Mr. Donal McNally:

Thank you, Mr. Chairman. My opening remarks are quite brief. First of all, I'd like to thank you and the members for the opportunity to make this brief opening statement today. The task of inquiring into the banking crisis and the events surrounding it will, I hope, reveal lessons for the future guidance of policy makers which will help reduce the risks of a recurrence of these events to a remote one. I don't think we could have another such unaffordable crisis.

I would like at the outset to express my regret at how matters turned out for the people of Ireland and for the period of austerity that affected so many, and for the increased burden of debt that we now carry. As set out in my written statement, my connection in this was as a senior civil servant providing economic and fiscal policy advice to Ministers and Government, who then decided on the policy actions to pursue.

I believe that, as confirmed by the Wright report, that the policy advice was appropriate, although not always followed. The advice was to run a fiscal policy close to balance or a surplus, and to avoid adding unnecessarily to demand in the economy, to improve supply and to guard our competitiveness. I did not provide advice on monetary or credit issues, that being the preserve of the Central Bank, or on credit growth, seeing that is a matter for the Central Bank to handle. While giving advice I also took advice, notably that the likely growth scenario was one of a soft landing, i.e. that the housing market would return to more normal levels in a manageable way. This was the view of economic advisers in the Department as well as outside, official and private sector commentators.

I did not foresee events as they happened. Others didn't do so either. I was aware of only limited contrarian advice at the time. It is difficult, as I said in my written statement, for cautionary or contrarian views to be got across when the economic news is so positive and when the country has been widely complimented on its economic performance.

The rise in asset prices was a factor of accommodating monetary policy and fiscal policy, strong domestic demand and certain property tax incentives. These incentives were introduced at various times since the 1980s. The motivation for these reliefs was to develop, restore, renew certain areas, and to stimulate employment and job creation. Some of these were more successful than others, and all were generally supported at political level. A number of these were terminated after 1997, some limited in extent, and some new ones introduced. The case for such reliefs was much diminished in the strong property market, but it took time to eliminate these from the tax system.

I accept that there was a deficiency in economic advice resources, which it also took time to address effectively. The situation was improved, but the problem is not just recruiting but retaining staff. The current Government economic and evaluation service model seeks to address these issues in a constructive way. Fiscal policy decisions take place in a different context to monetary policy action. That context is a democratic one. Government must marshal support for policy actions, and justify and defend these to parliament and the electorate. It is not easy to garner support for restraint when resources appear plentiful. A key challenge for the future, I believe, will be the need to communicate the wisdom of restraint to the public, even when resources allow, and the desirability of using surplus funds to reduce debt now to lessen the burden for the future. It also seems that the EU believes that closer monitoring of member states, more constraints on our freedom of action, and firmer rules on budgetary policies will bring about greater fiscal responsibility. Hopefully this will not be at the expense of democratic responsibility. In short, there are important lessons to be learned and there are important issues to be reflected on in the remit of the inquiry on which I hope I can help in that regard. Thank you, Mr. Chairman.