Let's Get Fiscal

Ireland’s most influential think-tank, the Economic and Social Research Institute (ESRI), is located in one of those horrible new developments at Dublin’s docklands – shiny, box-like office buildings that sprang up, seemingly overnight, during the boom. In the afternoon sunshine, it looks like it’s built of Lego.

Depending on how cynical you are, you could see it as entirely appropriate that one of post-Celtic Tiger Ireland’s most important economists has an office that looks out onto a desultory “ghost” building – only two floors of the colossal block opposite are occupied.
John FitzGerald graduated from UCD in 1970 and went to work in the Department of Finance, before moving to the ESRI 25 years ago. He lives in south Dublin and has three daughters, all in their 30s. Particularly since the good times ended, FitzGerald’s (mostly gloomy) pronouncements on Ireland’s future have been endlessly quoted and parsed in the media. There’s a framed newspaper cartoon in the corridor outside his office that sums it up: a scythe-carrying grim reaper is dressed as Santa, with a sled full of ‘job losses’ and ‘wage cuts’. The caption reads, “Happy Christmas and a Prosperous New Year from the ESRI.”
FitzGerald certainly looks every inch the super-serious economist – dark suit, steel-rimmed glasses, bushy beard and a purple, patterned tie that looks like it may date back to the Summer of Love.
While I’m fumbling in my handbag for a pen and trying to get the damn dictaphone to turn on, he mentions that an interview with an economist mightn’t be very interesting for Hot Press readers. But of course the problem is, since the ‘R’ word entered everyone’s vocabulary in 2008, the state of the economy has become all too relevant to us plebs. When your pay is slashed, the company you work for goes bust, or you find yourself working in Spar even though you’re a qualified engineer, you begin to wonder where exactly it all went wrong – and who’s to blame.
Well, here’s the man with the answers. Off we go.
The latest report from the ESRI says Ireland’s gross national product is going to start growing again next year. Is the recession over?
Not quite yet. It’s only when you see a reasonable rate of growth and people stop losing their jobs that we’ll know things are better. It doesn’t matter too much whether it’s a technical recession or not, things are pretty miserable at the moment. They will remain pretty miserable up to the end of this year. Next year, my colleagues are forecasting some return to growth, but it’s not going to feel great. I think it’ll be 2012 or 2013 before there’s an end to the feel-bad factor.
A lot of people scoffed at Brian Lenihan last December when he said “the worst is over”. Was he wrong?
He’s probably right. Our view is that the economy will return to quite rapid growth for a short period from 2012 to 2015, making up some of the lost ground. The bulk of the fiscal adjustment should be completed by next year’s budget, when he takes another €3 billion out of the economy. Things will be much easier from then on, if we are right.
You’ve said that the Government is going to have to raise taxes. Are you in favour of a higher tax band – say 50% for people earning over €100,000?
It’s not so much the top tax rate that is important, it’s that the people on high incomes should pay more tax. You can have a 50% rate but if people on really high incomes have so many exemptions that they don’t pay much tax, that’s not much use. The suggestions for reform from the Commission on Taxation were that you get rid of all these property write-offs and whatever, which mean that people on very high incomes can pay very low tax – that’s a much more effective way of doing it. Economists feel that high marginal rates on anything are damaging to the economy. But taking more money from rich people is not. You can take more money from rich people while not having absurdly high marginal rates of tax. For example, if you had a tax on really valuable property, that would mean that anyone who owns a house on Ailesbury or Shrewsbury Road would end up paying a lot of tax.
People have been going mad on Joe Duffy all this week about the new second home tax.
Well I think the tax isn’t nearly high enough on second homes. Everybody has to have somewhere to live but second homes tend to be in rural areas and impose needless costs on society. If you go down to Clifden and look at the holiday homes – they’re not in the village, they’re out in the countryside. The cost of putting a telephone line up the side of a mountain is €10,000 a throw.
What was UCD like in the ‘60s?
Great fun, I really enjoyed it. Found a wife. We met down the back of the economics class.
So is that why you love economics?
It certainly helped at the time, although it did distract from some classes.
Was UCD very radical?
It was a very exciting place, in that people were revolting against the Catholic Church and questioning many things that were wrong in Irish society. Many subsequent leaders like Ruairi Quinn would have been very prominent; Eddie O’Connor, formerly of Airtricity. Many of them went into politics – my wife subsequently became Minister of State. Ireland was a much smaller society. Only one in eight people went on to University.
So elite Ireland was a smaller society.
Yeah, because in modern Ireland, having qualifications is important. Both my parents went to university. If my father or mother ever went to a meeting, they would know everyone in the room. If I go to a meeting, I will know somebody in the room. Whereas if you go to a meeting, you may not know anyone in the room. In terms of civil service, politics, I’d know a lot of people who would have been prominent in university and you see them prominent in Irish society in the subsequent decades. That will be less so for the current generation.
That’s a good thing though?
It is. Foreigners say they want to learn from the Irish success story, the Celtic Tiger. Actually, it was the Irish failures that were interesting. One was the failure to open up to the rest of the world. We were boring people – all white, all Catholic, the same DNA, all blood-group O in the 1950s – although I actually am blood group A. We were 25-years behind the rest of the world. Second was the failure to invest to education. From Siberia though to Snowdonia, northern Europe invested in education post-Second World War. We waited 25 years. Two huge changes in Ireland are investment in education. Education is not for an elite. A huge proportion of the population are now well educated. And the second is the opening up, first through Irish people emigrating and then coming back – research done by my colleague shows these people are 10% more productive over their lifetime. And more recently, it is the immigration of foreigners to Ireland, who have helped jizz up Ireland and make it more exciting.
You’ve said the bank bailout is going to cost Irish taxpayers €1.2 billion per year in interest, quite apart from the €25 billion for recapitalisation. And most of that is going to Anglo. Would it have been better to let Anglo go to the wall?
I think so probably. Serious mistakes were made on the night of September 29. Either it should have been allowed to go to the wall or it should have been nationalised immediately. Patrick Honohan [Governor of the Central Bank] on Vincent Browne the following night referred to banks “gambling for resurrection”. What happened was, they were given a guarantee so the meter was running from September 29 and we, the taxpayers, were paying and they could do what they liked – with our money. Things were done before they [Anglo] were nationalised and the likes of Sean Fitzpatrick and the rest were taken out, which shouldn’t have happened, which further aggravated things. But the basic thing is – I do not see Anglo as being systemic.
Was the Department of Finance’s statement that Anglo was “a major financial institution whose viability was of systemic importance to Ireland” just nonsense?
I wouldn’t say nonsense, but a systemic bank is one where, if their liabilities were all assets in other Irish financial instructions – if they had borrowed all their money from Irish banks – then Irish banks would have lost when they went bust. That’s what happened with Lehmans’. Lehmans’ was systemic to the world. In fact, their [Anglo’s] bondholders – where their capital came from – were much more diversified. Irish banks were not that exposed. The second area in which they could have been systemic is if your cheque was drawn on Anglo-Irish and they went bust and all your wages were gone. But in fact Anglo-Irish was not that kind of bank. It was not like AIB or Bank of Ireland.
What about the argument that if Anglo had gone to the wall it would have affected Ireland’s reputation internationally?
Well do you think Ireland’s reputation since has been great?!
We hear a lot of Fianna Fáil politicians with this mantra that “it’s not our fault Ireland’s up shit creek – it’s because of Lehmans’.”
The bulk of our problems are of our own making, in that the housing bubble should have been stopped in its tracks from 2003 onwards. We [the ESRI] raised the issue with increasing asperity from 2003 onwards. We already, in 2001, suggested taxing mortgage payments to take the heat out of the property market. In December 2005 we published our medium term review looking at what would happen if housing prices fell by a third and the housing bubble burst. We suggested unemployment would go to 10% or 11% and recommended action be taken. The Irish Independent the next morning referred to the ESRI as ‘the Grinch that stole Christmas’. So this could have been stopped. The one area in which the ESRI failed is that we did not predict the financial sector bust. The failure of regulation in Ireland, I find horrific and surprising and certainly, we were not watching the [Financial] Regulator. Nor was the Department of Finance. Both the failure of regulation and the housing bubble could have been stopped.
Everyone’s playing the blame game now. Do you take your share of the blame?
The ESRI doesn’t. Individuals do because everything we do has a disclaimer that the authors are responsible. So the ESRI does not speak, individuals speak. I take responsibility for the failure to predict the financial market collapse.
But if you knew in 2005 that the property bubble was just that – a bubble – why didn’t you shout louder?
Our job is research, we don’t campaign. We provide advice on policy. We’re not policy makers. Talking to the media is uncomfortable for researchers.
I’m sorry!
We’re used to talking in abstruse terms and in formulae and algebra, but the Institute feels we have a duty to communicate with real people. That’s why I’m talking to you. We don’t campaign and I think we would lose credibility if we were seen to be political players. So we gave our advice. It merited an editorial in the Independent the next day. Brendan Keenan wrote a very good article. So don’t blame the media. It reported very well what we said and people continued to buy houses in ways that were unwise. But a lot of my colleagues who were interested in buying houses in that period did not. They listened to the ESRI’s advice; the people of Ireland didn’t.
How do you rate the new Financial Regulator?
Highly. I think you’ve got people who have never been part of the system who can take the pressure and make the right decisions, so I think you’ve seen a transformation and we’ll never be in this mess again. I’m sure we’ll make other messes that have nothing to do with banking.
You said earlier that there were failures in the Department of Finance. Is it fair that no heads have rolled there? Why are civil servants immune?
Well, we don’t know what the Department of Finance was… there were stories in the newspaper immediately after the event, saying the Department of Finance held a different view, in terms of the [bank] guarantee. We also don’t know to what extent the Department of Finance advised the Government to take action to deflate the housing budget or that they didn’t give the advice. So you cannot pass judgement without knowing what advice they were offering from 2003 onwards and what actually happened on the night of the guarantee.
So are we going to have to wait 30 years until these files are released to find out?
There are two inquiries going on, one with Klaus Regling, and the other within the Central Bank. The Klaus Regling inquiry may throw some light on this.
You’ve worked in the Department of Finance. Is there a culture there that economists can wave a red flag and say, “there’s something wrong here, we have to stop this”?
When I was there, this issue was taken very seriously, in ’77, ’78, ’79. We were very concerned that fiscal policy was inappropriate. The government was pumping money into the economy like nobody’s business and they cut taxes. It was clear that this was unsustainable. There was an article by Paddy Geary, who was presenter on the equivalent of Primetime – it was called Frontline at the time – and he went on to become Professor of Economics in Maynooth. I remember putting on the file an article he did in April 1978, which analysed all the problems in current fiscal policy and predicted what would happen and he turned out to be right. So certainly, when I was there, there were economists. But I think there are fewer economists working as economists in the Department of Finance today, which I think is a disadvantage and which we have flagged in a number of reports, going back to 1999. The Department itself and other departments probably needed more technical, skilled people.
Your father, as well as having been Taoiseach, was a lecturer in economics too. Is that where you got your interest in numbers?
I don’t know whether it’s genetic or whatever, but it did affect me. I thought I would become a historian rather than an economist. But there’s no market for historians so I became an economist. I got a job in the Department of Finance. They said, “Look, we don’t want historians, you have a degree in economics so be an economist.” And I enjoyed it greatly. I left after 12 years because I wanted to be an economist, rather than a manager. And also, I knew that family-friendly policies would be more accommodating in the ESRI than in the Department of Finance. But I left many friends behind and learnt a lot. It’s rather like the Jesuits. They get you at a young and impressionable age and they have you for life. The Department of Finance did mark me. Though it hasn’t stopped me being very critical of them.
Did you ever consider going into politics?
No. I think having been married to a politician and the son of a politician you learn just how difficult the life is, and I much prefer the role of being a researcher than a politician. There’s no way that I’d ever want to be a politician.
What did you think of Leo Varadkar slagging your dad in the Dáil recently: he said Brian Cowen was no Seán Lemass or Jack Lynch, but was “a Garret FitzGerald. He has trebled the national debt and effectively destroyed the country.”
At least Leo Varadkar isn’t boring.
What about Fintan O’Toole saying that he’d never encourage his children to stay in Ireland because there’s nothing here for them? Matt Cooper made the same point on The Late Late Show.
I think that’s totally over-the-top. Gay Byrne said the same thing all the time in the late ‘80s and I found it depressing. It is good that Irish people travel. I think an opportunity to study abroad, learn abroad, is important. But I think we will return to robust growth and I think we will return to full employment, if we manage things correctly. This idea that Ireland doesn’t have a future is mad. I have three daughters living abroad and I dearly hope somebody comes back to Ireland.
What do you think of the bailout of Greece?
I think economies can go bust in the euro area or default on their debts. It’d be very unfortunate. However, the Greeks have taken very firm action and given that they have taken action, I think it’s appropriate to facilitate them in what is a very difficult transition.
Could Ireland end up like Greece?
We could have but we won’t now. We took our plight really seriously. Between January and March of last year – there was a real feeling among the authorities that Ireland could go bust. Certainly, the Minister for Finance, and the Government, believed that Ireland could go bust. I think they were freaked. I think they thought they had to take even more dramatic action, but they got it right in the end. The other huge difference between us and Greece is that we will this year be running a balance of payments surplus. Which means, while the government will be borrowing a lot of money on our behalf abroad, we the people of Ireland will be actually repaying foreign debt faster than the government are borrowing. And next year, we – private sector, households and companies – will be repaying even more debt than the government are running up. Ireland is actually running down its debts while Greece, Portugal, Spain are running balance of payments deficits. So that as a people they are running up debts, not just the government. And that’s what makes it unsustainable.
What do you to relax?
I try and go as frequently as I can to babysit my grandson. I like walking in the mountains, meeting friends. I can assure you that I do not read economics for pleasure.
What was the last non-economics book that you read?
In the last few years I’ve read a lot of Scandinavian thrillers translated into English. – The Girl with the Dragon Tattoo, Stieg Laarson; Henning Mankell; Indridason, the Icelandic author; Jo Nesbo, who’s Norwegian. I read history. I read another book on the team of British and Americans who went trying to recover all the art and treasure that the Nazis had stolen.
What kind of music do you like?
Eighteenth-century classical music and a bit of The Beatles or ‘60s music.
Is there a God?
Yes.
Are you a Catholic?
Yes.
Were you brought up to be very religious?
No. In college I was part of a range of societies which were revolting against the Catholic Church. I have been furious with the Catholic Church for the last 40 years. I found myself, ironically, on Al Jazeera, about 18 months ago defending the Catholic Archbiship of Dublin [Diarmuid Martin] because he’s actually shown signs of trying to relinquish control of the schools. I think the institutional Catholic Church in Ireland has been a disaster for the last 40 years and it leaves me incandescent with rage, but I think the Archbishop of Dublin is doing a better job, for once.
So how do you square your anger at the institutional church with your faith?
The church is not the institution or the hierarchy. If you go back to the documents of Vatican II, I think one of the problems is that the bishops haven’t read the document on freedom of conscience. They did what they were told. The Cardinal [Seán Brady] did what he was told. He didn’t say “this is wrong” and stand up and be counted. I think everybody has to answer for themselves.
Do you think that the deal that was struck by Michael Woods on paying compensation to victims of abuse, should be revisited?
I think it’s an outrage. I just feel that the Church authorities behaved in a disgraceful fashion and they should be answerable for that, financially as in every other way. Insulating them from that is wholly wrong. I think that was a disastrous decision by the State. But then, I believe in the rule of law. If that is a legally binding agreement, well then it’s a legally binding agreement. No more than the bailout of Anglo-Irish – we’re stuck with it, but it shouldn’t have happened.
Would you describe yourself as left-wing or right-wing?
I have my political views but I keep them private as I have to produce independent research which has been denounced by every government. The first paper I produced, The Irish Times had the headline, ‘Taoiseach’s Son Denounces Government’ and, since, I’ve produced reports which may have embarrassed the government which had my wife in it. We’ve been critical of Fianna Fáil over the last seven or eight years, until recently. At the moment I actually think fiscal policy is correct, for a change. So, I have a job to do and if I was politically involved, it would make it problematic.
Do you think there’s a left-wing or a right-wing bias among economists in Ireland?
Oh, I think the spectrum is there. But on certain things – like, what is Ireland going to do to dig itself out of this mess – what’s been really interesting is the consensus among politicians from left to right that taking €4 billion out of the economy in the last budget was the correct sum to do. There’s huge disagreement on why we’re in this mess and on how you’d take out that €4 billion, but from the point of view of talking to people outside of Ireland, what strikes them is that there is this agreement that there was no other alternative. Some people feel, “slash public expenditure, fire large numbers of public servants”. Other people feel that isn’t the appropriate stance. I suppose I would find myself somewhere in the middle. Higher taxes are definitely important. But I do think the cuts in public sector pay rates were broadly appropriate. We’re going to have to cut the numbers in the public sector. I think the public sector can be made much more efficient. Whether that’s left-wing or right-wing, I’ll leave you to decide.
Are the unions right to reject the pay deal?
No, but I think the union leadership understand what the problems are, and the parameters the Government has to work within and I think they have been realistic. I think that criticising the trade union leadership if this agreement isn’t reached would be unfair. I think they have done their best by their members and by Ireland. The government can’t offer any more. I think the trade unions were treated badly in the pay talks in December. It was clear the Government could never agree to what was on the table and they should have said, “this isn’t on”. The reason it wasn’t on is that the unions wanted a temporary pay cut, which would be restored in due course when other measures were found. But it had to be a permanent change, otherwise people wouldn’t have believed in Ireland, in which case interest rates would have gone up, not just for the Government but for everyone, in terms of mortgages and whatever. The Greeks tried temporary measures and nobody believed it. So there is no alternative and I think the trade union leadership realise that. Whether they can convince an understandably very angry membership…
Are you saying the membership are being greedy?
No, that’s unfair. I think the people are furious. We shouldn’t be in this mess. They’ve had to take a 15% pay cut and they’re very cross. The fact that there is no alternative may take time to sink in. If they go on strike, the government can’t give in, so you lose your pay and you get nothing out of it. You go on strike when there’s an exit strategy, when you know there’s something you can get out of it. So the trade union leadership have a problem, but I would not be critical of them.
Why do so many economists have beards?
I haven’t a clue. Maybe shaving takes too much time and this is a more economical way of managing their private life (laughs).