An open letter to the new Minister for Finance

Dear Minister of Finance: 

First, congratulations on a hugely significant day in your political career for both you and your family on becoming Ireland’s 27th Minister for Finance and a member of the 32nd Dáil. Whatever happens, you will play a large part in the history of the country. The Ministry of Finance is the most prestigious one, the one with the history, and the one which, if everything goes wrong again, gets the blame.

History is on your shoulder now. You can be a Ruairí Quinn, who left office in June 1997 with the books balanced and the economy singing; or a George Colley, who managed during his tenure of the office you now hold from 1977 to 1981 of spending far too much, taxing far too little, and leaving the state half an inch from penury before the doors of Merrion Street closed swiftly behind him. You’ll need sound policies and a good dose of luck.

If the newly-elected taoiseach decides to keep the taxation and spending sides of the old Department of Finance in two, you will be responsible for collecting tax, dealing with the international elements of the finance portfolio, while your colleague, the new minister for public expenditure and reform, controls the spending and public sector reform elements of the portfolio.

This is a very efficient way of making the job work effectively, but you’d better be ready for a scrap come budget time, as the yin and yang of tax and spend are not always in balance. Of course, every department wants to spend more than they could spend last year, and the demands on you will be endless, but you knew that coming into the job.

Regardless of which party you’ve come from, you have inherited an economy which is immune to party rhetoric. Either domestic demand is growing, or it is not. Either corporation tax is surging, or it is not. Either unemployment is rising, or it is not. Despite your quite considerable powers, especially relative to other finance ministries in Europe, your ability to alter these features of the economy is relatively limited.

The Irish economy veers between Beautiful Freak and Freak Show, and your job will be to make either (or both) seem normal to the beady eyes of the IMF and Joe Public.

Right now, forecasts are good, but they were pretty good in 2006 and the first half of 2007, too. The economy is so open, so prone to volatility, its progress can be like a marble rolling off a kitchen table. You’re the one the history books will remember as either saving or damning the economy, depending on whether the marble is rolling or falling. You’ll face a stagnating eurozone, a stuttering Chinese economy, rock-bottom oil prices, bond yields in negative territory for the world’s largest central banks, a Middle East in crisis and a migrant surge, not to mention the threat of Britain leaving the European Union.

All ministers for finance live in interesting times. You are at the very heart of our system of government, after all. But these are an utterly unique combination of events, and how you tune your main instrument of fiscal policy, the budget, will have a bearing on how well the Irish economy responds to the direction these foreign forces push it in.

You have to help get investment into the country, and so many businesses and finance professionals and special interest groups of all kinds will want to meet you and bend your ear to give them this concession and that concession. Because not only you are the big cheese in government, you have the cheese to distribute.

Don’t listen to them. During the bad days of the 1980s, your predecessor Ray MacSharry famously refused to see any special interest groups, sending the very strong signal that there was just nothing to talk about because there was no money. You have the money, but listening intently to those who would help you spend it in their own interests is probably not a wise move.

Take hoteliers, for example. You may be aware that the 26th minister for finance, Michael Noonan, reduced Vat for hospitality providers. You will be heavily lobbied to keep this special Vat rate. You should ignore them. In a rising economy with a competitive exchange rate and a supply constraint, you are costing the taxpayer several hundred million euro per year and enriching hoteliers’ profits. But you won’t hear that talking to hotel lobbyists all day.

You have responsibility for banking and bank policy. Your predecessor couldn’t lean hard on Ireland’s banks because they were on life support. As they get healthier, you should feel free to lean on them as hard as the regulations allow, and even then maybe a little harder.

Ireland, like all economies with large banking systems, is subject to the Minsky cycle, where once-burned banks get cocky in a growing economy, their risk premium falls, and they start lending out stupidly to any eejit with a pulse and a field to build in.

Understand the cycle and work with the Central Bank, not against it, to curb its effects.

You have inherited an economy with a very strange structure. Large amounts of the economy’s high valued output comes from multinationals which pay you very little tax, and expect to be genuflected to. Shadow banks, unregulated financial intermediaries such as money market funds, represent 40 per cent of the entire eurozone’s banking assets, some €26 trillion. The International Financial Services Centre hosts some of the largest shadow banks in Europe, next only to Luxembourg. That’s a risk lying under your nose, and under your watch.

I wish you all the best. You have very talented and committed people working for you, and many will be very happy to help from the outside if called upon. Every report into the banking crisis recommended that the department become more porous, more open to listening to, and collaborating with, outsiders. You should use your power as Minister to ask those outsiders for help. If they are Irish, you represent the state, and they will say yes and help in any way they can.

You can count on your fellow citizens to give you a hard time when you mess up, but to help if you ask for it.

Yours, 

Stephen 

PS: Make sure you keep a diary of what you’re doing. Probably no other job you’ll ever do will be as interesting.