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4 THE BATTLE TO RESTORE FISCAL STABILITY
CATHY HERBERT
AT A CONSTRUCTION INDUSTRY conference in Dublin Castle in June 2008, a month after his appointment as Minster for Finance, Brian Lenihan mused laconically, and not a little wistfully, that it had been his misfortune to have been appointed Minister for Finance just as the building boom was grinding to a ‘shuddering halt’.
All hell broke loose. He was accused of throwing a wobbler, of wallowing in self-pity, of talking down the economy. For months, one national newspaper referred to him as the ‘gaffe-prone’ Minister for Finance.
At this remove, it seems extraordinary that such a blindingly obvious observation would cause such a furore. But it was the beginning of a pattern. Throughout his two years and nine months as Minister for Finance, Brian Lenihan coaxed a reluctant public and his fearful government colleagues to face the unpalatable truth about the extent of our economic crisis and to accept the need, however grudgingly, for the toughest budgets in our history.
Around the time he made his unguarded remark, he was finding out just how bad the figures were. He quickly realised the severe shortfall in tax revenue required an immediate response. On 13 June 2008, as news of the defeat of the Lisbon Treaty was filtering through from count centres around the country, he walked across to the Taoiseach’s office to brief him about the need for emergency measures to address the rapidly deteriorating budgetary position. It was a dark day for both men. Back in his office, Lenihan’s natural ebullience had given way to a deep gloom about the task that lay ahead. He was shaken by the gulf that lay between the triumphalism of the crowd that had drowned him out during a brief visit to the count centre in Dublin Castle and the harsh reality of the budgetary position outlined to him by his officials in the previous month. He despaired that he could ever bring a population that believed it could defy the expressed will of 500 million fellow EU citizens to accept the difficult decisions he knew he would have to make.
He did what he always did when he was worried: he telephoned a list of people – colleagues, close friends, acquaintances and people whom he barely knew but respected – and discussed the sorry position upside down and inside out until he could see a way through to the next step. This habitual, informal consultation process with a variety of touchstones was his coping mechanism throughout his torrid time in Finance.
On 8 July, he announced a series of measures to achieve immediate savings of €440 million. It was the first of six bouts of increasingly painful budgetary correction in his constant battle to stabilise the public finances. Two years and four months later, he lost that battle. But his dogged efforts made our bailout programme considerably less drastic than it might otherwise have been.
It became clear almost as soon as the July package was announced that it was inadequate. In September, it was decided to bring forward the budget by two months to October. That decision has since been blamed for the controversy that the budget provoked, swiftly leading to a number of high profile reversals. It certainly was an inelegant budget but it is doubtful that more time for greater deliberation would have made the kind of measures that needed to be taken any more palatable. Our position was pretty dire and our choices severely limited. We simply had to tax more and spend less: there was no painless way to do either, particularly after seven years of giveaway budgets.
As Lenihan was grappling with this budgetary dilemma, he was also dealing with the mounting liquidity crisis in our banks, which had intensified following the collapse of Lehman Brothers on 15 September. Two weeks later, the Government made the decisions to guarantee virtually all of our banks’ liabilities.
Notwithstanding the enormous consequences of that decision for our economy and for the Irish people, it was the alarming growth of our budget deficit that was uppermost in the minds of most of us in the Department of Finance in those weeks leading up to Budget Day on 15 October. The extent of the solvency issues in the banks had yet to emerge and the ferocity and depth of the international financial crisis could not have been foreseen. By contrast, the threat posed to our financial stability by our ballooning deficit was real and pressing.
Lenihan had hoped that bringing forward the budget would demonstrate to the public the gravity of this threat. In that respect, at least, it certainly failed. Almost all of its elements were deemed unacceptable by those affected and the consensus was that the budget was unfair and picked on the most vulnerable. Few put their heads above the parapet in defence of a politically toxic but economically necessary set of measures. October 2008 was a lonely month in Merrion Street.
The decision to abolish the universal entitlement to medical cards for over seventies was derailed by protesting pensioners, the most effective political lobby group of this long and deep recession. The fact that the State pension was increased by €7 in that budget made no impact at the time and has long since faded from memory.
The truth is, in late 2008, the public and the political system had yet to grasp the full extent of our economic difficulties. To be fair, neither was the severity and depth of the recession fully appreciated internationally and forecasts everywhere turned out to be wide of the mark. The Department of Finance forecast of a mere 1 per cent contraction in GNP in 2009 was in line with the projections of the ESRI, the Central Bank and the IMF. There was an expectation that we would return to growth as early as 2010 and that unemployment would peak at just over 7 per cent.
Never having served in an economic ministry and having no background in economics or business, Lenihan had no special insight into the likely twists and turns of an international crisis. But he was obsessed with one thing: the need to bring public spending back to levels that reflected our available resources. In the summer of 2008, he had watched from the sidelines as decisions on public service pay, the biggest element of public spending, were being taken in another arena across the courtyard from his office. Although officials from his Department took part in the talks, the Department of the Taoiseach was firmly in the driving seat. Privately, he was aghast that the rituals of social partnership were being played out, the actors apparently oblivious to the deteriorating economic backdrop. But a mere two months in his role as Minister for Finance, I suspect he was more reticent about his views around the cabinet table: social partnership was at the core of the political process and had become the preserve of the most powerful figures in the administration.
In the event, the talks broke down, earning the Taoiseach sharp criticism for his failure to do what every other Taoiseach had done since 1987: cut a deal with the unions. There was little acceptance either in the media or among the opposition that our circumstances had changed utterly. The talks reconvened in September and within days of the collapse of Lehman’s, the Government conceded an award of 6 per cent over twenty-one months. I recall Lenihan asking two of his senior officials if we could afford the pay increase. If it was the price of industrial peace, he was told, it was worth it.
The exchequer returns at the end of 2008 showed a drop of more than €8 billion in tax receipts over the year. In January, the Government said immediate savings of €2 billion would have to be found. In early February, five months after it was granted, the pay increase was suspended and the Government introduced a public sector pension levy, which amounted to an average cut of 7.5 per cent in the pay of public servants without the agreement of the unions. A short time later, the social partners walked away from the process.
Lenihan had been in cabinet for just under a year when he was appointed Minister for Finance. I had worked with him since January 2006, just after the Office of the Minister for Children was set up and, as its political head, he began to attend Cabinet meetings. He was fascinated by the business of government and had an in-depth knowledge of how the system worked, much of which he learnt from his father, who had held seven different portfolios in his long political career. It was as if he had been training to be a minister all
