Mr. John McCarthy:

Sure, thank you, Chairman, and thank you members of the joint committee. I can be very brief, Mr. Chairman, as I have submitted a more detailed witness statement to the joint committee already. Just by way of introduction, you have directed me to give evidence relating to my role as chief economist/assistant secretary and all other roles in the Department of Finance. As you mentioned, I was appointed to the position of chief economist in November 2013. Prior to that I worked at a technical level in the Department, at grades equivalent to that of assistant principal and principal officer from about 2001 onwards, with the exception of 2004 when I was back working in the Central Bank. For the most part, during this period, my work involved producing economic forecasts for the Department, as well as undertaking some technical work on the public finances, mainly related to the Stability and Growth Pact, the structural budget balance, fiscal stability treaty and so forth. Please let me briefly summarise the, the main points of ... or what I see as the main points of my witness statement.

As I've outlined, the stance of macroeconomic policy during the first decade of monetary union was completely inappropriate. While monetary policy was exogenous, it was determined externally by the European Central Bank with regard to economic conditions in the euro area as a whole, fiscal and incomes policies in Ireland should have been counter-cyclical with the view to stabilising aggregate demand in the Irish economy, which was essentially operating at full capacity or even beyond full capacity for most of this period. The contraction of the tax base and the ramping up of public expenditure on a permanent basis were clear policy mistakes and ultimately led to a very large structural deficit once the crisis kicked in. That the public finances were in broad compliance with the requirements of the Stability and Growth Pact during most of this period provides no comfort.

Let me say a little bit on the ... on the Department's warnings. The Department did advise, both internally and externally, regarding the pro-cyclicality of fiscal policy, regarding the loss in competitiveness, as well as the over-dependence of the economy on new house building and construction more generally. This is acknowledged in various reports, Wright and Nyberg being good examples. However, it is also clear that the Department should have adapted the tone of its warnings as the imbalances were becoming more acute and I would certainly agree with this analysis.

Now, in relation to the housing market, the general approach in the Department was to highlight the central scenario of a soft landing but also to outline, in various internal memos and so forth, that there were risks to the ... to this ... such a benign outcome. I think it's important on the outset to stress what is meant by a soft landing. This was the assumption that prices would level off or even decline moderately so that with continued consumer price inflation, real house prices would realign with fundamentals over time. In addition, it involved the assumption that activity would revert to more sustainable levels in a gradual manner, rather than in a very disruptive manner. Clearly a soft landing did not materialise and this was an incorrect call.

Finally, if I could just say a few words on the resources of the Department, and specifically within the economic division. Certainly, when the crisis hit there were very few economists working in the economic division. The number of people that I would consider as technical economists you could count on one hand, I think it's fair to say, in the division at that time. But I think it's fair to say the picture has changed in the intervening period with improved resourcing, especially on the quality. Okay? I think we are now approaching a critical mass of economists within the Department and we are publishing some of our technical work, something which never happened before, and we are engaging in a more structured manner with the wider economic community. So, from an economic perspective, I think it's fair to say that the Department is in a much better place now. Chairman, with this brief summary I will conclude my opening statement. Thank you.