Guest post from Gene Tunny: Freeing Fiscal Policy from political tinkering – podcast discussion with Nicholas Gruen

This podcast is quite a lively exploration of a proposal of mine that is – frightenly – a quarter of a century old! Below is Gene Tunny’s introduction to his podcast interview with me. NG

Last month, in a Financial Times article, (unpaywalled pdf here) Nicholas Gruen proposed an independent fiscal policy advisory body so that fiscal policy is freed from political tinkering. In his view, during an economic crisis, the fiscal stance, or the size of a stimulus, could be decided by an expert body, rather than being decided by a political process in which political considerations may be decisive. Fiscal policy could be operated in a way similar to monetary policy conducted by independent inflation-targeting central banks.

In his FT piece, Nicholas notes that President Biden and congressional Democrats may have pushed for the huge $1.9 trillion stimulus because they could later lose control of Congress and the ability to boost the stimulus later if required. He also points out that political considerations, i.e. wanting to be seen as responsible economic managers, led the Cameron government in the UK to tighten fiscal policy too early in the aftermath of the 2008 financial crisis.

I’m grateful that Nicholas agreed to be interviewed for my Economics Explored podcast regarding his FT article, and I’ve just published our conversation as Episode 81 of the show. We had a great discussion about how fiscal policy could be delegated to an independent body in such a way, whether fiscal policy is too political for politicians not to be involved, and whether politicians would ever give up their power to determine fiscal policy.
When I questioned Nicholas about the political feasibility of his idea, he pointed out that bringing down the tariff wall was once seen as politically impossible in Australia. In the late sixties, no less an authority than Max Corden wrote that analysing tariff cuts in Australia was of academic interest only because tariff cuts would be politically impossible. It was only half a decade later when the Whitlam Government cut tariffs by 25 percent across the board, largely inspired by advice from Nicholas’s father Fred Gruen, incidentally. So we shouldn’t let political considerations deter us from considering radical policy ideas.

I’d encourage you to listen to the conversation and let us know what you think in the comments below.

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I am and will always be Not Trampis
I am and will always be Not Trampis
3 years ago

would a fiscal council have acted as quickly as the government did in 2008 and avoided a recession. I doubt it.
Think about a council headed by Peter Boxall for example. It would have exacerbated the GFC woes.
It would be a political football either way.
Do you really think such a council would have done things differently in Europe. The elites letting down the people again would be the call from some.

then we have to ask what exactly do you wish politicians to do.

paul frijters
paul frijters
3 years ago

I believe Indonesia had something like this, ie a separate body that did economic policy, deliberately insulated from normal politics. I dont know particulars though. Of course similar ideas have been floated in various guises in various countries, including constitutional fiscal rules.
I am not sure it can be done, even if the will is there. There are so many ways that a government can do fiscal policy anyway that it is hard to see how one could prevent them from interfering if the pressure is on. It is also hard to see the measurement system being able to give ‘indicators’ that can be used to initiate the workings of an independent agency. There are so many ways the trigger measures can be gamed, such as what counts as a recession or the notion of revenue.

Also, given the politicization of all these supposedly independent agencies via appointees at the top (just think of how all those ICAC-type organisations around the country have been neutered in the last decades, such as in Brisbane), this would just be another agency to capture. I think the key in these agencies is how you appoint the top and where the budget comes from. You need to take that out of the political games.

Even apart from that, I am not sure the idea is sensible on its own merits. The thing with fiscal policy in times of recessions is that you need to coordinate with other countries, which needs political discretion. Put fiscal policy in a truly independent agency and you cant coordinate unless everyone else has similar institutions with coordination mandates. Then we’re pretty much talking about separate crises governments.