Yes folks, progress might be painfully slow, but we’re gradually moving the idea of independent fiscal policy from “you dreamers just don’t understand the real world” category to the “you’ve gotta get hip, you’ve gotta get real reform” category.
The OECD has published another article about independent fiscal policy. I’ve not had time to go through it yet, but here’s the abstract and a link – for the record.
The fiscal position has deteriorated sharply, leading to large deficits and adding to high debt levels. Some countries have experienced financing pressures. Detailed multi-year plans to stabilise the public finances are required. Prolonged fiscal consolidation and reforms will be needed to bring debt to a more prudent level, increase the ability to withstand future shocks and to prepare for future ageing costs.
Working Paper No 829: Improving fiscal performance through fiscal councils
I dunno. What would a Fiscal Council recommend now in, say, Ireland or the UK? And how long would such an arrangement last in those circumstances?
The point is that the government’s fiscal stance has huge distributional – political – as well as macroeconomic implications, and therefore ought to be firmly under the control of the politicians. That’s especially so when we talk about intergenerational issues such as “ageing costs”.
As I’ve said before, this is all about old-fashioned class interest. And the OECD’s economists (especially in Economic Division – ELSA aint so bad) are firmly resolved to make particular classes bear the cost of the GFC.
DD,
1. I agree with you – I wouldn’t be recommending a fiscal council for a Europe bent on premature and heroic austerity measures. Not really the best context for the introduction of a fiscal council.
2. We’ve sparred on the distributional issues before. Beats me why you can’t separate the distributional issues from the basically technocratic issue of the fiscal stance. Of course you can’t do it perfectly, but I’ve proposed a way of doing it adequately – a fiscal parameter (which would effect an across the board chance in taxes) as a back-up measure if the government can’t deliver a (technocratically) satisfactory fiscal stance. Do you think that would have unacceptably distributional consequences and if so why?
3. If for the sake of argument I grant your point that there are ineluctably political aspects of the fiscal stance, would you grant mine, that the populace are never going to be able to tell the difference between an opposition driving a debt truck around and crying poor and the real thing? Do you think that’s healthy and what do you think we should do about it?
Do you really think that Europe’s austerity measures are premature and heroic? Wouldn’t desperately late and grasping be more accurate?? To rehash a quote:
Also, I think, and hopefully Nick will correct me here, but one of Nick’s key motivations appears to be despair at Australians’ obdurate and seemingly (to him at least) irrational phobia of public debt.
On the other hand it seems at least arguable that this phobia, as well as a rather provincial attitude to competition in the banking sector, was one of the main ingredients in our relatively successful GFC. Overall, we are one of the vastly more ‘balanced budget’ countries in the OECD, aren’t we?
So it seems to the economically ignorant such as myself that Australia gets fiscal stance largely (within the very broad parameters required for political judgement) right, and I can’t see how this independent fiscal council would address what (once again I speculate) you may feel was the ‘real’ problem being the actual allocation of spending.
This may have been one of my most ignorant contributions ever, and I am quite tired so it may be less coherent that I would have liked, but hopefully you can at least set me straight!
Nicholas – How should we decide that a policy domain requires an independent body to oversee government policy?
Why should we stop at fiscal policy? For example, why shouldn’t state governments have independent bodies that can report on the likely impact of tough on crime policies?
DD
“The point is that the government’s fiscal stance has huge distributional – political – as well as macroeconomic implications”
And monetary policy doesn’t?
I think you blokes aren’t thinking this through to the logical conclusion, which is benevolent dictatorship by a suitably qualified – and no-doubt neo-Keynesian – technautocrat.
We could call him God Emperor 2.0.
You know it makes sense.
Patrick,
Take the UK. You’re right. They should have run tighter fiscal policy – something that a fiscal council might have helped with. They haven’t done so and so, as a result of that, and bank rescues they now have a higher level of debt than they should have. They should consolidate but they should do it over a period of time. The timing of the current bout of austerity is driven by political cycles, not economic ones. Like Howard’s fiscal contraction of 1996 the UK contraction of 2010-11 concentrates the pain in the early part of the electoral cycle. Anyway, the Lib-Dems popularity has just halved in the polls, so we’ll see what that brings about. I wouldn’t much fancy being them, but they get five years if they can hold it together so it will be interesting.
Don,
We already have independent setting of sentences – via the judiciary. But short of that use of judicial power, I think some body to independently investigate crime policies sounds sensible, though the policies themselves seem inherently very value laden and so I would have thought should ultimately be made by politicians, not their delegates. But I’m open to persuasion as to what constructive institution building might go on in the area – or any other area.
Nicholas – So decisions based on values are best made through the political process and those made on matters of fact are best made by experts?
What other criteria should we use to decide whether or not to use an independent body?
What ‘fiscal stance’ decisions are based on facts and not values??
Don,
I don’t think I can make these distinctions particularly watertight, but since you’re interested in the criteria, why don’t you have a go at specifying them. Ultimately I’m a (Burkean) conservative on this stuff, which is to say that criteria are useful to guide one’s thinking and debate issues but I don’t have in mind any end point where it will all be worked out according to some model.
Generally speaking the more something depends upon technical judgements which don’t involve heavily ‘value laden’ outcomes (the most obvious example of a value laden outcome for my purposes here is something with strong distributional implications) the more worthwhile it would be to have institutional development to involve some independent body with technical expertise. We do that with building bridges, ensuring public safety and so on. The more things go in the other direction – where outcomes are likely to be legitimately contested as a matter of distribution and political philosophy the more appropriate it is for the decision making to be dominated by democratic political apparatus.
I’m also aware (Don and Patrick) that it’s very easy to quibble with the words I’m using. I’m aware that I’m ultimately appealing to values in determining the appropriate fiscal stance. But the values we’re talking about are more ‘technical’ than the values we’re talking about when we ask ‘should the rich pay more tax than the poor?’ One could try to unpack the difference, but I’ll leave that to you if you think it’s worth your doing it.
A fiscal council could also help with forcing government and opposition to address reality. The US is a fairly clear example where Republican deficit hawks ‘know’ that tax reductions do not reduce revenue and, although to a much lesser extent, Democrat deficit hawks ‘know’ that spending increases do not increase deficits. The political class in Australia have not exempted themselves from arithmetic to the same extent, and it would be nice to keep it that way.
The weakness in the argument for fiscal councils is that it is that same austerity-crazed Europe where independent fiscal councils are a feature of the landscape in many countries. The German Council of Economic Experts seems as enthused for austerity as the Merkel government.
Thx Alan,
I’m an austerity guy myself, so no complaints there. The only thing is that austerity is there for a purpose – to give you some firepower when you need it. The analogy isn’t perfect but Genesis has the right idea – you know the old line – 7 years of feast to set yourself up for 7 years of famine (though fiscal expansion need only be a pretty rare phenomenon, used only for emergency management owing to the speed of its response vis a vis monetary policy and when encountering liquidity traps. Fiscal councils could also help with provision of appropriate analysis of govt debt v govt investment in assets.
Assuming you were the head of an EU fiscal council, would you be recommending drastic austerity measures as current policy?
Well I’m no expert on the macro-economics of Europe, but my ‘in principal’ answer is ‘Nope’. The right recipe is loose fiscal policy followed by austere fiscal policy for some time. A commitment to inflation of around 4-5% for a few years wouldn’t be such a bad thing either with the main difficulty working out how to deliver it and then how to exit from that regime down to 2-3% inflation. But all this is predicated on some capacity to deliver discipline once it’s needed and to do so over the long term. Of course it would also be a good thing not to waste the crisis and to try to clean out as much dirigiste dross as one could. There’s a fair bit to do!