Economic policy advice on reducing the risks to macroeconomic and financial stability from the housing market, restoring competitiveness and preparing to adjust in a downturn was available to the Government prior to the financial crisis.
In a research paper which I presented in the plenary session of the Annual Economic Policy Conference in Kenmare on 13 October 2006 (attended by a good number of senior civil servants), after discussing the adjustment mechanisms available to Ireland as a member of the European Economic and Monetary Union, I pointed out four main challenges facing the Irish economy and suggested a combination of policy measures to respond to these challenges. The four challenges that I identified were as follows:
a) maintaining a high potential output growth rate
b) restoring competitiveness
c) managing potential risks to macroeconomic and financial stability from the housing market
d) adjustment to a slowdown in the United States and an expected appreciation of the euro against the dollar
The policy measures suggested to respond to these challenges included the following:
a) fiscal tightening to reduce domestic demand pressures
b) a wage restraint in the public sector
c) fiscal measures to reduce the risks to macroeconomic and financial stability such as phasing out the tax relief on mortgage interest payments, a tax on imputed rents, a broader capital gains tax, or a property tax on vacant of secondary dwellings (as options available to the Government)
d) limits on the use of real estate as collateral to protect the banking system against over lending and bad loans
e) running a large fiscal surplus during the current boom to prepare for a downturn in the world economy
The Irish Times of 14 October 2006 covered extensively my main points. The paper was published in the Quarterly Economic Commentary in March 2007.