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The case for an independent fiscal authority

  • 16-01-2009 12:30am
    #1
    Registered Users Posts: 8,452 ✭✭✭Time Magazine


    As has been well documented on this forum, our looming budget deficit is of serious concern. The latest estimates state that the figure is of the order of €20bn. This is about €16,000 per household.

    Our Constitution enshrines the position of the Comptroller and Auditor General. This is an independent authority to investigate wasteful public expenditure. Rather understandably, governments don't do a very good job at investigating their mis-management and thus independence is mandated. A similar, though far more important, principle of independence is maintained by the judiciary.

    Over the past twenty years or so, it has become increasingly apparent that independent central banks keep inflation lower than those under government control:

    indep.11.19.05.jpg

    Consequently there has been much reform to remove the minting machines from the hands of the government. Blair did it as soon as he took power, and it is best typified by European Monetary Union.

    It seems the only place governments maintain free reign is in fiscal policy. This has advantages -- taxation and expenditure are extremely sensitive, political issues that should be processed through the democratic mechanism. However it is also inherently problematic. Frank Barry recently bemoaned the government's failure to oversee our public finances, and I look forward to Morgan Kelly spouting off about the government buying a failing bank.

    I'm going to sleep on it, but I think there may well be a serious case for an independent fiscal authority. They should, of course, have only limited control over fiscal policy. However, given the dire state of our national finances, who are the government to say they should maintain responsibility. Both An Taoiseach and the Minister for Finance have been in government for the past ten years, overseeing one of the largest booms ever in the Western World. Two years ago the then-Tánaiste said we "did not need" the billions of euro of stamp-duty revenue. Eighteen months ago the then-Taoiseach suggested economists who predicted a collapse in the housing market should "go jump off a bridge". The ESRI's John FitzGerald and the aforementioned Morgan Kelly, among others, have been warning about the fragility of the government finances for several years. Journalists, less rigorous in their methods, have been predicting similar for even longer. Who is Brian Lenihan to suggest he should maintain complete control over our fiscal policy?

    Who can argue that it would not be beneficial for this fiscal authority to have the power to prevent a large (>€100m) item of expenditure before it becomes a great waste? Who can argue that, in light of the government blindly ignoring economic advice, that some formal preventative measures should not exist? Who can argue that the government's wanton disregard for the realities of the business cycle does not provide support for an agency with the power to block tax cuts? Why do we not have somebody with the power to force the government to take note of the wall it is about to drive into?

    It seems to me that the one lesson we have really learned over the past year is that the government cannot manage the affairs of this state properly, and it should at least do the decent thing to prevent such a ridiculous situation emerging again.


«1

Comments



  • an algorithm could run both fiscal and monetary policy!!!!!


  • Closed Accounts Posts: 2,208 ✭✭✭Économiste Monétaire


    Just to add: The Swedish Fiscal Policy Council is an independent review body that activly criticises government fiscal policy. It's not in direct control of fiscal policy, which is what The Economist is calling for (I think). Their website is here, and read their first (summary) report here (PDF, English); it gives some information on the body's purpose.


  • Closed Accounts Posts: 545 ✭✭✭BenjAii


    We might have thought the Maastricht criteria for entry to the Euro, was to some extent, what you are suggesting, but it seems that was not so set in stone after all further down the line.

    But the idea is sound, what good is a government if it can't run balanced books. We can't even argue that our deficit has the good of an Obama style targeted fiscal stimulus.

    I'd take the idea further and extend it to bank regulation to prevent funding future unsustainable property booms too and whatever it takes to regulate for the prevention of the financial products that started this whole mess.

    I certainly think the days of laissez-faire regulation are dead and buried for a generation at least.


  • Registered Users Posts: 27,645 ✭✭✭✭nesf


    Philosopher kings, no?


  • Registered Users Posts: 17,825 ✭✭✭✭silverharp


    an algorithm could run both fiscal and monetary policy!!!!!

    hmmm an electronic gold standard. I guess you will always end up with a Nixon type character that wants to fight a war but doesnt have the stones to be honest and tax to do it so the leading countries will always find a way of changing the rules

    A belief in gender identity involves a level of faith as there is nothing tangible to prove its existence which, as something divorced from the physical body, is similar to the idea of a soul. - Colette Colfer



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  • Posts: 5,589 ✭✭✭ Griffin Hundreds Newsprint


    As has been well documented on this forum, our looming budget deficit is of serious concern. The latest estimates state that the figure is of the order of €20bn. This is about €16,000 per household.

    Our Constitution enshrines the position of the Comptroller and Auditor General. This is an independent authority to investigate wasteful public expenditure. Rather understandably, governments don't do a very good job at investigating their mis-management and thus independence is mandated. A similar, though far more important, principle of independence is maintained by the judiciary.

    Over the past twenty years or so, it has become increasingly apparent that independent central banks keep inflation lower than those under government control:

    indep.11.19.05.jpg

    Consequently there has been much reform to remove the minting machines from the hands of the government. Blair did it as soon as he took power, and it is best typified by European Monetary Union.

    It seems the only place governments maintain free reign is in fiscal policy. This has advantages -- taxation and expenditure are extremely sensitive, political issues that should be processed through the democratic mechanism. However it is also inherently problematic. Frank Barry recently bemoaned the government's failure to oversee our public finances, and I look forward to Morgan Kelly spouting off about the government buying a failing bank.

    I'm going to sleep on it, but I think there may well be a serious case for an independent fiscal authority. They should, of course, have only limited control over fiscal policy. However, given the dire state of our national finances, who are the government to say they should maintain responsibility. Both An Taoiseach and the Minister for Finance have been in government for the past ten years, overseeing one of the largest booms ever in the Western World. Two years ago the then-Tánaiste said we "did not need" the billions of euro of stamp-duty revenue. Eighteen months ago the then-Taoiseach suggested economists who predicted a collapse in the housing market should "go jump off a bridge". The ESRI's John FitzGerald and the aforementioned Morgan Kelly, among others, have been warning about the fragility of the government finances for several years. Journalists, less rigorous in their methods, have been predicting similar for even longer. Who is Brian Lenihan to suggest he should maintain complete control over our fiscal policy?

    Who can argue that it would not be beneficial for this fiscal authority to have the power to prevent a large (>€100m) item of expenditure before it becomes a great waste? Who can argue that, in light of the government blindly ignoring economic advice, that some formal preventative measures should not exist? Who can argue that the government's wanton disregard for the realities of the business cycle does not provide support for an agency with the power to block tax cuts? Why do we not have somebody with the power to force the government to take note of the wall it is about to drive into?

    It seems to me that the one lesson we have really learned over the past year is that the government cannot manage the affairs of this state properly, and it should at least do the decent thing to prevent such a ridiculous situation emerging again.

    Very interesting point, just two things stand out for me.

    Firstly, the main goal of this agency would be to reign in spending when times are good, in order to prevent the build up of excess that we are currently going through. However, people have short memories and I could see the agency taking heavy flak for 'retarding the potential of Ireland' or some similar clever little slogans.

    Secondly, if you impose hard limits on spending, where excess of these limits triggers an independent investigation you may find yourself in a death by a though cuts situation, where proposals are restructured to get around the limit.

    But a very interesting point and one that should hopefully be popping up at higher levels.


  • Closed Accounts Posts: 2,208 ✭✭✭Économiste Monétaire


    Apologies for bumping an old thread, but our dear leader was correct a year ago, and now Philip Lane strikes a similar note in today's Irish Times:

    http://www.irishtimes.com/newspaper/finance/2010/0312/1224266101517.html
    ECONOMICS: Now is a good time to consider a new approach to the conduct of fiscal policy, writes PHILIP LANE

    DURING THE current economic crisis, the Government has been compelled to undertake a sizeable budget correction in the midst of a severe recession. While this route may well have been the best option given the situation we faced, it begs the question of whether a different path for fiscal policy during the pre-crisis period may have permitted a less onerous fiscal response in the last couple of budgets.

    This question is also relevant for other economies that must undertake sizeable fiscal corrections, such as Greece and Britain. Debate about how fiscal policy is conducted through the economic cycle is especially important in view of Ireland’s membership of the economic and monetary union (EMU), since fiscal policy is the main tool available to deal with country-specific shocks.

    Accordingly, it is timely to consider a new approach to the conduct of fiscal policy in Ireland. If a new fiscal framework could enhance macroeconomic stability for Ireland, it would improve the policy coherence of EMU membership.

    Moreover, by improving the prospects for long-term fiscal sustainability, it should also improve Ireland’s reputation in international debt markets, helping to reduce the high spreads on Irish sovereign debt.

    International research evidence indicates that the political distortions that may prevent the accumulation of sufficiently large surpluses during the good times can be mitigated by the introduction of effective fiscal rules and an independent fiscal policy council.

    The overriding principle in designing fiscal rules for Ireland should be to preserve medium-term fiscal sustainability. To this end, it is appropriate to target an annual surplus in the structural fiscal balance – the budget balance after allowance is made for the ups and downs of the economic cycle – for several reasons.

    First, Ireland faces the prospect of higher future public spending needs on healthcare and pensions due to the ageing of the population. Second, public debt will be quite substantial by the end of the current fiscal adjustment process: returning the level of public debt to below the 60 per cent ceiling specified in the EU Stability and Growth Pact will require a sustained period of structural surpluses. Third, it is appropriate to target a structural surplus during normal times to provide a buffer against a major negative macroeconomic shock, such as we are now experiencing.

    In tandem with the last point, the structural balance fiscal rule should contain an escape clause by which a structural fiscal deficit is permitted in the event of a sufficiently large macroeconomic shock. Such an escape clause provides the flexibility to address major recessions or (in the other direction) episodes of overheating, which may require extra fiscal measures beyond the automatic stabilisers that are part of the passive cyclical component of the budget.

    Fiscal rules are more effective if the setting of policy incorporates a role for an independent fiscal policy council. The establishment of such a council in Ireland would offer many potential benefits.

    Such a council could play a role in identifying the cyclical state of the economy and the distribution of macroeconomic risk factors. Given the macroeconomic environment, it could make recommendations concerning the overall budgetary stance that would be consistent with medium-term fiscal sustainability. It could also monitor compliance with the specified fiscal rules and make recommendations concerning the appropriate adjustment path in the event of non-compliance. In related fashion, it could make an ex-post evaluation of the conduct of fiscal policy over the preceding year.

    In addition to these direct budgetary roles, an independent fiscal council could contribute to the transparency of the fiscal process by acting as an independent monitor of the quality and availability of the fiscal data. It could also promote public debate about fiscal policy through engagement with Oireachtas committees and the media and the organisation of policy workshops.

    In terms of scale, the Swedish Fiscal Policy Council provides a model. Moreover, it would be desirable to match the Swedish practice by including some non-Irish members in the council, since this expands the range of potential members and provides a mechanism for Ireland to learn from the experience of other countries.

    It is important that the fiscal policy council is an independent institution, for the same reasons that justify the independence of central banks. But it is also vital that the council is accountable.

    Accountability can be made effective by a two-track process. Council members should testify before the relevant Oireachtas committees on a regular basis and explain any errors in projections made by the council. Also, the technical quality of the work produced by the council should be audited in regular reviews by an international expert group.

    It is plausible that the difficulties faced by the EU in handling the Greek crisis may lead to initiatives to encourage the formation of fiscal frameworks that combine a set of fiscal rules and a formal role for an independent fiscal council in each member state. As an early adopter of a new fiscal regime, Ireland could establish itself as a leader in European fiscal reform.

    Philip R Lane is professor of international macroeconomics at Trinity College Dublin


  • Registered Users Posts: 8,452 ✭✭✭Time Magazine


    Apologies for bumping an old thread, but our dear leader was correct a year ago, and now Philip Lane strikes a similar note in today's Irish Times:

    I never liked admitting it, but I also thought was Philip as a little bit slower than me. Glad to see he's not that far behind.


  • Registered Users Posts: 25,993 ✭✭✭✭noodler


    Read the Lane article a few weeks ago. There was some regressional analysis alright about how countries with a said council have more stable public finances.

    I guess how these people are chosen is going to be an issue, they need to be independent but at the same time it could be a hard sale to some members of the public if you had an unelected Fiscal Council advising the goverment to cut spending in sensitive areas etc.


  • Registered Users Posts: 411 ✭✭Hasschu


    I am not aware of any country where the gov't of the day cannot remove the head of the Central Bank or members of the board if it is deemed to be in the best interest of the country. The head of the Central Bank has a duty in all countries to brief the gov't of the day frequently, routinely and at 3:00 a.m. if necessary. The reverse side of that coin is the Minister of Finance has a duty to brief the head of the Central Bank in a similar manner. "Independence" is highly nuanced in all countries. In the case of Ireland it would not matter how you structured the governance it would still be the same inbred, political clique in charge. Intimidating the head of the Central Bank is something most Governments get accused of in bad times.


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  • Registered Users Posts: 27,645 ✭✭✭✭nesf


    noodler wrote: »
    I guess how these people are chosen is going to be an issue, they need to be independent but at the same time it could be a hard sale to some members of the public if you had an unelected Fiscal Council advising the goverment to cut spending in sensitive areas etc.

    Best thing is for said council to suggest overall numbers, i.e. a target surplus etc and let the politicians deal with the political issue of how to apportion the given limit between various good causes etc.


  • Closed Accounts Posts: 784 ✭✭✭Anonymous1987


    nesf wrote: »
    Best thing is for said council to suggest overall numbers, i.e. a target surplus etc and let the politicians deal with the political issue of how to apportion the given limit between various good causes etc.

    How would a total target be set? based on the level of interest repayments?


  • Registered Users Posts: 17,825 ✭✭✭✭silverharp


    ECONOMICS: Now is a good time to consider a new approach to the conduct of fiscal policy, writes PHILIP LANE

    Barn door and horse bolted comes to mind. Surely 10 years ago was the time to make these kind of decisions.

    Given that alot of EU countires will have Debt to GDP over 90% over the next 5 years and then lets be positive and say that they claw their way back to 60% over the decade following that. Where will the opportunity come from to hive away structural surpluses? By then negetive demographics eects will be kicking in, there will be a pensions crises and then some brainiac will suggest that public welfare liabilities should be funded going forward to preserve medium term fiscal stability?

    A belief in gender identity involves a level of faith as there is nothing tangible to prove its existence which, as something divorced from the physical body, is similar to the idea of a soul. - Colette Colfer



  • Registered Users Posts: 27,645 ✭✭✭✭nesf


    How would a total target be set? based on the level of interest repayments?

    Ideally against tax revenue stress test scenarios so as to offset against future potential bad years. It'd be a very complex and unfortunately imprescise undertaking though with plenty of room for debating for more or less surplus during the good years etc.


  • Closed Accounts Posts: 6,609 ✭✭✭Flamed Diving


    noodler wrote: »
    Read the Lane article a few weeks ago. There was some regressional analysis alright about how countries with a said council have more stable public finances.

    I'd imagine there would be some potential endogeneity issues present. Fiscally austere countries would probably be more likely to set these type of councils up, when you think about it. Was there any mention of this in the paper?


  • Registered Users Posts: 8,452 ✭✭✭Time Magazine


    Barn door and horse bolted comes to mind. Surely 10 years ago was the time to make these kind of decisions.

    PR Lane (1998) "On the cyclicality of Irish fiscal policy", Economic and Social Review, Volume 29, pp. 1-16.


  • Registered Users Posts: 17,825 ✭✭✭✭silverharp


    PR Lane (1998) "On the cyclicality of Irish fiscal policy", Economic and Social Review, Volume 29, pp. 1-16.

    :D then he's my hero, shame no one listened

    A belief in gender identity involves a level of faith as there is nothing tangible to prove its existence which, as something divorced from the physical body, is similar to the idea of a soul. - Colette Colfer



  • Registered Users Posts: 17,825 ✭✭✭✭silverharp


    Based on the IT article above though he only alludes to pension issues going forward. He would need to specifically calculate the fiscal effects of demograhic changes going forward. Its not a simple as hiving off a couple of % of GDP as a future recession cushion.

    A belief in gender identity involves a level of faith as there is nothing tangible to prove its existence which, as something divorced from the physical body, is similar to the idea of a soul. - Colette Colfer



  • Closed Accounts Posts: 7 bcurtis


    its a good idea but sooner or later, just like central banks, this type of body loses it's independence.
    i say bring in a gold standard or a commodity based currency. that will take the politicians and the fractional reserve bankers, who are always keen to inflate, out of the equation when it comes to money. that ,in turn, will put restraint on what politicians can offer the public in order to get themselves elected or re-elected. it would also prevent them creating asset bubbles for the same reasons.


  • Registered Users Posts: 8,452 ✭✭✭Time Magazine


    bcurtis wrote: »
    its a good idea but sooner or later, just like central banks, this type of body loses it's independence.
    i say bring in a gold standard or a commodity based currency. that will take the politicians and the fractional reserve bankers, who are always keen to inflate, out of the equation when it comes to money. that ,in turn, will put restraint on what politicians can offer the public in order to get themselves elected or re-elected. it would also prevent them creating asset bubbles for the same reasons.

    "A gold standard only works when everybody believes in the overall fiscal and monetary responsibility of the major world governments and the relative price of gold is fairly stable."

    Price of Gold
    monthly_dollar.gif

    Does that look stable to you, and do you trust governments more than independent authorities?


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  • Closed Accounts Posts: 7 bcurtis


    well Nixon closed the gold window in 1971, turning the dollar into a fiat world reserve currency, so there was bound to be some fluctuation in the gold price not to mention the value of the dollar itself. But if you look at gold, over long periods of time, it's purchasing power remains extremely stable unlike fiat currencies.
    the chart I attached demonstrates this. It also clearly illustrates the tendency of central bankers, independent or not, to debase fiat currencies.
    this debasing of the currency through inflation and fractional reserve banking is the root cause of the endless boom bust cycles.

    i don't trust the government or any independent body to control the money supply.

    i believe in free markets


  • Registered Users Posts: 8,452 ✭✭✭Time Magazine


    bcurtis wrote: »
    well Nixon closed the gold window in 1971, turning the dollar into a fiat world reserve currency, so there was bound to be some fluctuation in the gold price not to mention the value of the dollar itself. But if you look at gold, over long periods of time, it's purchasing power remains extremely stable unlike fiat currencies.
    The serious rise came over the past years or so, not in 1971. Surely you don't think there's that much of a lag in wonderfully efficient markets. So going by increase in gold prices since 2000, you'd expect a major fall to come soon.

    Or, in other words, it's not stable at all.
    the chart I attached demonstrates this. It also clearly illustrates the tendency of central bankers, independent or not, to debase fiat currencies.
    this debasing of the currency through inflation and fractional reserve banking is the root cause of the endless boom bust cycles.
    Independent European central banks have only come properly into force since the 1990s. Gold has been rising in price since then. You implied yourself that gold is currently priced over and above its long-run average. Thus, if it is truly stable, it will soon fall. Going by my first graph, it was pretty stable (well, deviating within 50% of its mean, so not very stable) between 1980 and 2000. Now look at this:

    gold_10_year_o_eur.png

    So if you expect gold to "remains extremely stable", then you're expecting a drop of about 60% soon. Do you think the euro will drop by 60% soon?
    i don't trust the government or any independent body to control the money supply. i believe in free markets
    That's dodgy enough by itself (as I will get to in a minute), but you know this thread is about fiscal policy and not monetary policy, right?

    Nonetheless, you believe in efficient markets. But you want the government to peg the money supply to gold. Why don't you just buy gold, free from market interference?

    And is that belief in the free market based on anything in particular? Is there any evidence that I could provide (e.g. a series of Nobel Prize-winning theoretical papers showing that rational free markets don't work unless everybody has perfect information; dozens of papers showing experimental evidence that people do not have perfect information or, even if they did, they still don't behave rationally; papers showing massive arbitrage opportunities that persist for years implying that the market is not perfect) that would suggest that free markets are sub-optimal?


  • Closed Accounts Posts: 7 bcurtis


    The serious rise came over the past years or so, not in 1971. Surely you don't think there's that much of a lag in wonderfully efficient markets. So going by increase in gold prices since 2000, you'd expect a major fall to come soon.

    Or, in other words, it's not stable at all.

    my point here was that gold retains its purchasing power over long periods of time relative to real goods not fiat currencies. so i would not expect the gold price to fall any time soon. i would expect it to keep rising as people lose faith in fiat currencies and begin to doubt the ability of their respective governments and central banks to borrow and print their way out of recession.

    Independent European central banks have only come properly into force since the 1990s. Gold has been rising in price since then. You implied yourself that gold is currently priced over and above its long-run average. Thus, if it is truly stable, it will soon fall. Going by my first graph, it was pretty stable (well, deviating within 50% of its mean, so not very stable) between 1980 and 2000. Now look at this:

    There was massive inflation in america in the 70s due to an increase in money supply made possible of course by the closing of the gold window. this required federal reserve chairman paul volcker(79-87) to raise interest rates to 17% to try and bring inflation under control. this might explain the fluctuation in gold price when measured in dollars on your first graph.
    as for your second graph the same applies. we've seen massive inflation of the euro since it was introduced. this is evidenced by the real estate bubbles and rising prices across the region.
    That's dodgy enough by itself (as I will get to in a minute), but you know this thread is about fiscal policy and not monetary policy, right?

    sorry for getting off the subject a bit. i realize this is a thread about fiscal policy but my point was that we should let sound money curtail extravagant fiscal policies rather than more bureaucracy.
    Nonetheless, you believe in efficient markets. But you want the government to peg the money supply to gold. Why don't you just buy gold, free from market interference?

    when i say "i don't trust the government or any independent body to control the money supply. i believe in free markets"
    i mean no one should have a monopoly on printing money. it should be left to the free market and out of the control of a central body, be it a government or a central bank.
    at least with the gold standard you can't just print more gold.
    the ideal free market solution would be to remove legal tender laws and have competing currencies.


  • Closed Accounts Posts: 6,609 ✭✭✭Flamed Diving


    You believe that markets are efficient. Without resorting to anecdote, tell me why this is?


  • Closed Accounts Posts: 7 bcurtis


    well i believe, left to their own devices, markets will eventually find an equilibrium and intervention only distorts or delays this process.


  • Posts: 5,589 ✭✭✭ Griffin Hundreds Newsprint


    bcurtis wrote: »
    well i believe, left to their own devices, markets will eventually find an equilibrium and intervention only distorts or delays this process.

    Got any proof for that?

    Also, why then is the FOREX market one of the most inefficient markets (in terms of economic theory) out there?


  • Closed Accounts Posts: 2,208 ✭✭✭Économiste Monétaire


    bcurtis wrote: »
    well i believe, left to their own devices, markets will eventually find an equilibrium and intervention only distorts or delays this process.
    Partial or general equilibrium?


  • Closed Accounts Posts: 6,609 ✭✭✭Flamed Diving


    bcurtis wrote: »
    well i believe, left to their own devices, markets will eventually find an equilibrium and intervention only distorts or delays this process.

    You believe. As in, this is your opinion? I have reason to doubt that, simply given the language you use. I'd imagine you haven't been introduced to the origin of this language, and are simply repeating something you have read in a lay book or website.

    I apologise if I am mistaken, but I have a hunch.


  • Closed Accounts Posts: 7 bcurtis


    Got any proof for that?

    well one example is, propety prices were over infalted due to government intervention now free market forces are trying to correct this but governments and central banks keep intervening and proping up the price. this is just creating a false floor.
    Also, why then is the FOREX market one of the most inefficient markets (in terms of economic theory) out there?

    i would say its inefficient because there's way too much intervention. central banks openly intervene in the currency markets.


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  • Posts: 5,589 ✭✭✭ Griffin Hundreds Newsprint


    bcurtis wrote: »
    i would say its inefficient because there's way too much intervention. central banks openly intervene in the currency markets.

    I'll give you three goes.

    Yes, there is intervention but it is very rare. The market moves over 3 trillion dollars a day. Intervention moves a few billion euro a couple of times a year.


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