The Cedar Lounge Revolution

The Nyberg Report: Brian Lenihan still doesn’t get it… April 21, 2011


Fianna Fáil finance spokesman Brian Lenihan, minister for finance on the night of the guarantee, said he supported the report’s analysis that there was a systemic failure of regulation. “The report is a direct challenge to what it shows to have been a wide consensus through that period, which looked at the property market primarily in terms of the need for more houses and expectations of rising prices.

“The report is also correct in pointing to the political consensus, involving all parties, which saw the main issue at the time as being the expansion of public services. Fianna Fáil accepts its responsibilities in this regard, but the question remains whether Fine Gael and Labour will now recognise and acknowledge their role,” he said.

That’s a comfy little narrative and no mistake. And it is of a piece with the efforts of the administration he was a part of to blame the public sector and/or public expenditure over the past few years.

Now granted none of this happened in a vacuum. As the report notes in section 4.5 which relates to the Department of Finance Pre-Crisis (2003 to mid-2007) :

4.5.3 The ability of the DoF and the Minister for Finance to convince Government of the need to restrain expenditure growth was somewhat blunted by the fact that during 2003-2007 tax revenues were consistently higher than forecast, leading to a larger budget surplus than projected. As maintaining budgetary surpluses was seen as less important once public debt had reached relatively low levels,117 the Minister for Finance was under considerable pressure to allow relatively high rates of expenditure to meet social and other priorities. Thus, current expenditure growth exceeded that of nominal GDP growth in all years since 2000, increasing particularly rapidly from 2005 onwards.

The problem is that in light of the above Lenihan provides a very partial reading in that he leaves out a fundamental aspect of the equation. If he goes to he will find that it says this:

Advice on Economic Policy115

4.5.2 The DoF was generally conscious of the need to rein in both general government expenditure and tax reliefs that favoured the property market. For example, a 2004 brief prepared for the new Minister for Finance urged restraint in terms of growth in expenditure and tax reliefs and emphasised the need for base-broadening taxation measures. It also stated that competiveness should be maintained by controlling the domestic cost base and indentified the need for capacity to respond to economic shocks.116 However, the brief was silent in relation to credit growth.

And:

4.5.4 Despite the significant political pressures operating in the opposite direction, the advice on restraining expenditure should have been more vigorously articulated than actually was the case. Greater emphasis should have been put on the cyclically adjusted budget balance, given the fact that the composition of total revenue had changed significantly with a sharp increase in the share of cyclical taxes,118 many of which were directly related to the credit-induced housing boom. At the same time, tax reliefs relating to property distorted resource allocation and undoubtedly contributed to overheating in the property market.

As McGee notes:

There is criticism too of the “piecemeal basis” of policies to restructure the banks. Other aspects which fall into the political sphere, of which Nyberg is critical, are the heavy reliance on transactional and cyclical taxes and continued tax breaks.

Lenihan ignores entirely the revenue side of that equation where the state made insufficient efforts to ensure that income was sustainable – as famously articulated by the ‘I’ll spend it if I have it” approach of one his more famous predecessors as Minister of Finance.

And governments he was part of took a deliberate decision not to engage with taxation increases during the economic cycle. And this permeated the body politic, to the degree, and here Lenihan is half-right, that we had the ludicrous sight of the Labour Party attempting to undercut Fianna Fáíl and Fine Gael in 2007 in relation to tax cuts.

But for him to walk away from the prime political responsibility of the low tax trope that the Fianna Fáil/Progressive Democrat governments put at the center of their political project is an abject disavowal of responsibility.

On a slight tangent I met a friend who had been involved in the GP component of the government yesterday who was sure that once people recognised that FF and GP had taken tough decisions and had had no choice voters would come back to them.

I don’t think so.

An interesting admission about the state and default. April 21, 2011

This is a very interesting admission, is it not? So far we know that a broad range of national and international voices have been arguing that the debt placed upon this state is too great, even within the context of the orthodoxy.

But now Arthur Beesley writes in the Irish Times:

What does the Greek situation mean in the Irish context? Despite public utterances to the contrary, serious anxiety lingers in Government circles that the combined weight of bank and sovereign debt presents an unsustainable burden to the State.

And there’s a bit more. As regards the gathering pace of a serious, as distinct from cosmetic – as in our own case this last week, renegotiation of the Greek ‘bailout deal’ Beesley makes the following points:

This however is question which refuses to go away. Indeed, the very volume of restructuring reports and their increasing frequency suggests that public opinion is being softened before the bailout troika of the European Commission, the IMF and the European Central Bank issue their latest judgment on Greece in June.
The official line remains that the country’s debt burden remains sustainable, but it would appear that doubts are steadily growing. Furthermore, the questioning reaction of market investors shows they are not at all convinced by the soothing words of those who say the doubters are wrong.

This has been characteristic of the crisis both here and more broadly, from the off. First the orthodox line is held whatever the evidence to the contrary. Then there’s a softening of that line at the fringes, but the official rhetoric remains the same. And then, as with the IMF/ECB intervention, when it’s actually in train they remain wedded to that rhetoric. It’s only subsequently that what was deemed sustainable is admitted to be otherwise, and this when everyone in the process is well aware of the reality and its only government and their cheerleaders in the media who have said otherwise.

Now there’s an argument that of course the state would do all in its power to shore up our reputation through keeping the mood music positive. But that only takes one so far when we’re dealing with matters economic which while hardly transparent are clearly far from as opaque as some would like or think them to be.

In retrospect Brian Lenihan was the worst offender in this regard from the political class. Little wonder that Brian Cowen effectively kept his mouth shut and head down for much of his term as Taoiseach. If anything should have been indicative of how severe the situation was, and how badly he and his had screwed up on their watch that should have been a great big clue. But as we know this syndrome was far from restricted to politicians. Those in positions of authority in our regulatory and financial institutions played a similar game. And sure why not? That’s the game they’d played through the good time when all was sweetness and light. No wonder too that that optimism turned into truculent and surly arrogance when it all went south.
Not only did they have no ability to deal with crisis, neither did they have an ability to craft a rhetoric to do likewise. And here’s the thing. To believe that Fine Gael and Labour are immune from this would be a very great error. They too were purveyors of unbridled optimism during much the same period, and their adherence to the orthodoxy has given them next to no room to reposition themselves given that they argue for much the same policies to engage with the crisis.

Though perhaps it’s a half step forward to hear that at least some inside this administration recognise what many of us already have intuited. Perhaps.