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

  1. I am and will always be Not Trampis says:

    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.

  2. Nicholas Gruen says:

    Yes, of course you can imagine people who would be a nightmare on the body.

    Just as you can imagine people who are similarly nightmarish in government – like the Cameron Government!

    (I say that as a bit of a fan of Cameron – at least among right-leaning politicians – in many other respects).

    So where does that kind of tit for tat get us?

    (And if we want to carry on like that, shouldn’t it be over Twitter?)

    Ditto your later question – what I want politicians to do. I say what in the column (it includes total responsibility for all aspects of fiscal policy other than the relationship between aggregate revenue and outlays and even there I suggest it might be good if it shared responsibility).

  3. paul frijters says:

    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.

  4. Nicholas Gruen says:

    Thanks Paul, I think you make some good points. In fact on appointment, that’s one area in which I’ve changed since I first advocated this. Thinking precisely of the point you make about independence and capture, if you read the column closely it says nothing about how independence is to be delivered. I would have liked to add some consideration of that in the column, but that was not really possible as I only had 800 words and it broke the ‘talk about only one issue’ rule of op-ed writing. But I will write about that subsequently.

    On your other point, yes, there is some risk that governments use their powers to try to get around it. But at least as I’ve proposed the mechanism, the fiscal body can just make changes to revenue via across the board tax changes so that seems to me to address the point – providing there’s independence.

    The way you write you imply that the fiscal body would follow mechanical rules. I think that’s a bad idea in central banking and it’s a bad idea here. In my model, the fiscal body would exercise its discretion.

    That’s why I don’t accept your last point that international coordination somehow vitiates the idea. The fiscal board ought to strengthen the national government’s hand in international negotiations because it can credibly commit to undertakings – by involving the fiscal body in delivering them. The body’s objectives can include taking into account the need to participate in such arrangements.

    As I intimate in the interview, this whole idea that such bodies have to deliver on rigid rules pre-set by government or the legislature is, I think, a category mistake. I know it makes everyone think they’re doing great constitutional engineering – the Parliament or the Government are really in charge and this body is their delegate. But there’s no contradiction in those bodies delegating sufficient powers to empower the fiscal body to use its discretion.

    Though central bank enabling acts adhere to the form implied by this idea that the legislature sets their objectives and they meet these, in fact that’s not what they do. Central banks routinely miss their targets. Why? Because in their judgement it’s better policy. There’s some grumbling but no-one does anything when they do this. No-one gets sacked. So let’s stop kidding ourselves. (I say this as a strong critic of the way in which the RBA has taken it upon itself to miss its inflation targets, but that’s because I think sticking to the target would have generated better policy. Sometimes it would not.)

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