Wright: Expectations around next election could help overheat economy
Ireland will face more problems with an overheating economy unless expectations surrounding the next election are restrained, a banking expert said.
Canadian Rob Wright highlighted the absence of independent controls over interest rates and real needs in a country recovering from one of the costliest banking crises since the Great Depression as factors which could promote overspending.
The Government guaranteed Ireland’s ailing banks in 2008 in the belief that they were stable – a decision which eventually led to a €64bn rescue of the financial system and an international bailout of the State and economic slump.
It followed a massive property price bubble enabled by banks borrowing from international money markets then lending to investors who swelled public coffers through housing taxes.
Mr Wright said: “This is a real human tragedy, this is why I am here saying we should learn from it and make sure it does not happen again.
“In a recession people lose their cars, jobs and houses, this is extremely negative.
“Establishing a framework for stable, on-going growth is the most important thing.”
Ireland exited its bailout package earlier this year and declared an end to austerity in next year’s budget which eased spending restrictions imposed by the EU and International Monetary Fund (IMF) lenders.
Mr Wright is a former deputy minister of finance in Canada. Four years ago he compiled a report on failings by Ireland’s finance department during the crisis.
He added: “There are expectations in Ireland in the next election that you will be able to solve a lot of problems with resources that you won’t have to resolve those problems.
“Unless you are ready to restrain that expectation you will have the same challenge.”
The next general election is due in about 18 months.
Mr Wright was questioned by the group of 11 legislators on his report.
The Joint Committee of Inquiry into the Banking Crisis is expected to hear from major international institutions.
The witness said some good advice that should have been taken by the Finance Department before the crash was not.
“It was not as if the government was adding great dramatically new incentives for the housing sector.”
But government spending was increasing by 12% a year for a decade.
“It was basically not restraining some of the elements that were there, some of the elements that were creating more expectations for spending, not unlike in any other country.”
He added by 2005 the brakes should have been applied.
“They were spending money when it should not have been spent in an over-heated economy.
“Rein in the spending, take some action to rein in the construction sector.”
He added: “When you had spending ramped up that dramatically in an overheated economy that is a dangerous point.”
A number of steps have been taken to try to avoid a repeat of the crash including removing interest deductibility against taxable income for financial costs and measures on mortgages.
But Mr Wright pointed to the absence of complete freedom for Ireland’s Central Bank – interest rates are set by the European Central Bank ECB.
He told TDs: “You face the same pressures we see all parties under, to meet real needs of the economy that fuelled the fiscal spending.
“What has changed very dramatically now is that a central banker used to pull people back. Central bankers are much better at pulling back.
“Now you don’t have a central banker that is going to deal with the unique monetary needs of this country, you are part of a broader economic union.
“It puts a lot more pressure on you as politicians to help the people of Ireland to restrain expectations and to explain why there is a danger of over-incentivising the economy that is not obvious to people yet.”
