of indirect tax increases. As regards the Budget's overall fiscal stance. The most appropriate indicator of the budgetary position is the general government balance (GGB), which we forecast to move from a surplus of 1.1 per cent of GDP this year to a deficit of 0.6 per cent of GDP in 2005. This expansionary fiscal stance may not be inappropriate given that there are potential downside risks to our forecasts over the next few years.
A year later, writing in the quarterly economic report of December 2005, in an article entitled Future Irish Growth: Opportunities, Catalysts, Constraints, Professor Frank Barry of UCD concluded as follows, "It is suggested here that if Ireland can continue to attract substantial [foreign direct investment] and the labour pool necessary to man it, further convergence on US income per head – which remains well above that of the EU 15 – should be [available]."
Clearly, Chairman, Ireland has been extremely effective in attracting FDI. At the heart of that success is the operational effectiveness of IDA Ireland, the agency responsible for implementing Government policy in this area. And, for example, the IMD World Competitiveness Yearbook 2008 ranks direct investment flows to Ireland at $10.79 billion and 4.22% of GDP as the two most significant improvements in competitiveness of Ireland in that year.
On the second question, Chairman, the appropriateness of expert advice: when it comes to expert advice and high-quality economic analysis, the Government have a wide range of sources available - international organisations - including the European Commission, the IMF, the OECD and financial ratings agencies like Standard and Poor's and Moody’s. Each carry out independent assessments of macroeconomic and prudential conditions in Ireland, and for the most part these are undertaken about annually and usually highlight what, in their view, are the prospects facing the economy, and the policy initiatives that were required to prioritise to optimise economic performance on a sustainable basis. These organisations have the advantage of having international perspectives, and the insights they provide are especially valuable when considering economic conditions and prospects in a comparative context. In other words, they enable us to judge performance relative to countries with whom we compete. This comparative perspective is obviously very useful from the point of view of assessing if Government policy is on the right track.
At national level there are several organisation, funded or part-funded by the Exchequer, such as the ESRI, NESC, Forfás and the Central Bank, which through their regular publications and studies on particular aspects of the economy, provide valuable and continual monitoring of economic performance at macro and sectoral level, and with respect to individual policy initiatives undertaken or proposed by Government. Increasingly, in recent times, domestic financial and professional services providers have also devoted increased resources to economic analysis, policy evaluation, commentary and economic forecasts. And while the research of these organisations focus primarily for the benefit of their own clients' bases, it can provide useful insights for policy development and evaluation in public policy terms.
I would like to also mention under this heading - which is in my report, but I won't read it, but it's in the report - the elaborate annual process of soliciting and evaluating pre-budget submissions from interested parties and individuals by the Department of Finance. This process provides a broad platform from which Government can elicit ideas, potential initiatives and amendments to existing schemes to improve budgetary formation. In addition, it's always open to Ministers, on the advice of their Departments, to solicit interest from external consultants with respect to particular issues or problems which are foreseen developing. Furthermore, there is well-developed public tendering processes in place to facilitate the public service in procuring the most appropriate level of expertise at fair value for taxpayers.
In overall terms, therefore, I hope the committee of inquiry can see from my remarks that aside from economic advice available from the permanent Civil Service, in particular the Department of Finance, there is a very wide range of sources of advice, both from an international and domestic focus, which allows Government to draw a synthesis which one hopes of course is balanced and gives due consideration to the very wide range of views that is inevitably brought forward in such a process.
Obviously I am not going to present a comprehensive review of the policy decisions that were made in this period, nor the inputs to those decisions. However, I think it's important that the committee takes due recognition of the information that was available when the decisions were being made to counteract the retrospective narrative that has developed with the benefit of hindsight over the years since the crisis first began to manifest in 2008. To this end, the table included summarises IMF forecasts and results for real GDP percentage growth in Ireland as published in the World Economic Outlook
over the period 2004 to 2009. The WEO is published in spring and autumn and data from successive publications are shown in my statement.
It can be readily seen, Chairman, that the crash was not foreseen by the IMF, who only realised their outlook when the slowdown was well and truly at hand. For example, as late as autumn 2007 the IMF was forecasting that the Irish economy would grow at 3% in 2008 after inflation is deducted. Even when it became clear that there was a severe global downturn, the IMF forecast in late 2008 that there would be no more than a marginal fall of 0.6% in real GDP in Ireland in 2009. This data indicate the information that was available to decision makers at this time, and the conclusions are clear: even an organisation such as the IMF remained convinced that Ireland’s economic expansion was sustainable.
Inevitably, of course, there were stresses and strains associated with rapid expansion in economic activity.
The most noted and commented upon at the time was the growing importance of the construction sector in the Irish economy. At some stage, this growth would inevitably ease. For example, the ESRI medium-term review of 2003 noted that, and I quote, "At some stage over the coming decade, when the demand for housing has been largely met, it is likely that prices will fall to levels closer to the European Union average, and this will be the signal for a winding down of capacity in the sector ... the inevitable process of adjustment to lower demand [for building and construction output], which is still some way off, will prove painful for the sector". In other words, market forces, which had driven up prices, had led to increased economic activity. However, as supply rose, some of the increase in prices and activity would be expected to be reversed and this was expected to occur at some stage during the years 2003 to 2013. In its subsequent medium-term review in 2005, the ESRI noted that no slowdown was seen and there were ... there was "a growing aura of invincibility about the Irish economy", with consumers showing a "high degree of certainly about the future". And, while, with the benefit of hindsight, this can be interpreted as unwarranted complacency, the ESRI went on to conclude that the "fundamental factors driving the Irish economy ... remain quite favourable". A note of caution was sounded but the subsequent analysis, which comprised a high-growth and a low-growth scenario, was based on alternative assumptions regarding the impact on Ireland of what were described as "global economic imbalances" which could lead to the US economy slowing considerably and experience a painful adjustment. Chairman, to an extent, this is what subsequently transpired. The forecast based on this scenario was that Irish growth would slow to 3.5% per annum in the years 2005 to 2010 and 3.1% from 2010 to 2015. Unemployment would rise to about 7% in the early years of the slowdown before falling back to the 2005 level of 4%, while the public finances would remain broadly in balance. Of course, if the US economy did not suffer this painful adjustment, then Irish growth rates were forecast to be higher. The implication is that no homegrown crisis was foreseen and even an imported one would have relatively mild effects due to the fundamental sound nature of the Irish economy.
These examples are provided here, Chairman, simply to illustrate what was available to policy makers and it's not my purpose to critique these organisations. However, the research and conclusions of these organisations constitutes a major input to policy decisions. Of course, having this research available does not mean that the most appropriate course for policy was always clear. Some divergences of opinion are to be expected, indeed, contrasting views and opinions were encountered. The range of views was always taken into account in reaching policy decisions during my time in office but the synthesis of opinions leading to policy decisions inevitably reflects the conclusions of the vast majority of the research. I believe that this is the correct basis on which decisions should be made. In this respect, it must be noted that the overwhelming and virtually ... consensus during this time was that Irish policy was moving the economy in the right direction, that the economy was on a sustainable growth path that could be expected to slow somewhat in response to changes in fundamental drivers, that the main risk would be traced to developments in external economies and that the dangers posed by domestic factors represented challenges to be managed rather than the first indicators of a crisis, as subsequently developed.
Chairman, I'm ... for time reasons, I'm ... I'm skipping some of the sections.
