Independent Fiscal Policy catches on: OECD calls for strengthening of independence of the UK’s Office of Budget Responsibility

Having visited the OECD and observed the strange way in which views are arrived at and prosecuted, I read all OECD commentary with a grain of salt. The OECD staff spotted my stuff for the BCA on independent fiscal policy in 1999 and flew me to Paris to present to a Senior Finance Officials meeting. I presented away and made my points. No-one seemed to really disagree with them, but it was clear that I’d been invited as a kind of variety act, someone to spice things up with a new idea which could then be chatted about but not taken seriously. No Senior Finance Officials thought the idea would play all that well back home.  So it never really got considered.

When it’s doing reports, the OECD has some of the conflicts of interest of a journalist – trying to maintain good sources, and is in many ways a consensus organisation. And then it’s often in the country it’s studying being paid by the country as a consultant as it was recently in Australia studying regulation review.  It’s bad manners for consultants to be rude about their clients. And like so many such organisations, the writers of OECD reports are forever worrying about their ‘messaging’.  I sometimes wonder whether there’s any more than messaging to such people’s work.  It certainly takes up a lot of their headspace. Perhaps that’s approrpriate.

The OECD were told of lots of things that were not to flash about the way we regulate. But they decided early on that their ‘messaging’ for their client, the Australian government would be more generous.  This wasn’t just their consideration for their client – or even mostly that. It was mainly because Australia’s regulation review performance has been good if you compare it with its OECD peers, and in that context it would have been unfair and gauche ‘messaging’ to have the OECD report rehearse a long list of complaints and inadequacies from the people it talked to. And fair enough too.  But it did have the effect that the report wasn’t, IMO a very insightful guide as to how the Australian Government might do better.

Anyway, another role of the OECD is a kind of group cheer squad for the central agencies of their client countries. Perhaps it is in this role that, in the report extracted below – and it seems yet to be posted on the OECD website – the OECD hands out high praise for the deficit reduction efforts of the UK Government. Indeed it leads off “The comprehensive budget announced by the government on 22 June was courageous and appropriate”.  At least from my knowledge, I’d say it was emphatically neither.  It’s inappropriately timed – consolidation should cut in later. And it’s ‘courage’ is born of political cowardice, it’s the courage of politicians who, like John Howard in 1996 are putting the fiscal pain as far as possible between themselves and the next election.

Meanwhile, that idea I put to the Senior Officials back in mid 2000 has caught on:

One of the key measures announced by the new government is the creation of the Offi ce for Budget Responsibility (OBR). This is clearly an important initiative in terms of strengthening government management of public spending and improving public confi dence in the government’s fiscal policy. The experience of OECD with establishing similar bodies in Canada, Korea, Austria, Hungary, and Sweden suggests that in such bodies clear signals of impartiality are important. At present, the interim UK body is housed inside the Treasury, its Director appointed by the Chancellor, and its staff seconded from the Treasury. A more permanent set up at arm’s length from the Treasury could be considered in order to fully benefi t from the new body as our cross-country-experience has shown.

Fiscal consolidation through sound budget management. Reducing the defi cit stands out as the mainchallenge that the new government has set for itself. OECD shares the UK government’s position that fiscal consolidation is a policy for growth and is currently defining a set of agreed principles for sound budgeting. These principles could serve as a useful base for monitoring progress. One of the key measures announcedby the new government is the creation of the Offi ce for Budget Responsibility (OBR). This is clearly animportant initiative in terms of strengthening government management of public spending and improving public confi dence in the government’s fi scal policy. The experience of OECD with establishing similar bodies in Canada, Korea, Austria, Hungary, and Sweden suggests that in such bodies clear signals of impartialityare important. At present, the interim UK body is housed inside the Treasury, its Director appointed by the27Chancellor, and its staff seconded from the Treasury. A more permanent set up at arm’s length from theTreasury could be considered in order to fully benefi t from the new body as our cross-country-experience has shown.

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Butterfield, Bloomfiled & Bishop
Butterfield, Bloomfiled & Bishop
11 years ago

Nick,

If monetary policy is conducted by the Independent CB and Fiscal policy conducted by the independent OBH what is the government going to do?

Paul Frijters
Paul Frijters
11 years ago

I had a look at the proposed Office of Budget Responsibility. It is basically a version of the ‘Centraal Planbureau’ which has operated in the Netherlands for 60 years, i.e. it calculates the effects of policies on the budget and gives a set of predicted economic outcomes. In no way are they supposed to dictate or even ‘negotiate’ fiscal policy. Like in the Netherlands, the OBR will be a part of the Treasury.

Variants of this kind of institution exist in many countries, fitting in perfectly with the central planning culture of the 1950s. They have existed for a long time without becoming institutions that in any way control the budget, i.e. no ‘fiscal parameter’.

Peter Brady
Peter Brady
11 years ago

Nicholas,

let me see if I have this right.

The Government of the day tells the OBH, OBR whatever what sort of policies it will adopt.

Thus in 2008 the ALP would have told them ,eventually, STIMULATE.

On the other hand if the government was led by a latter day Joe Lyons they would have told them keep the budget balanced.

Am I reading you correctly or am I way off beam?

Paul Frijters
Paul Frijters
11 years ago

I agree that independent analysis of the effects of new policies on the budget is a desirable thing to have, particularly with the RSPT debacle of using private consultancies in mind.

derrida derider
derrida derider
11 years ago

What a time to propose such a thing!

Where fiscal policy should currently be set in the UK is exremely debatable at the moment, even among technical experts; it therefore matters which experts you choose. It’s debatable because the need for austerity depends wholly on your views as to how the British economy does and should work; the role and behaviour of the City of London is especially crucial. In turn, this is legitimately a question of ideology that an elected government, not technocrats, should decide.

The implicit assumption in these proposals to put fiscal policy in the hands of unelected technocrats is that these technocrats have no ideology or self-interest. Bullshit. Central banks tend everywhere identify their interests with the interests of the sector – dare I say the class – they are supposed to be managing, and from whom their members are drawn. A fiscal board would similarly be the subject of some very ugly lobbying, much of it indirect through created narratives about who is “responsible” and therefore worthy of appointment to that board. I say keep tax and spending in the hands of the people elected to do it and who are properly accountable for it.

PS: Your comments about the OECD are true – and I say that from years of dealing with them. They also have other vices that you don’t list – notably a deeply Eurocentric worldview.

Tel
Tel
11 years ago

A fiscal board would similarly be the subject of some very ugly lobbying, much of it indirect through created narratives about who is “responsible” and therefore worthy of appointment to that board. I say keep tax and spending in the hands of the people elected to do it and who are properly accountable for it.

Of course we all like Democracy. I understand that North Korea are very much into elections too, same with Iran, Zimbabwe, and even the old East German state was democratic. To borrow from a very successful and powerful man, “It does not matter who casts the votes, what matters is who counts the votes.”

But then again, if you can’t trust a government institution to refrain from corruption, how does anyone trust the Australian Electoral Commission?

By the way, this business of “properly accountable” deserves further exploration, I’m hoping that the NSW and Victorian Labor governments will take the trouble to itemize their stimulus spending in some meaningful and accountable manner. Sure I walk past a bunch of schools with bit signs posted up “Government Stimulus Spending Here!” but I’m curious about how much was spent and what it was spent on. Does anyone know the URL for this data?

Paul Frijters
Paul Frijters
11 years ago

DD,

I am more in agreement with your arguments than Nick is. However, the Office of Budget Responsibility is not an institution that will make decisions about where to spend the money and whom to take it from. It is there to say ‘the policy will give us X billion dollars, that one will cost Y billion dollars, and another will lead to unsustainable deficits’. That is a whole different kettle of fish to what Nick advocates.

On the issue of democracy versus independent mandated institutions, I still think it important to keep fiscal policy in the realm of elected politicians. I can see Nick’s point that we have parked all kinds of decisions in independent mandated institutions (the legal system, the Central Bank, Food Standards), but by and large all major decisions about whom to take money from and whom to give it to are still made by elected politicians. Yes, these politicians are manipulated from all sides and the populations that elect them are manipulated from all sides, but to some extent that shows that interest groups have to mold the opinions of a whole population to protect their interests. As soon as such decisions were to be made by an institution, the full weight of interest group lobbying would descend upon the few in that institution, and for my taste the experiences with communist systems tells you where that eventually leads: a completely co-opted and corrupted political class of technocrats. I am already ambivalent about all these industry-specific regulators who look to me to be prime targets for interest groups, and don’t want to siphon off the main political game to similar bodies. Ultimately, I have more trust in the gut feelings of a whole population than the undying integrity of technocrats.

jen x
jen x
11 years ago

Nicholas@8

So your thrust is that an Australian IFA would counter balance the deficit/govt spending hysteria of The Opposition and the media.
Seems drastic, but hey, it has been getting pretty dire.

However, the fact that the OECD has suddenly switched on to the idea now, in response to Cameron’s politically expedient budget cuts gives something of an indication of how independent such a body is likely to be.

Also, if the stronger version were adopted wouldn’t there be more than tiny changes to personal/company tax required occassionally. How would this be determined and how could it achieved without a mandate? In this instance, it would seem that the role of government is being devolved. Even with an RBA style over rule clause, really, once such an institution is established there is no going back.

Patrick
Patrick
11 years ago

OTT, that kind of messaging dominates every large bureacracy I have ever interacted with (including the large bureacracy within a lot of large companies, except that they adjust the messaging much more ‘dynamically’ than the government/public bureacracies).

At least the OECD messaging is motivated by the exact opposite considerations to those of the bulk of UN bodies!

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