CURRENT AFFAIRS
‘The thing that really struck me about the present recession is the extent to which people are utterly dependent on the State. They have nothing to fall back on’
the money and get caught in this interest rate trap that we’re caught in, you have the money to do it.” He suggests such a rainy day fund might be as much as 20% of
GNP. “That’s what would help you deal with those kind of shocks. And that’s quite independently of the National Pension Reserve Fund, which is really there to finance the pension payments of the future, although we’re currently using it to finance some of the shock.”
Personal assets
And it is not just government that should be thinking of rainy day funds. Policies need to be put in place that encourage individuals also to have such a fund, argues Durkan. “The thing that really struck me about the present recession is the
extent to which people are utterly dependent on the State because they have nothing to fall back on,” says Durkan. “Individuals too should have a rainy day fund. There is evidence already that individuals are saving, with recent estimates suggesting that the personal savings rate has reached 12%, having fallen to just 2 or 3% during the boom years. “People are saying that this 12% is too high and that if we spend more, the economy has a better chance of coming out of recession but, on the other hand, 2 or 3% was too low. If you go back to data from the Fifties, Sixties and Seventies you won’t find numbers that are as low as that. Ten, 12, 15% are not excessively high figures for the personal savings rate, and I think they’re the kind of figures we should be aiming for.” Durkan says the tax system has favoured private individuals hold- ing their wealth in the form of housing and pension funds assets, which are very illiquid. “If you look at the asset structure people have in Ireland, and probably in the UK too, they don’t have cash.” The only way to change this is through policy, he says. “The rea- son they don’t hold assets like cash or equities is because the tax sys- tem encourages them to hold their assets in another form. Contributions to pension funds are tax deductible, and that looks like really good value so people do it automatically. The same is true of housing. You get tax relief on mortgage interest, and that encour- ages people to push their borrowing beyond their limits. So get rid of that tax advantage altogether,” suggests Durkan.
An Irish Fiscal Council He points to a recent proposal from fellow economist Philip Lane for improving fiscal policy through the creation of an advisory body - an Irish Fiscal Council. This would be along the lines of the Swedish Fiscal Policy Council, which would set the scene for medium-term fiscal policy, examine government fiscal proposals,
16 UCD BUSINESS CONNECTIONS
and monitor outcomes. “When it was first mooted I wasn’t enamoured with the idea,” admits Durkan. “I thought it would never happen in Ireland because the politicians wouldn’t like it and they’d discount it. Then I thought: just because you think that they won’t run with it is not a good reason for ignoring it. “You could design it so that it would work,” he says. “I actually think there’s an awful lot to be said for having people who will look at what government does, write about it and make it available to the public. That enforces a discipline on them.”
An original concern was the problems that the UK version ran into, the Office for Budget Responsibility (OBR), which came under fierce criticism for not being adequately independent from govern- ment. “They’re trying to extricate themselves from it now, and they’ve appointed someone to head it from the Institute of Fiscal Studies who would be regarded as independent, but that independ- ence would be key for any such council,” says Durkan. However, the challenges would be significant, he says. “Remember your money would be coming from government and they may not like what you are saying, so you have to be a particular type of person who’ll stand up to people. “Often you’re standing up to people who might privately agree with you – the public servant who is telling you you can’t say these things, he might simply be pursuing the interests as he or she sees it of the government or the minister. So, I think that’s always a challenge, but if you have a good Fiscal Council, with good staff and they are truly independent, that could be extremely constructive.”
Durkan recounts the story of a politician he had wrangled with
several decades back who recently spoke to him about what “great times” they were. “I was totally bemused by this because I was under huge pressure from his officials about what I was writing back then. I soon realised of course that the officials had been trying to antici- pate his reaction, whereas he had just regarded it as part of the cut and thrust of life. The politicians might just be more receptive to this than we imagine!” Whatever your view on some or all of Durkan’s proposals, there is a strong argument for a reformed fiscal policy that is less likely to fall prey to the cycles of boom and bust. This might be just the right time to look back and learn lessons from the past.
Ann O’Dea
Joe Durkan teaches on the part-time MBA programme in UCD Smurfit School and on the BComm programme in UCD Quinn School
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