Policy added ‘fuel to fire’: report

GOVERNMENT policy helped to lead the country into economic crisis, according to the Governor of the Central Bank who went on to suggest that the government also made people believe “the party could last forever”.

Both the Honohan Report into the Irish Banking Crisis and the Regling Watson Preliminary Report on The Sources of Ireland’s Banking Crisis are scornful of government policy in the run-up to the banking collapse.

Central Bank Governor Patrick Honohan writes in his report: “Macroeconomic and budgetary policies contributed significantly to the economic overheating, relying to a clearly unsustainable extent on the construction sector and other transient sources for Government revenue (and encouraging the property boom via various incentives geared at the construction sector).

“This helped create a climate of public opinion which was led to believe that the party could last forever.”

“The Government’s procyclical fiscal policy stance, budgetary measures aimed at boosting the construction sector, and a relaxed approach to the growing reliance on construction-related and other insecure sources of tax revenue were significant factors contributing to the unsustainable structure of spending in the Irish economy.”

The Regling Watson report says: “Ireland’s banking crisis bears the clear imprint of global influences, yet it was in crucial ways ‘home-made’.”

According to the report “there was scope to mitigate the risks of a boom/bust cycle through prudent fiscal and supervisory policies” so as to aid a “soft landing” for the property market.

Instead, the report states, “official policies and banking practices in some cases added fuel to the fire. Fiscal policy, bank governance and financial supervision left the economy vulnerable to a deep crisis, with costly and extended social fallout”.

The report claims there was an increased need for “good” policies which try to compensate and set incentives in such a way that vulnerabilities in the economy do not get out of control.

“In Ireland, an imprudent expansion of bank lending, accompanied by an unwise policy on tax exemptions, resulted in this natural economic cycle becoming much more extreme than should have ever have been the case.”

The report cites the narrowing of the tax base as a crucial factor, claiming: “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, often in particular regions of the country. And it contributed to a more general mis-allocation of resources as some of the tax concessions seem to have been granted on an ad-hoc basis in a not fully transparent way.”