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16-01-2009, 00:30   #1
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The case for an independent fiscal authority

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:



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.
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16-01-2009, 00:44   #2
blindjustice
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an algorithm could run both fiscal and monetary policy!!!!!
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16-01-2009, 00:50   #3
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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.
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16-01-2009, 00:53   #4
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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.

Last edited by BenjAii; 16-01-2009 at 01:13.
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16-01-2009, 01:25   #5
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Philosopher kings, no?
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16-01-2009, 06:59   #6
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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
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16-01-2009, 08:17   #7
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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:



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.
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12-03-2010, 14:12   #8
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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/...266101517.html

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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
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12-03-2010, 18:22   #9
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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.
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12-03-2010, 20:04   #10
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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.
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13-03-2010, 18:32   #11
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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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13-03-2010, 18:39   #12
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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.
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13-03-2010, 19:17   #13
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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?
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13-03-2010, 19:59   #14
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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?
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13-03-2010, 20:50   #15
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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.
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