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In July 2011, the Minister for Finance, Michael Noonan TD announced the establishment of the Irish Fiscal Advisory Council (IFAC). The Council is soon to be established on an independent statutory basis by the forthcoming Fiscal Responsibility Bill. This Bill will also introduce fiscal rules and give legal backing to binding multi-annual expenditure ceilings. Professor Alan Barrett was appointed as a member of the Council alongside Professor John McHale (Chairman), Mr Sebastian Barnes, Dr Donal Donovan and Dr Róisín O’Sullivan.

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The establishment of the Council, Barrett says “follows a growing trend internationally”. A similar body in the UK for example, The Office of Budget Responsibility, produces the macroeconomic forecast independently of the Government. While the Irish Fiscal Advisory Council offers policy advice as opposed to offering technical and mechanical suggestions, both, Barrett explains, are rooted in the notion that their independent nature can help eliminate the “optimism bias” or “natural inclination for Governments to be over optimistic in their economic forecasts”.

One of the key elements within the mandate of the Council is to comment on the macro-economic forecasts that make up the Government’s budgetary strategy. They are also required to assess fiscal projections and, given the key principle of counter-cyclicality i.e. “when an economy is doing well, it is desirable that Governments build up surpluses so that when the economy is doing badly, the Government is able to spend more to cushion the effects”, the Council must also comment on the “appropriateness” of the overall fiscal stance. The Council has also been assigned the task of assessing how well the Government is meeting its own fiscal targets. “At one level, we could be described as a fiscal watchdog. It  is there because of this observation that Governments tend to run up debts.”

Some recent commentary has suggested that the Government is not following the advice of the Council. Questioned on this, Professor Barrett highlights the “strange environment” the Council currently works in, that is, under the guise of the EU/IMF programme of support. “With other bodies in town looking at what the Government is doing, we are in a slightly artificial setting. It will however be interesting to see how things unfold when the Troika are gone.” While there is no onus on the Government to take on the advice, “the Council was established with the thinking that over time…the Fiscal

Council would become an established part of the system”. In Barrett’s opinion, there should be a “political cost” for the Government should they choose to ignore the advice being offered by IFAC. While the Council’s most recent report, entitled ‘Strengthening Ireland’s Fiscal Institutions’, suggested that the Government be formally obliged to respond “in truth, the response could also be ignoring us”. “There may also be an embarrassment factor if they are going against the advice.” As time goes on “trust in the Council should grow and people should believe in what it has to say” Barrett adds.

IFAC: Funding

Another issue raised in the report, and in correspondence with the Minister for Finance as Barrett mentions, is the funding model, which Barrett describes as “a real difficulty”. Currently, The Council is being funded through a grant-in- aid provided by the Irish Government.

The Council’s long-term funding will be considered in the context of the Fiscal Responsibility Bill. As two of the members work voluntarily, and the remaining members receive a stipend, Barrett believes, that this cannot be sustainable given “the considerable level of work” that is required for a fully functioning Council. The members of the Council feel that their employers should be compensated. “There should be a time buy-out, in the case of the Chairperson there should be a 50 percent time buy-out, in my case this could be 20 percent”. “We are worried about being part of a Council that is toothless” he notes.

 

EU Fiscal Compact Treaty

Discussing the EU Fiscal Compact Treaty, Professor Barrett is keen to point out that much of the content of the Treaty, “has existed for a number of months anyway”. The Stability and Growth Pact, for example, has been in place for a long time, yet “while the structure and rules about how to conduct fiscal policy were there, the enforcement mechanisms were nonexistent”. Barrett affirms that fiscal rules cannot rest solely at EU level but must “operate in a national framework”. In this light, “a national level formulisation would be a good thing”. However, Barrett stresses his concerns that “the nature of fiscal rules, especially numerical fiscal rules, can be overly restrictive and may not actually lead to good policy”.

For Barrett, while it is a positive development that the infrastructure is going to be there, he would have some concerns over the rigidity of its application. The biggest challenge facing the European Union is undoubtedly fiscal credibility, and, given the debt and deficits situation there is “clearly a need to have a rule book that applies across the EU…that Member States are going to implement”. “Hopefully there would be a degree of flexibility; you do not want to be in a situation where rules are directing fiscal policy in a way you don’t really want.” Reiterating this point, Barrett refers to the importance of counter cyclical fiscal policy, and how rules must be conducive to the economic circumstance the country finds itself in. “In certain circumstances you want fiscal policy to be looser and in other circumstances you want it to be a bit tighter.” When Ireland’s debt comes under control for example, and there is no immediate threat to the solvency of the State “this is the point where you would like a higher degree of flexibility”. While we have very little choice in Ireland at the moment given the urgency in reducing debt levels, the rules need “to be such that severe austerity is not being imposed when ideally you would be loosening the purse strings”. What would be the repercussions of a no vote should a referendum arise? “Putting Greece and Portugal aside…there seems to be a greater degree of comfort around the European situation at the moment, as reflected in the bond yields in Italy and Spain and in Ireland. This gradual movement towards the Fiscal Compact and this new set of rules seems to be “providing some degree of comfort” across EU Member States. If Ireland was to block the Treaty, “I really don’t think the rest of the European Union is going to sit around waiting for us to agonise over it– I think the implications for us could be quite severe”.

 

Economic prospects

Speaking on the broader question of Ireland’s economic prospects and the conflicting comments from some that Ireland can expect growth once the terms of the EU/IMF bailout cease andfrom others that Ireland can expect many more years of austerity, Barrett suggests that we could expect “abit of both”. “I certainly think growth can return to the Irish economy”. As witnessed in the earlier part of 2011,“there is still a vibrant export base in this country but there is a lot holding the economy back such as consumer confidence” amongst other factors. “It is perfectly feasible to see a situation in which the economy does start growing”.

However, Barrett explains, “the problem with exports is that is that they are not really employment intensive”. Once the export sector is functioning “reasonably well”, this consequently means a significant cohort of people feel secure in their jobs and spend domestically, employment will in turn be generated in Ireland and the “second round effects” are visible. “This is really what we need to start seeing in Ireland.”“Unfortunately”, Barrett adds, the “euro area got itself into difficulty and exports suffered” and this “positive dynamic” that had the potential to evolve “didn’t follow through”. Will Ireland face more austerity following completion of the EU/IMF deal? We are witnessing “enormous cuts in an economy that is contracting” but in the future “while there might be ongoing austerity, it would not be half as bad compared to the last number of years”.

 

ESRI: An independent entity?

Reflecting on recent comments bydeparting Economic and SocialResearch Institute (ESRI) research professor, Richard Tol, that the work of the ESRI is compromised given the amount of funding it gets from Government, Barrett comments: “When it [the ESRI] has needed to criticise the Government on its public policy programmes, it has done so”. Drawing upon similarities with RTE, he adds: “There is clearly an ethos among RTE journalists that you completely destroy yourself if you allow yourself and your credibility to be overly influenced.” He stresses that although “we are publicly funded, those who work in the ESRI are academics and researchers who are very interested in producing research that is independent in nature and that genuinely shines a light on the Irish economy or Irish society”. People who work there “would not want to work there if they had to be a mouthpiece for someone else”. Barrett began working in the ESRI in 1994. From early on, he understood the inherent ethos to be “the minute the independence of the ESRI was compromised, we may as well have just shut down”. This, Barrett maintains, has been the unique characteristic of the ESRI over the years and one of the primary reasons he vehemently rejects the recent criticism. “If there was any suggestion that results should be nuanced, alarm bells would go off and there would have been a proactive effort to ensure research results were never altered.”

“I simply don’t accept suggestions that research results were downplayed or altered”. “If you want to criticise the Government, you must back up your statements. In the ESRI, you are put through your paces.” The ESRI has a turnover of about€12m per year, including a grant-in aid of about €3m and a further €9m towards specific research projects. The Government calls upon the ESRI to undertake these particular projects and they will always insist on the publication of the relevant study. Thus, “the agenda is in a sense set by the Government.” While the ESRI can make suggestions and “engage in discussions”, what is studied is “ultimately” the prerogative of the Government. Does that compromise independence? “There are people who would like to study many issues but they are not likely to get the funding for them.” “The advantage of the current model”, is that the Government chooses “the practical problems” rather than “academics deciding the most important issues”. Does the Government take on board the findings and suggestions of the ESRI? “If, as a researcher in the ESRI, you believed you were going to undertake a project one day, and the results were going to be put into policy

the next day, you are probably going to be sorely disappointed.” “Policy moves very slowly, the policy influence often comes about when trying to influence the agenda over time.” From the late 1980s, the ESRI began undertaking research on poverty and social exclusion. By the late 1990s, the first national anti-poverty strategy that set targets in terms of poverty levels and how to measure poverty was created.

“It probably took ten years for the policies to be actually implemented” but the role of the ESRI was to “shine a light on the big problems facing Ireland and the potential solutions”. While it may be slightly “depressing at one level”, “if you are consistently doing the work, showing where the solutions are, doing policy evaluations you just hope over time they will influence the policy agenda”. However, the ESRI is regularly quoted in the media and in the Houses of the Oireachtas and for this reason “you do see a real impact of this in influencing the debate”.

This interview was featured in the February issue of the PAI Journal. To view the Journal, please click here.