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Fixing the Economy: A radical new approach needed to fiscal planning, leading economist says.
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One of the thorniest problems arising from Ireland’s eurozone membership during this downturn has been the absence of any mechanism to devalue our currency and thus help restore economic competitiveness. That is, apart from the unpopular and painful option of reducing wage and price levels throughout the economy.
But if we took a different approach to managing how we go about managing our fiscal business, this might not arise as such a crushing problem in the future, according to Philip Lane, Professor of Economics at TCD. In the process, we might get a better handle in the medium to long term on some of our other EMU-related problems as well.
Lane proposes the establishment of a Fiscal Policy Council plus a new set of complementary rules for framing budgetary policy and has set out his ‘broad brush’ ideas in a paper delivered to the Statistical and Social Inquiry Society of Ireland yesterday evening.
Ireland must devise its own statutory framework to compel governments to live within their fiscal means and to generate surpluses, Lane believes.
For full text of Lane’s paper follow this link: http://www.tcd.ie/iiis/documents/discussion/pdfs/iiisdp315.pdf
A new radical approach to budgetary planning and implementation is necessary to avoid repeating the mistakes of the past and the painful adjustments we are currently having to make to correct them. His suggested reform would also be entirely compatible with the rules of the Stability and Growth Pact and help us to live within its framework.
Public debt will be very substantial by the time this crisis ends, Lane points out. To get back within the 60% debt ratio required by the SGP rules will require a sustained period of generating structural surpluses.
Rules defining budgetary choices and a Fiscal Council charged with the task of monitoring government performance in this area would bring many advantages, Lane contends.
The way it works now is that in times of plenty governments come under sustained political , media and public pressure from interest groups to increase public spending across the board.
“In a political system with fragmented political power, positive income leads to more intense lobbying by each powerful group,” Lane notes.
Thus there are few political brownie points in policies that seek to accumulate surpluses or keep spending growth within strict limits in such times. For example, the only ‘rainy day’ fund established in the past decade, when the government was awash with surpluses, was the National Pensions Reserve Fund, only ever intended anyway to provide partial support for an anticipated burgeoning pensions bill later this century. But accumulating surpluses in good times would mean having funds to, at least in part, offset the need for drastic spending cuts when severe recession afflicts us.
In simple terms, Lane wants statutory based rules to curtail the normal pro-cyclical spending pattern of successive Irish governments. This would include an obligation on the Minister for Finance of the day to comply with strict ratios of income and expenditure, thus restricting annual budgetary choices. A ‘rainy day’ fund could be used to capture proceeds from surprise windfalls (such as those that arose from tax amnesties in the past) and then used to fill the gap when there are unexpected shortfalls in government revenue.
Lane argues that the system would have benefits for workers, households and companies in terms of inducing less volatile employment and income levels. He further argues for the introduction of a two tier system of public sector pay, with Part ‘A’ guaranteed as untouchable by government while the ‘B’ component would be flexible and could be adjusted if that became necessary in the event of a severe external shock to the economy, or maybe even one of the homegrown variety.
The new system would make the Miniiter for Finance legally responsible for the overall budgetary strategy adopted by governments, significantly increasing his powers, which might make some actors on the political scene uncomfortable. The Independent Fiscal Policy Council, envisaged as possibly smaller but basically along the lines of a Swedish FPC appointed in 2007, would oversee the system, monitoring budgetary choices and making recommendations.
Apart from the benefits to fiscal strategy, Lane argues the new framework would increase the transparency of the budgetary process. The FPC could have a role in research and promoting the public engagement of ordinary citizens with planning how the State should spend the their taxes.
“The adoption of such a framework requires buy-in from the political system and policy officials in the Department of Finance,” Lane concludes.
But he points out :“It offers substantial medium term benefits by improving Ireland’s ability to deal with macro-economic shocks. Moreover, by improving the foundations of future fiscal policy, it will further help to improve Ireland’s reputation.”
There’s lots to argue about in terms of the Professor’s analysis of how we got to where we are, as well as his solution for not ending up in the same jam again. Not to mention either how existing institutions and power-houses of influence might receive proposals that must inevitably curtail their existing power and influence and get rid of much of the secrecy involved in the current budgetary process. But there’s more than plenty in this splendidly radical proposal to chew over and that merits further thought and investigation at the very least.
How this proposed reform is taken up politically in the weeks and months ahead will be interesting to observe.
The problem with this type off fiscal policy group is that fiscal policy is as much a function of political ideology and political expedience as it is an academic exercise. The debate about whether public sector wages are to be determined by number crunchers OR the numbers placed secondary to human considerations will in essence be the debate the next election will be lost over.
I cant imagine Labour or any true keynesian being comfortable with this idea. I personally see a lot of merit in it but you would have to be careful it didnt turn into a little in-house IMF thinktank.
Des,
When I read Lane’s paper my initial thought was ” might work for the Swedes, but could never work here.” First, we’re too small and already have enough institutions making predictions and issuing advice (the wrong advice, a lot of the time!) to guide any Minister for Finance. Second, our political culture is so adversarial, there is little or no prospect of ever having the parties in opposition at any given time resisting the temptation to turn the whole process into a political football for their narrow political goals.
But when you think about it, seriously, for a while, the other side of the coin is that we are a peripheral eurzone country and circumstances of size, geography and the necessity of functioning as an open globalised economy cannot and will not change. At this stage I believe that a large part of what went wrong for us was that we couldn’t politically manage the free flow of credit coming from the centre of the eurozone during the boom years. We just didn’t know how to do it. In similar cirumstances a decade or so down the road we might easily find ourselves in the same place again as we are now.
There’s definitely a risk in what Philip Lane has set out of a home grown mini-IMF think-tank, all of our very own, emerging from it. But as he said in his paper, this is preliminary broad brush thinking and it would take a major research project into feasability of the system he proposes, plus a major political debate, to tease it out into a workable system.
I also think it’s past time the annual budget nonsense that goes on here was done away with. It no longer fits either with the technology of our age, the flexibility required in fiscal planning or the need of citizens for greater openess and transparency within the whole process. I don’t fully understand why he went into such detail on the public service pay aspect at this initial stage, which I think may end up as a distraction from discussion of the broader merits of his proposal.
“Ireland must devise its own statutory framework to compel governments to live within their fiscal means and to generate surpluses, Lane believes.”
Since Jack Lynch abolished rates “Democracy” has been shown up to be nothing more than the politics of the lowest common denominator which is greed and selfishness. That is the reason we had nothing since but cycles of boom and bust. The solution up to the time we joined the euro has been devauation which reduced the assets of those with more than their fair share of cash , thereby creating a certain amount of equlibrium in human affairs.
However it seems that the most greedy saw that this could not be the case with the euro and they saw their opportunity to firstly make lots of cash and then insist that this cash hold its value and even gain in value by deflation. So now the opposite to the normal cycle has happened. Instead of inflation we have deflation. Instead of equlibrium in human affairs we have a greater concentration of waelth in those with cash. And their grip is obviously tightening.
These are now the people who governments and are delighted to see govenments in debt because they control debt.
@Des
The debate about whether public sector wages are to be determined by number crunchers OR the numbers placed secondary to human considerations
Its the cold number crunching that tells us whether the money is available to fund the warm-fuzzy human considerations.
Ignore the former the latter will surely fade into distant unaffordability.
At which point I guess we’ll have to pay those deserving public servants with platitudes?
Here’s another “cold number”: 4.35 billion, the population of the Republic. And though a small, very wealthy elite (and their hangers-on and admirers) may want to run it for their own benefit – they like State contracts, police and the courts, obviously – the rest of us get to disagree.
Here’s another “cold number”: 4.35 billion, the population of the Republic.
Which republic?
The combined populations of the People’s Republic of China, the Democratic People’s Republic of Korea, the Bolivarian Republic of Venezuela, the Republic of Cuba and the People’s Republic of Cork would still be, oh a few thousand million short of the mark.
EWI, Proposition Joe, Just shows –million, billion –whatsa differance—-national debt, borrowing requirments, budget deficit, number of zeros don’t register—billion definitely doesn’t register, we have no concept of billion, which may be just as well as our bank gaurantee in billions would definitely keep us awake at night.
Lads, I am conservative in my views on fiscal policy and economics. But I am pointing out that the small detail that we let people vote in this country is likely to hamstring any progress towards ” radical fiscal policy”.
That is unless we get a nice right wing concerted backlash in the next election as a result of the tax payers getting fed up with the vested interest benefit groups of bankers, judiciary, trade unions etc. A backlash giving a centre right party an overall majority to really reform.