Mr. Charlie McCreevy:

Thank you, Mr. Chairman. I was Minister for Finance from the 26 June 1997 to the 29 September 2004. As directed by the committee, I submitted a statement on specific lines of inquiry relating to my role as Minister for Finance. As my period as Minister for Finance ended in September 2004, some considerable time before the banking collapse, my statement deals only with those areas of interest of which I might have some direct knowledge or which would have arisen during my tenure as Minister. This opening statement refers briefly to areas of my written statement.

The new regulatory structure was set up during my time and culminated in two separate Bills in 2002 and 2003. In 1998 the Government agreed in principle to the setting up of a single regulatory authority for financial services. Interestingly, the idea of an SRA was first mooted in 1989 but it was decided not to go ahead with same at that time. We asked Michael McDowell to chair the implementation advisory group. It consisted of nine persons and produced two reports, a majority report and the minority alternative model. It took some time to reach political agreement as to the new structure, which eventually led to the two Bills as referred to above. There was considerable disagreement and not just between the politicians. If you read the commentary on stances of that time, there was not universal agreement as to how and where the new authority should be located. I've noted with a certain degree of irony that a number of the politicians and commentators who wished to keep the Central Bank out of the key role at that time were to the forefront in advocating the return of all powers to the Central Bank post the recent financial crisis, and that has now been done.

Practically all of the debate of those years centred on the consumer protection angle, and little on prudential supervision. I outlined in my statement the various reasons for such debate orientation. I further outlined in my statement that the rules for the capital requirements for banks were designed internationally following the Basel committee recommendations. There has been a recurring notion in much of the Irish media commentary of recent years that principle-based regulation, also referred to as light-touch regulation, was an Irish invention. In particular, some commentators have gone so far as to advise that light-touch regulation was even a Charlie McCreevy invention. Much as I might be flattered to think that I might own the copyright, it is not the case, and light-touch, principle-based regulation was a long time in vogue internationally, and years before I arrived as Minister for Finance. At least some of the earlier evidence to this committee has at least scotched that notion.

I have outlined in my statement as to how capital requirements for Irish banks were managed under the same formulae and policies which applied to all the other European banks.

As the new structures were in the embryonic stage of development before I ceased as Minister in 2004, I can only comment in a cursory way on the co-operation and integration of the new bodies. However, during the setting up of IFSRA, I was strongly of the view that there was an excellent level of co-operation between the chair of IFSRA and the Governor of the Central Bank. The new structure allowed the Central Bank to concentrate on the macro level and to produce financial stability reports which contain guidance for the financial regulation to follow. IFSRA had responsibility for the individual institutions under their remit.

I now turn to direction from the committee on advice. Strictly, the reprimand from Brussels on our 2001 budget would fall under the heading of "advice". The European Union was of the opinion that our budget and stability programme update were inconsistent with the broad economic policy guidelines and issued this reprimand early in 2001. However, in November 2001, the Council of Ministers lifted its earlier reprimand and stated, "Unexpected economic developments were such that the inconsistency underlying the recommendation has lost its force." This says much about the whole art, if it is one, of economic forecasting. In fact, during the course of 2001, the international economic slowdown had gathered force arising from a number of factors, and economic activity in Ireland had declined sharply. In fact, the year-on-year increase in real GDP in Ireland decelerated from 13.1% to 0.1% in the last quarter, thus the 2001 Irish budget was then seen in a different light in Brussels. I shall also mention that, in 2001, there was much criticism of the EU reprimand, and not just from the Irish Government. Many commentators, nationally and internationally, were critical of the EU stance. As many referred to at the time, there appeared to be one set of rules for the larger countries, and a different book for the smaller member states.

On the issue of advice given to governments from many quarters, the Department of Finance, Central Bank, ESRI, OECD, European Union, IMF, and others, the line taken by all democratic governments is that it is just what it says on the tin, advice. Democratically elected governments must, at all times, with their freedom, do what they consider best, in the interests of their people. Yes, this means the ignoring of some advice and the taking of others. I note with some wry amusement that the current Government, as is their right, seems to be steadfastly ignoring advice from a plethora of sources. The Fiscal Advisory Council, established in law by the present Administration, are saying that the projections for growth, consumer spending and population are too optimistic. Also being sidelined are commentaries from the ESRI, the European Commission, and the IMF, not to mention some domestic economists and commentators.

My high regard for the Department of Finance and the staff is well known and has been documented many times previously. However, it is not a criticism when I note the very obvious. Very few worthwhile initiatives of different political Administrations would never have seen the light of day if advice from the Department of Finance had been followed. One of the most groundbreaking changes in Ireland was the introduction of free secondary education in the sixties by the late Donogh O'Malley. This was done without the approval of Finance, and those of an historical bent know that the Department was so exercised, that it got its Minister, the late Jack Lynch, to formally complain to the Taoiseach. Finance were totally unaware of the proposal, and O'Malley was, indeed, in contravention of Cabinet rules for making such a major announcement without informing his other colleagues, and, in particular, the Minister for Finance. Wasn't it a good job for Ireland that Seán Lemass ignored the angst of the Department of Finance?

I look back on the advices from a number of the already mentioned sources. For example, in 2002 the main theme seemed to be the threat of inflation, and there was little talk of housing prices, or that general area, in any of the commentary. In fact, a leading economist was so concerned in 2002 on the slowdown, that he suggested the diverting of funds, of the annual contribution of the pension reserve fund, and putting that money into capital projects. Some commentary always referred to the fact that we had €1.5 million people between the age of 50 and 34, and that the demand for housing would continue to be very strong. To illustrate, again, the futility of forecasting, I would draw attention to the 2000 report from the long-term issues group of the Department of Finance. It predicted a total population of 4.1 million in 2056. It's about 4.6 million today. And that the Exchequer debt would be wiped out entirely by 2012. During my time as Minister for Finance, I was painted as a right wing ideologue, possessed of a Scrooge-like parsimony when it came to public spending. On the other hand, post the financial crisis, I've been turned into a kind of Santa Claus and the philosophy most often attributed to me by my detractors is supposedly encapsulated in the quote, "When you have it, you spend it". It is ironic that this comment was made on the publication, in November 2001, of the following year's departmental Estimates. The headline in the Irish Independenton the following day was entitled, "McCreevy takes the axe to public spending". The first line of that article reads, "Finance Minister Charlie McCreevy last night brought to a shuddering halt the big-spending era that went with the economic boom", end of the headline. Later on, in that article, it refers to me saying, "When you have it you spend it. The mistake is to try to spend it when you haven't got it". Now, however, I think it can be fairly said that the above actual comments of mine, when I was answering a question as to why I was reducing public spending, have been distorted and non-contextualised to an extraordinary degree. The comment at that time attracted little attention but seems to have got a special lease of life during the economic downturn. The reason for such misrepresentation ... well, to quote from another scribe, "It might just be an interesting example of the way popular quotes get distorted over time to better fit the public perception of the person who made them".

I vigorously disagree with the assertion that the Government, during my term as Minister for Finance, misspent the proceeds of the stellar economic growth of that period. We did increase spending in a large number of areas to make up for lost time, and for the under-provision of services in the previous decade and a half. As a percentage of GNP, in 1986, Government expenditures stood at 58%, and Government debt at 122%. At the end of 2003, the respective figures would have been 38% and 35%. In respect of spending during my time in office, I've set out, in tabular form, the percentages for total Government expenditure and gross current expenditure. These figures are taken from the public document Budget Statistics 2014, published by the Department of Finance. The figures I quote are in respect of GNP and, of course, the percentage figures in terms of GDP would be lower. In terms of GNP, gross Government ... gross current expenditure ... I'll leave ... the figures for Government expenditure are in a different column; I'll just refer to the gross current expenditure figures. As a percentage of GNP, in 1997 it was 35.2%, and that relates to a previous Government of Fine Gael and Labour. In 1998, for me, it was 31.7%; in 1999, it was 30.4%; in 2000, it was 28.1%; in 2001, it was 29.5%; in 2002, it was 30% even; in 2003, it was 29.8%; and in 2004, it was 29.8%. No matter how these figures are interpreted, it is quite clear that there was no splurge over the period. This was a period of considerable economic success. The numbers for people at work increased massively; there was practical full employment; the scourge of forced emigration ceased after 150 years; we experienced the welcome new phenomenon of migration to Ireland; the population increased dramatically; we increased spending considerably in the areas of health, education and social welfare; the pension for the aged was increased to a proper level; child benefit more than doubled; and many other improvements in public services. And, during all of those years, we ran substantial Exchequer surpluses, except for a small minus in one year. This was achieved after paying for a massive public capital programme, the most visible example being the now excellent road network, and yet there was still a surplus. We also set up the National Pensions Reserve Fund, setting aside most of the proceeds from the Telecom privatisation, and setting aside 1% of GNP annually. This fund was intended not to be touched until after 2025, and was there to provide for future pension liabilities. Since the recent financial downturn, critics are suggesting that we should not have spent all of this money.

So if we had spent less, it would have meant larger budget surpluses and some have gone on to say we should have built up further rainy day funds, apart from the pension reserve. Now, are these people for real? In a political democracy, it is especially difficult to run any kind of a budget surplus and many were even against the idea of the pension reserve fund. It is difficult to run a surplus in a democracy. If there was one patient untreated by the health services, one family without a house, one special needs person without proper services, one pay demand unmet, what justification would any Government have had for increasing the reserve fund and initiating further buffers? Not alone would it be politically unacceptable but I suggest it would be morally wrong also.

The next theme of the committee refers to the property sector and, by implication, the question of tax incentives in that area. Activity in the construction sector has always been a key driver of economic activity. Despite the gains made in residential construction over the years, Ireland's housing stock is still below the EU average in units per 1,000 of population. This is particularly obvious in 2015, which results in rents climbing substantially. Furthermore, it has always been part of the Irish social culture for persons to actually own their own home. This led the Government to initiate various reports of the housing market, which resulted in some changes. Tax incentives for the property investment have been a feature of the Irish tax code for over 50 years. As far as I can research, there are incentives as far back as the 1959 Finance Act. Some have sought to give the impression that the property tax incentives only really started after the '97 Government came into office. However, if you look at the list of incentives by non-Fianna Fáil-led Governments, you will find many others, such as urban renewal, seaside resorts, designated islands and many more.

My attitude to property tax incentives is summed up in my budget speech on the 2003 budget, when I was going about ending the deadline for some of the schemes. I proposed ending many on 31 December 2004. As I said in that speech, "the existing demand for property investment and the desire to improve equity in the tax system, there is no justification for a continuation of these reliefs beyond 2004". Regarding the philosophy of property tax incentives, I stated, "I am a supporter of properly-focused, clearly defined, specific reliefs which can encourage the development of goods and services, including public services, which might otherwise not be provided, or where provided, are too little or too late." So to conclude, quite recently an Irish commentator wrote the following:

The reality is that economics is a social and not a physical science. Economic outcomes are generally driven and shaped by human behaviour, and unfortunately human behaviour is rarely possible to predict with any degree of certainty.

During my time as a student in University College Dublin, what is now the department of economics was then known as the faculty of political economy. The longer I was in politics, the more I understood the accuracy of that old definition in UCD. Thank you very much.