John Considine and Theresa Reidy
University College Cork
The Department of Finance has set out its mission statement in very broad terms. Its role is ‘To support the achievement of the Government’s economic and social objectives by promoting a sound, sustainable economic and budgetary environment, continuing improvements in the efficiency of public services, and an effective framework for financial services.’
There are competing views on the role of Finance departments. The Irish Department of Finance takes the broad view for itself. The narrow view allocates a tax and expenditure role. This narrow view presumes that monetary policy and financial supervision is controlled by the Central Bank and is usually accompanied by a non-interventionist disposition on policy. The broad view is that they control tax and expenditure policy, as well as managing the economy and administering financial policy.
In evaluating the Department, whether you take a broad or narrow conception of the role of Finance, the Department has an unfavourable track record. This in itself is not particularly noteworthy, Government departments are often subject to criticism. However, the Department of Finance has long promoted itself as “first among equals”. There is a significant body of evidence which undermines this view.
The narrow view of Finance posits the Department as the “guardian of the public purse”. Hecklo and Wildavsky (1981: 40) quote a British Treasury official describing their role as “the first lesson for any new official in the Treasury is that it is the Treasury’s business to save money, not to spend it”. In this core responsibility, the Irish Department of Finance has a variable record. The first fifty years were marked by an enthusiasm for austerity, though this did not always translate into actual policy outcomes in terms of fiscal imbalance. This preference for fiscal conservatism may have led Whitaker (2009) to refer to a culture of “miserabilism” in the Department. Some looseness in current spending was planned from the 1970s and the period since 2000 marks the start of sharp increases in public spending. Recent evaluations (European Commission, Mc Carthy Report) have indicated that concern with value for money slipped sharply during this period.
In the broad view of Finance, departments are allocated wider roles in economic planning and finance policy. Economic planning is most associated with TK Whitaker’s time in the Department. This was the highpoint for the Department and economic planning in Ireland, while the low point is associated with the creation of the separate Department of Economic Planning and Development in 1977. More recently, low numbers of professional economists in the Department have pointed to the low priority given to long term economic planning and new departures in economic theory and policy.
Limited economic expertise has also been cited as an explanation for the poor forecasting record of the Department of Finance. High margins of error have long been a feature of forecasts of revenue and deficits. Poor forecasting is a feature of general Irish economic commentary and the Stability and Growth Pact update from October 2008 outlines a number of forecasts from several agencies, including the Central Bank, ESRI and private sector commentators, all of which were inaccurate, a point was made by the Secretary General of the Department to the PAC on May 6 2010. However, European evaluations have highlighted the poor forecasting record of the Department for some time. Importantly, in a comparative evaluation, the Department came second last of the 12 Eurozone countries. While there is an element of uncertainty in all forecasting, the Irish Department of Finance is amongst the worst at this inexact science.
These points are important in terms of the reputation of the Department of Finance. The myth of Finance suggests a rigorous Department, keenly focused on controlling public expenditure. The international and domestic evaluations paint a very contradictory picture to the conventional wisdom of Finance. The Department of Finance seems lax in its approach to budgetary predictions, particularly multi-annual budgetary projections and targets, and control of spending outcomes, despite their overwhelming fixation with control of the expenditure process.
The final aspect of the role of a Department of Finance is financial policy. Traditionally, this area has been delegated to the Central Bank (and the Irish Financial Service Regulatory Authority). This delegation has not always worked and has resulted in unclear lines of responsibility. A good example was the evasion of DIRT. The Department of Finance claimed the issue should have been dealt with via exchange controls (i.e. the Central Bank was responsible) while the Central Bank claimed that it was a taxation matter (i.e. the Department of Finance and the Revenue Commissioners were responsible).
Of all other policy areas, this is the one where the Irish Department has been subject to the greatest criticisms. Financial policy has been marred by scandals for many decades. The small size of the financial sector in early decades mitigated the need for a developed financial policy. As the financial sector expanded, policy and regulation have tended to lag. Scandals in relation to DIRT, the collapse of ICI and the more recent banking crisis are glaring flaws in the management of financial policy.
Inadequate performance is a growing theme in public coverage of the Department of Finance since the 2008 financial crisis. There are big questions to be addressed in the Department of Finance. The first must be whether the Department should have, or has the capacity, to achieve the broad objectives which it sets for itself. Despite, their institutional pride and view of themselves as superior, the evidence does not support this.
