Today’s Financial Review column.
Eminent economist Brad Delong despaired at news of George W Bush’s second electoral victory four years ago:
The American political system . . . appears incapable of setting out the central fiscal [or budgetary] policy issues in ways that give voters a chance to make informed judgments . . . even between candidates whose programs are serious and those whose programs are mathematically impossible jokes.
Bereft of any magic plan, Delong conceded one glimmer of hope. Though monetary policy was still far from perfect, the new commitment to central bank independence had delivered a record period of strong and stable growth.
Delong proposed a similar shift in fiscal policy with an independent Fiscal Stabilisation Board having some role in managing the fiscal stance the budget deficit or surplus just as central banks now manage the monetary stance interest rates. Deputy Governor of the US Fed, Alan Blinder had outlined similar ideas.
Back then Australia had already been the first country to debate the issue. Keen to entrench continuing reform and alarmed at Howards apparent lack of economic reform vision, the Business Council of Australia (BCA) proposed a suite of macroeconomic reform policies including more independent fiscal policy.
It argued that both budgetary responsibility and flexibility would be enhanced if parliaments legislated to enable small across-the-board changes to be made to company and personal income tax rates. This power could then be exercised with some input from an independent Central Fiscal Authority. Of course, as now, governments could change the fiscal stance using tax and spending changes of their own choosing. But the scope for across-the-board tax changes would sit in the background rather like interest rates do today, both broadening the options available to manage the macroeconomy and constraining the government to deliver responsible and appropriate policy.
The BCA was agnostic about how much independence to give the Authority. After all, the simple provision of public advice as the Productivity Commission provides on tariff changes would usefully raise the cost of political irresponsibility.
But after a generation in which reform became a national policy reflex, a Great Complacency was setting in. I remember the delegation that put these ideas to political leaders on both sides their thoughts already turning to their next electoral auction. Independent fiscal policy advice would cramp their style. The conversation turned to more immediate concerns. BCA delegates left the meeting wondering who had come up with this idea anyway. It was your correspondent dear reader; now older, humbler, but (alas), no wiser.
And so it was that when company tax revenue came a gusher with the resources boom, it mainly funded improvised giveaways rather than further reform.
But with this idea, as with so much else, the landscape is changing fast. During booms more independent fiscal policy hamstrings politicians’ natural passion for pleasing their constituents. But when downturns threaten, at least within reason, it sets those passions free! In downturns politicians should spend more and tax less. But paradoxically they find it hard to do the right thing because voters, pundits and the markets take it for the usual expediency.
But, as Government Ministers compete to see how often they can say decisive, while dilly dallying daily around that other d word, “deficit”, how much easier their life might be with a respected, independent agency lending its authority to all that must be done; from reassuring the public and the markets of the appropriateness of even quite large deficits if they prove necessary, to ensuring that any fiscal stimulus is timely, temporary and well targeted? Oh and getting the government’s shoulder back to the fiscal wheel once recovery proves sufficiently robust.
In the long run most commentators suggest that independent fiscal and monetary agencies be separate with some coordinating mechanisms. But, given the need for speed and – yes – decisiveness while we’re thinking all that through, the Government could make Australia and international exemplar once again with a simple letter to the Reserve Bank Governor.
Please work with us on our fiscal strategy.
And publish a regular report on how we’re going.
When the BCA argued for macroeconomic reform, we quoted John F Kennedy: the time to fix the roof is when the sun is shining. Alas, sun-drenched, we regressed to our lucky country ways. The perfect storm might do more to concentrate the mind.