Towards a Fiscal Council

Earlier in the year, the Labour and Greens parties released a set of Budget Responsibility Rules, envisaged at time as being the rules that would guide the two parties if they were in a position to form a government.    The actual new government, of course, includes New Zealand First, with the Greens at a partial arms-length.  Then again, James Shaw is now an Associate Minister of Finance.    The status of these rules isn’t clear, but since they haven’t been disavowed I’m assuming they will, at least broadly, provide the basis for the new government’s fiscal policy.

I wrote about the rules at the time they were announced.  I didn’t have too much problem with them, but outlined a number of areas where details might matter quite a lot –  including, for example, the fact that the appropriate prudent level of the fiscal balance should depend, in part, on the expected rate of population growth –  and areas where what look like very well-intentioned rules can be open to being gamed, potentially in quite sub-optimal ways.

My main interest, then as now, was in this item

Measuring our success in government

  • The credibility of our Budget Responsibility Rules requires a mechanism that makes the government accountable. Independent oversight will provide the public with confidence that the government is sticking to the rules.
  • We will establish a body independent of Ministers of the Crown who will be responsible for determining if these rules are being met. The body will also have oversight of government economic and fiscal forecasts, shall provide an independent assessment of government forecasts to the public, and will cost policies of opposition parties.

Labour and the Greens promised to establish a Fiscal Council.

If so, they will have plenty of support.  The OECD has regularly advocated the creation of such a body.  So –  from the right –  has the New Zealand Initiative.   Such entities are pretty common in advanced economies now, especially in Europe.

A few years ago, The Treasury commissioned Teresa Ter-Minassian, former head of the IMF’s Fiscal Affairs Department, to undertake an independent review of The Treasury’s fiscal policy advice.      She looked at the possibility of establishing a Fiscal Council, and wrote as follows:

As regards the possible creation of a Fiscal Council, if it were established, it should probably have a more limited role in New Zealand than in most other countries that have created similar institutions. A more limited remit for the Council would be justified by the degree of operational independence of the Treasury in forecasting and policy analysis, its well-established non-partisan reputation, its sound record of relatively accurate and unbiased macroeconomic and fiscal forecasts, and the already strict fiscal accounting and transparency requirements mandated by the Public Finance Act.

The main purpose of the Council would be to offer an independent expert perspective and commentary on the advice provided by the Treasury to the Government on fiscal policy issues, and on the decisions taken by the Government and the Parliament on those issues. Such a Council would not need to operate on a full-time basis, and therefore would not be very costly.

If the Council was constituted by a small number of well-respected national, and possibly international, figures, with substantial fiscal expertise, previous policy experience, and strong communication skills, its commentaries at key points in the budget cycle, and on such important documents as the Long-Term Fiscal Statement and the Investment Statement, could help increase the resonance of fiscal policy options and choices with the media and the public opinion, and build social consensus on needed reforms.

There are two, quite separable, dimensions to the Labour/Greens proposal.  The first element is that the Council

will be responsible for determining if these rules are being met. The body will also have oversight of government economic and fiscal forecasts, shall provide an independent assessment of government forecasts to the public,

and the second is that it

will cost policies of opposition parties.

In general, I support the establishment of a small body to do something along the lines of the first of those sets of responsibilities.  This is what I wrote earlier in the year

The main area where a fiscal council –  or indeed, a broad macro policy advisory council –  could add value is around the bigger picture of fiscal policy (not just rule compliance, but how the rules might best be specified, and what it does (and doesn’t) make sense to try to do with fiscal policy).

But there are still important caveats.  For example, it is fine to talk in terms of the council having “oversight of government economic and fiscal forecasts”, but quite what level of resource would that involve?  Does the proposal envisage that the core forecasting role, on which government bases its policies, would move outside Treasury?  Even if there was some merit in that, it would be likely to end up with considerable duplication –  since neither the Treasury nor the Minister is likely to want to be without the capability to have their own analysis done, or to critique the work of the fiscal council.  The UK’s experience is likely to be instructive here, but we also need to recognise the small size of New Zealand and the limited pool of available expertise.  Our population –  and GDP –  are less than a 10th of the UK’s.

Again, I think Labour and Greens are moving in the right direction here, so I’m keen to see a good robust institution created, not to undermine the proposal.   The success of such a body over time will depend a lot on getting the right people to sit on the Council, and to keep the total size of the agency in check.   Too large and it will be an easy target for some other future government –  no doubt enthusiastically offered up by a Treasury keen to remove a competing source of advice.  But make it too small, or with too many establishment figures on the Council, and people will quickly wonder what is the point.  As it is, we don’t have a lot of independent fiscal expertise in New Zealand at present (as distinct, say, from specific expertise on eg aspects of the tax system).   I presume that if they form a government later in the year, Labour and the Greens will be looking quickly to the experiences in this area of small advanced countries like Ireland and Sweden.

It would simply not be possible to offer any sort of detailed oversight of the Treasury’s economic and fiscal forecasts –  that went beyond the sort of commentary market economists or even people like me can add to the mix from time to time –  without a reasonably significant staff establishment (people who are over lots of detail, including around revenue forecasts).    And I’m not sure what would be gained by doing so.  We don’t have an obvious problem in that area.  And as the Ter-Minassian report points out, unlike the situation in many countries, the published and economic and fiscal forecasts in New Zealand are those of The Treasury, not those of the Minister of Finance.   One can overstate the importance of the difference –  the Secretary to the Treasury has a lot of irons in the fire with the Minister at any one time and so it is hard to envisage the Treasury forecasts being too different from what a Minister might prefer –  but it does provide some protection.

A Fiscal Council seems more likely to add value if it is positioned (normally) at one remove from the detailed forecasting business, offering advice and analysis on the fiscal rules themselves (design and implementation) and how best to think about the appropriate fiscal policy rules.  The Council might also, for example, be able to provide some useful advice on what material might usefully be included in the PREFU  (before the election, I noted that routine publication of a baseline scenario that projected expenditure using the inflation and population pressures used in the Treasury economic forecasts would be a helpful step forward).

As I noted in the earlier comments, presumably the government will be wanting to look at what is done in other small advanced countries.  Ireland (total cost around NZ$1m per annum) and Sweden are obvious examples.    Having said that, countries that are part of the EU (and especially the euro area) have some distinctive issues that aren’t relevant to New Zealand.  For a country in the euro, fiscal policy is the only short-term cyclical management tool available, and the risks of a tension between the short and long-term are greater, and there is less of an independent check on serious fiscal imbalances from monetary policy.   There is unlikely to be a simple-to-replicate off-the-shelf model that can quickly be adopted here, and some work will be needed on devising a cost-effective sustainable model, relevant to New Zealand’s specific circumstances.  That is partly about the details of the legislation (mandate, resourcing etc), but also partly about identifying the right sort of mix of people –  some mix of specific professional expertise, an independent cast of mind, communications skills, and so on.  A useful Fiscal Council won’t be constantly disagreeing with Treasury or the Minister of Finance (but won’t be afraid to do so when required), but will be bringing different perspectives to bear on the issues, to inform a better quality independent debate on fiscal issues.

I also wonder whether consideration should be given not just to a Fiscal Council but to something a bit broader, what I’ve labelled as a Macroeconomic Advisory Council.   The governance and monitoring model for the Reserve Bank is up for review.   There seems to be pretty widespread support for moving to a (legislated) committee-based decisionmaking model for monetary policy.    Few people seem to have yet focused on the Bank’s financial stability and regulatory functions, but the case for a committee is at least as strong for those functions.   And few people –  other than, presumably past Governor and Board members –  think the Reserve Bank’s Board has done a particularly effective job in holding the Governor to account.     Perhaps that model was always unrealistic –  the Board was inevitably always going to be too close to the Governor that it would focus more on having his or her back than on holding the Governor to account on behalf of the public.  Perhaps it is time to move away from that model, and consider whether the public interest might better be served by asking an independent Macroeconomic Advisory Council to contribute to the debate, and periodic review, of monetary policy and financial stability policy, in a similar way to what Fiscal Council proposals have in mind for fiscal policy.   Again, it wouldn’t be about second-guessing individual OCR decisions or specific sets of forecasts, but offering perspectives on the framework and rules, and some periodic ex-post assessment.    In a small country, it would also have the appeal of offering some critical mass to any new Council.

(I touched on this option in a post written in the very early days of this blog, where I linked to a discussion note on similar issues I had written in 2014. )

The second responsibility of the proposed Labour/Greens fiscal council would be the cost of policies for Opposition political parties.  I’m much more sceptical about that proposal, even though it has recently had support from Peter Wilson (formerly of The Treasury) at NZIER, and from the New Zealand Initiative.  I wrote about this idea at some length when the Greens first proposed a Policy Costings Unit (an idea which attracted quite a bit of support from across the spectrum).    I wasn’t opposed, just sceptical.  That remains my position today, and the recent election campaign –  the first for decades I’ve watched not as a public servant –  hasn’t changed my views.

This is what I wrote last January

In the end, people often don’t vote for one party or another on the basis of detailed costings, but on “mood affiliation” –  a sense that the party’s general ideas are sympathetic to the broad direction one favours.  And I can’t think of a New Zealand election in my time when the results have been materially determined by the costings (accurate or inaccurate) of party promises  – perhaps in 1975 National might have won a smaller majority if the cost of National Superannuation had been better, and more openly, costed, but I doubt it would have changed the overall result.

And then, of course, there is the fact that economists, and public agencies largely made up of economists, have their own predispositions and biases.    The Economist touched on this issue quite recently.  It isn’t that economists are necessarily worse than other “experts”, or that people consciously set out to favour one side or another in politics, but (say) whatever the merits of the sorts of policies the Greens have favoured, it is unlikely that the New Zealand Treasury (1984-90) would have evaluated them in ways that the Greens would have found fair and balanced.  Perhaps ACT might have the same reaction to today’s Treasury?  If it were only narrow fiscal costings an agency was being asked to evaluate, perhaps these predispositions of the analysts would not matter unduly (although even there, much depends on the behavioural assumptions one makes), but the Greens’ proposal includes analysis of the “wider economic implications” of policy proposals.

On balance, I still think there is a role for something like a (macro oriented) fiscal council in New Zealand, perhaps subsumed within the sort of macroeconomic or monetary and economic council I suggested here (but perhaps that just reflects my macro background).   And there is probably a role for better-resourcing select committees.  But when it comes to political party proposals, if (and I don’t think the case is open and shut by any means) we are going to spend more public money on the process, I would probably prefer to provide a higher level of funding to parliamentary parties, to enable them to commission any independent evaluations or expertise they found useful, and then have the parties fight it out in the court of public opinion.  The big choices societies face mostly aren’t technocratic in nature, and I’m not sure that the differences between whether individual proposals are properly costed or not is that important in the scheme of things (and perhaps less so than previously under MMP, where all promises are provisional, given that absolute parliamentary majorities are very rare).  If there are serious doubts about the costings, let the politicians (and the experts each can marshall) contest the matter.

Was there a problem in the most recent election?  There was a big debate around Steven Joyce’s claims of a “fiscal hole” in Labour’s plans.     But it seemed to get sorted out in the ensuing debate.  Various experts weighed in –  including the anonymous group of former senior Treasury officials – and a reasonable consensus seemed to emerge: Joyce had probably over-egged his claim, but that the Labour fiscal numbers would be tight indeed, perhaps very tight.     Was there a need for extra taxpayer-funded analysis to deal with those claims (which were as much about framing as about bottom-line numbers anyway)?  I don’t see the gap.    And arguments about a capital gains tax, for example, don’t really depend on (soft as soap bubbles) revenue estimates, but about the merits (and demerits) of such a possible tax.  That is the stuff of the political debate.  It is up to each side to marshall their arguments –  and experts, to the extent they are helpful –  and for those of us offering independent commentary to play some role in shedding light on the claims and evidence that are put forward.     Treasury officials –  even if seconded to a Fiscal Council –  certainly can’t be regarded as a disinterested voice on such an issue.

And some of the very biggest issues of the election campaign were around emissions reduction, water use and pollution, child poverty reduction, and even immigration.  Policy in each of those areas probably has some fiscal dimensions, but in few of those areas are fiscal considerations likely to be the key factor –  whether in shaping how people vote, or in the potential economic and social ramifications of the options voters are deciding among.    Actually, the same could be said of housing policy –  a costing unit might focus on whether the KiwiBuild costings looked plausible, but that is probably of second order importance to reaching a view on what overall mix of housing. tax, land use, immigration policies might offer the best way back to a functional and affordable housing market.

As it is, election costings unit haven’t become generally established in other countries, and outside the Netherlands, I can’t a single example that seems to be working very well.  NZIER’s (Australian) economist seemed keen on the Australian approach.  Unless I missed something, when I checked their election costings website for the last Federal election, not a single policy of the main opposition party (Labor) had been costed through that process.    Labor ran the incumbent (first-term) government extremely close in that election, and it wasn’t obvious at the time that they paid any price for not utilising that process.  And nor is it obvious why they should: in the end each voter gets just one vote (well, ok, both NZ and Australian systems are a bit more complex than that, but you get my point) and in deciding to how to cast that vote, most of us are probably making some  sort of overall assessment of the values, competence, vision of the respective parties, on whether or not it is “time for change”, and so on.  We simply don’t decide –  and probably are quite rational in doing so –  by attempting to evaluate detailed policy costings, or the regulatory equivalent.  In New Zealand, apart from anything else, we know that the election policies are opening bids, going into government formation negotiations.  We also know that incumbent government are advised, on details, by fairly competent officials, and that successive governments have a track record of managing overal fiscal policy in a fairly responsible way –  sometimes blindsided by events, but usually events that not even the wisest Treasury or Fiscal Council will have foreseen.

If anything, I’ve become more sceptical of the policy costing unit idea than I was when the Greens first raised the option.    Such a unit probably can’t do much harm, but it is hard to see it doing much good either, and risks skewing debate away from the issues that, in any election, matter rather more.  It is, perhaps, a Treasury official’s dream but –  valuable as good Treasury officials are –  not what will help voters evaluate competing visions and aspirations for how best our country should be governed.

 

7 thoughts on “Towards a Fiscal Council

  1. Steven Joyce did not overegg the $11.7 billion cost overrun he forecasted. That number is actually quite conservative. It is just become very apparent that the 7 economists that backed Labours budget can’t add and clearly can’t do maths..

    Regional Infrastructure fund is $1 billion
    Shifting Auckland Port is $5 billion.
    100 million trees at $20 a tree is $2 billion
    10,000 houses a year, land cost is $2 billion plus build cost $4.5 billion. Total is $6.5 billion.and thats conservative because the land cost is a big unknown.
    Monorail is from $5 billion to $15 billion. The existing Len Brown’s pet train project is already cost overrun from a budget of $2 billion now costing more than $4 billion.
    A 10c fuel tax on Regional Auckland will only collect $300 million a year. The cost to get monorail to the airport is $5 billion minimum and you don’t even own the land yet.
    Free University, Year 1 $300 million, Year 2 $600 million and Year 3 $900 million. Thats $1.8 billion

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  2. NZIER think tank says – “NZ lacks systems to check political parties’ promises”
    -https://www.stuff.co.nz/business/97795067/nz-lacks-systems-to-check-political-parties-promises-think-tank-says

    Australia has had since 1998 CHARTER OF BUDGET HONESTY ACT 1998
    Part 1 – Costing of election commitments: roles of the Secretaries and the Parliamentary Budget Officer
    https://www.finance.gov.au/publications/charter-of-budget-honesty/

    Don’t suppose this would work for New Zealand – nope – probably get shouted down – too complicated

    Talk about complicated – Teresa Ter-Minassian – one could summarise that up in one sentence

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    • I’m not entirely sure the point you are making, but Australia does not have a Fiscal Council. We’ve had a Public Finance Act (fiscal responsibility bits) since 1994.

      There are bits to like about the Aus system, but it isn’t a model that would meet what the parties say they want to do here.

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  3. Democracy works best with complete transparency – sunlight is the best disinfectant.
    I’m all for a fiscal council including costing opposition parties manifestos.
    Something similar but of a smaller scale should also be required of local government.

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    • But it would never be “required” – only an option that parties could choose to use. Evidence in Aus is that, not surprisingly, they use it strategically. Perhaps especially, parties that are strapped for cash would use it.

      And mandating it wouldn’t work: parties could simply provide only sketch outlines, which would be impossible to formally cost.

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  4. It should be mandated.

    If parties only provide sketch outlines then the Fiscal Council assessment would state that the policies couldn’t costed or the expected cost is X but with a range of Y to Z.

    The public can then take that into consideration when voting.

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  5. To do so would seem to me like a gross intrusion on freedom: to require a party campaigning for election to have its policies costed by some bureaucrats, using those bureaucrats’ own assumptions, preferences etc. If voters want costings, and won’t vote for parties not providing them, it incentivises the parties to get costings from their own credible consultants.

    Perhaps as importantly, it would materially overweight fiscal considerations. No one has suggested requiring parties to have their regulatory, foreign, social or defence policies evaluated by bureaucrats. Many of those promises are at least as far-reaching in impact as spending/tax policies.

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