Professor Alan Ahearne:

It is not so much that the techniques economists use have changed but that one can get different answers if one adds some more data. That was quite dramatic in the Irish case. For example, when the IMF was here in 2006 and 2007 for its annual estimate of the Irish economy, it made estimates of things like the structural deficits and the underlying budget position in which it tried to look through the cyclical factors. At the same time it considered what economists call the output gap which is a measure of whether the Irish economy is overheating or going along about where one would expect it to be.

In 2006 and 2007 it said the output gap was zero, the economy was exactly where it thought it should be, there was no overheating. It thought the structural balance was in surplus so it said even if one went deeply into it and took out the cycle, the public finances looked fine. That was published in its Article IV reports. I presume at the time that must have been taken as a sign. Here was an experienced international organisation giving the green light to the Irish economy.

When it reworked that, using the same methods but with more data now, and everybody is wiser after the fact, it estimates that the Irish economy was greatly overheated to the tune of almost 7% of GDP in 2007 and there was an enormous underlying structural deficit of 9% of GDP. It is now saying that the public finances were greatly boosted by the property bubble but the techniques they had did not identify that. Now it sees the bust and that changes everything but at the time it issued its report and other economists were making similar calculations it did not have the benefit of seeing the bust and those techniques produced what looked like benign results.