A New Fiscal Framework for Ireland Post author By Philip Lane Post date February 11, 2010 You can find this paper (presented to SSISI this evening) here. You can find the slides for the talk here. Categories In EMU, Fiscal Policy Tags fiscal framework for Ireland 34 Comments on A New Fiscal Framework for Ireland ← State In No Rush to Collect Dividend → Rationale for the Greek Deal 34 replies on “A New Fiscal Framework for Ireland” A very interesting presentation and discussion. The proposals/concepts that stuck in my mind were: 1. A Fiscal Policy Committee. 2. Developing fiscal rules. 3. Factoring in cyclical fiscal factors in any recommendations. 4. Tentative ideas about restructuring wage packages with a portion there of contingent on macro-economic performance. 5. A statutory mechanism for feeding economic policy analysis and recomendations into budgetary debate. I left the last proposal for last as I think it is the only one that is achievable and also the one that may be most effective over the long term. There are numerous national and international bodies already analysing our economic performance who should/could have recommended counter-cyclical fiscal policy. The national ones (DoF, ESRI) will guard their turf. The international ones (OECD, IMF, EU Commission) will carry on regardless. Any new body would likely have lost media interest by the time the next crisis was imminent. However, feeding proper analysis, independent of the DoF, and data to the opposition and independent commentators would be a lastingly effective measure in an adversarial parliamentary system notwithstanding the fading fo collective memory. I would suggest that if any such mechanisms for release of data and independent analysis are proposed then it should include a requirement tha thte Government release all relevant data in freely accessible data format. Thanks again. […] | Views on the Economy and the World Philip Lane’s paper & slide deck are available here: The Irish Economy Blog Archive A New Fiscal Framework for Ireland Are people willing to talk reform ? Fix things ? Will the Opposition swing in behind this call ? […] The idea that we could have improved our situation through Keynesian countercyclical policies is ludicrous. We have no control over the currency we are forced to use. We are almost always diametrically opposed in our fiscal state to the economies that set the interest rates for this currency, Germany and France. Also. countercyclical tax policies are liable to marked lagging effects which pitch the economy into a kind of psychosis over time. No mention of time in the piece. What tax rates should the Government set? There is no way of knowing. Political interference distorts the exercise even further. All these ideas constitute the perspective of a central planner; essentially a socialist perspective. As to the expert group. Who needs a group of expert socialist planners? The fact is the economy is a healthy living organism that needs no planners to make choices for the citizens. It does not need fixing. It need to be left alone and it will work out all prices, wages, savings and investment of its own accord. Taxes should be lowered because this is consistent with liberty. Lower taxes increase supply because of increased returns on productive enterprises. Liberty is a necessary precondition for prosperity. The mess we find ourselves in now (E34 billion required by the State in 2010) can be resolved by liquidating debts and starting afresh with a free market, Capitalist, libertarian perspective. As to the Euro? The choice now is either pull out or go for complete fiscal integration including taxes, wages, regulations, legal, etc. I don’t think so. @OlivePlant I thought this post was about a new Fiscal Framework etc. I am sorry to have to offer a very different view. Please take it on board as a reflection of reality. I live in another country, far richer and larger than Ireland. Aside from the economics taught to accountants, I studied to be one once, I am self taught. I respect great learning, but not so much that I neglect the practical. The federal nature of the EZ is neglected in Philip Lane’s masterly consideration. The USA is in trouble as a result of creeping centralism, powered by the money makers, the banksters, the company. The EU will suffer the same fate, sooner than later, as it is a “crisis” that will permit extraordinary measures. With inflation, it is possible for dictatorial central governments to act as benefactors, handing out money, while forging unbreakable shackles. This is an inexorable and in the last analysis, away from all emotion, desirable conclusion. Ireland has and is showing gross political ineptitudeon a macro level, while as usual, being very apt on a micro level. Stealing revenue from other states is a trick. It is the foundation of all competitiveness. Is it enough to survive this sort of misgovernance? The paper attempts to suggest structures to alter this without revealing that subversion of structures is an Irish speciality. Look at the Honahan experience. Showing that he is not fitting in with those in power, like George Lee, some of the power of the CBI is now routed to NTMA. Because Mr Somers has retired. Because they can. Business ability in spades. Governance however requires transparency and honesty, ahem! We are all Germans in nature. That is, in fact, a good thing. Indo-Aryans. We tamed the bull. We harnessed it for agriculture and we suckle at the teat of the cow. Even the Khazars are wlecome. Inclusiveness is not evil and the larger group of humans are also welcome. We must combine. One of the few advantages of total war is the aftermath. We can see how destructive it has been and with the increase of technology, how more destructive the next total war will be. Fighting until an unconditional surrender should be a war crime. We are in Europe. They will make the rules. They are us or they are not us. Which is it? A federal approach will ensure accountability but at a higher level. Those who actually have power can command respect whereas the voters can be and have been, bought off. If we really want to change things for the better. Do we? Mokabaybob I take it all back! Welcome for using the word libertarian! What have you published compatible with free thinking and acting? We have to recognize the world in which we live. It is far from ideal. More laws everyday as if the Oireachtas has to act like a factiory. Everyone taking away from most and giving to the few. The nwo on the horizon so we must ingest fluoride, lithium and anti-depressants for social control. What are your proposals? This engineered depression enables another squeeze of the Iron fist, to be followed by a velvet glove, disguised by inflation, once it is re-established. Many thanks for posting on this paper. It is rich in insight, analysis and prescription. However, I was struck by your reference (fn 1) to an earlier wave of research warning about the new economic policy imperatives. In addition to your and John FitzGerald’s papers, I suspect the “amongst others” include work cited previously by Kevin O’Rourke that comprised papers by him, Rodney Thom and Peter Neary. If the thrust of this work by such a combination of the most competent, internationally-recognised and widely-cited economists in Ireland at that time could be waved aside by government, what hope is there that the eminently sensible proposals in this paper will gain any traction? And Zhou, much and all as I agree with the thrust of your comment, I’m afraid you’re seeking to pour new wine into old wine-skins. I know I keep beating the same drum, but, until there is fundamental reform of the system of democratic governance, the design, scrutiny, amendment, implementation and review of public policy – and, in particular, economic policy – will continue to be entirely dysfunctional and damaging to the interests of the economy and citizens. Surely it is in the interests of economists to push, collectively, for these reforms so that the demand for high-quality economic policy expertise is increased and more effective policies are implemented in the public interest? Sure we’ll have a fiscal policy committee; strong, independent and able to set policy without fear or favour … It wont, as Mr Lenihan might say, cost us a penny….. All we or indeed he need do is carry as as we are. The meetings and key personnel for this will probably be offshore. Bring it on. Achieving fiscal balance is only one part of the equation. The other is at what level of taxation (as a percentage of GDP) that balance is achieved at. You could have a zero deficit with both expenditure and taxation at 25% of GDP. You could equally have a zero deficit with both expenditure and taxation at 55% of GDP. The difference between these two scenarios is far more important to economic growth than whether the deficit is 1%, 2%, or whatever, although obviously in either case it should never be allowed to go to 7%, 8% or higher. Many of the countries which are currently being lauded for their relatively low deficits are in that position because taxation as a percentage of GDP in their economies is now about 55%. Figures just out this morning. The German economy grew by zero per cent in Q4. Contrast with the U. States, which grew by 1.4 per cent (5.7 per cent annualised) in Q4. Once again, Boston is proving its more resilient and dynamic than Berlin. I caught a snippet of Ruairi Quinn on Newstalk this morning. It strikes me from what Ruairi Quinn said and from what has been going on in the Eurozone recently that it is likely that the EU Commission, or another EU body, may start to perform some of the functions of Philip Lane’s proposed Fiscal Council in a more independent and pointed way. I had to smile when the gentleman who responded for the DoF suggested that the DoF could release more analysis and data prior to budget. Governor Honohan was of course correct that the DoF could not reconcile its obligations to the Minister with such obligations of disclosure. The mealy mouthed reference to related disciplines in the DoF’s response to George Lee’s PQ about the number of economists in the DoF wa the proof in the pudding. It is good to know that the DoF is taking criticisms of its forecasting ability, its economic expertise and its general capacity to heart. It is regrettable that it is acting defensively and denying such criticisms rather than taking them on board. @Zhou, There can be no doubt that those who decide in Brussels, Frankfurt and the core Eurozone countries are looking at ways to prevent a repeat of the PIIGSs’ fiscal incontinence during the last decade. And I’m sure many people in the PIIGS would welcome the smack of firm government from that source. But this runs the risk of widening further the existing democratic deficit and creating increased resentment about decisions being made by faceless Eurocrats. This is something Irish people should decide, and have the opportunity to decide, for themselves in the context of the fiscal constraints imposed by membership of the Eurozone. And I like your distinction between the DoF taking something to heart – i.e., being peeved, shifty and defensive about it – and taking it on board – i.e., responding in a positive and constructive manner. But it would be unfair to be too harsh; the DoF does not have a corporate or legal existence separate from the Minister. This is also something that needs to be addressed. @MokababyBob http://www.irisheconomy.ie/index.php/2010/02/09/iceland-iceland-collapse-collapse/#comment-35484 @Paul Hunt One of the points made by John FitzGerald and others in the discussion was that our compliance with the rules of the Growth and Stability Pact had lulled us into a false sense of fiscal security. It was also noted that the rules generated at EU level were designed to apply to all and becaus eof this flaw in the design process were unsuitable (or not fit for purpose as Ruairi Quinn said today) for application to different regions (that’s what we are and Spain is) within the EU. Last evening, I got the impression from the respondents and some comments that we in Ireland do not need the kind of new institution and practices that Philip proposed. The fact that we are in dire economic straits is a clear indicator that the existing mechanisms have failed. Our governing class (which is wider than the Government and Civil Service) simply ignores any opinion (no matter how well founded it is) from any source eg. ESRI, Central Bank, EU Commission, IMF. In pulling ourselves out of various failures in the past, we set up new institutions and modifed some of the then existing practices. The 1940s saw, inter alia, the creation of the Central Bank, the expansion of the County Management system (a kind of separation of powers when Local government raised most of its fund itself and was also responsible for a a far wider range of public serrvices than now)) throughout the state The late 1950/early1960s saw, inter alia, the setting up of the Agricultural Institute, the Economic Research Institute (later ESRI), Institute of Public Administration The 1980/90s saw, inter alia, the creation of the Top Level Appointments Commission, (limited) Freedom of Information(FoI), Ombudsman etc. The powers-that-be have systematically limited the scope of previous changes eg. limitations on FoI, centralisation of power, sweeping things under various carpets. The political class firmly believe that they have the right to interfere in arbitrary and whimsical ways, regardless of the cost. Given the scale of the failure of fiscal management here, Philip is right to propose new institutions and practices, backed up by analysis of this failure and experience elsewhere. He echoes the response of earlier generations to similar crises and has probably met the same comment from incumbents as earlier protagonists of change did! As with Paul Hunt, I doubt that anything sustainable will be done without introducing new checks and balances in how power is acquired, exercised, controlled and lost. We need to limit the scope for excess by the powerful. These proposals can assist that aim @Zhou, Points noted. I think the discussion of fiscal policy in the context of the Eurozone has migrated to Karl W’s post on the Greek situation. @Donal, As usual, points well made, but again, as usual, I fear you will find little appetite to engage on these issues on this blog. Too “politcial” I suspect. Funny though that the economic policies that attract most posts and comments are determined by a particular playing of the political game and how this game is played is determined by the rules applied, but this sequence of causation attracts little comment. If the rules of the game ensure the unassailable dominance of one team one can be sure that the policies will not be in the public interest. @Donal O’B Limiting what elected representatives can do is to limit democracy and self determination. Philip Lane pointed out that the problem was that people did not have access to good quality information as things stand. This asymmetry between what the DoF tells the Minister and what the Media tells the public is preventing the people from arriving at informed views on matters. Philip Lane’s suggestion of a new body went further than the existing bodies because he thought their analysis should be presented to the Dail and the data it was based on should be available to the public. This is an clever balancing of democracy and technocracy. @Zhou, Not wishing to cut across Donal, but what you’ve described would merely present an inconvenience for a government which controls all but one Oireachtas Cttee and can whip through any bill it likes – including multiple SIs. I very much doubt it would have prevented the implementation of the idiotic policies in the decade prior to this debacle. Philip, This is a really good idea in principle. As you acknowledge, though, for it to go anywhere, it needs a buy in from the main political parties and judging from some of the comments above there will be a fair bit of resistance to it in certain quarters. No doubt you will already have e-mailed a copy of the paper to the MoF’s office. But I think it might also be worthwhile distilling the key proposal and the rationale for it into about 800 words and offering it to the IT for publication early next week? @Paul Hunt I suppose it really depends on the way it is designed. If the Fiscal Policy Committe must be allowed present its analysis to the Dail and if the opposition are given it as ammunition then the people should be able to see what the politicians are doing. If the people support the Government in acting imprudently then so be it. However, in that case the people will be more easily be able to identify those who did do wrong and to punish them. It will improve debate, information flow and accountability. If a Fisacal Policy Committee had performed the analysis suggest by Philip Lane it would have identified the large part of our GDP/ revenue was bubble based and should be discounted in designing sustainable policies. I think Philip Lane should also look into setting up an “Edit Function Policy Steering Committee” and how it might have saved us from some of the more egregious typos, grammatical errors and stylistic debacles on this site. I think this is a very important proposal – yes it isn’t fleshed out – but the crux of the idea is clear and solid examples are presented. I suggest a political PR company should do some pro bono work and get this a wider audience @Paul Hunt Perhaps I am wrong, but I detect an awareness of the political dimension of macro-economic management on the part of those promoting this site. Philip’s paper is a good example, as was the referencing of Niamh Hardiman’s SSISI paper in November 2009. I believe that people fear ad hominem/ad party rants. But those managing this site have tolerated some of that and let us know when they think it goes too far. I presume they are trying to ground discussion on macro-economic management on evidence. Some of us use “non-economic” evidence to illustrate (hopefully) the impact of past events on how we got to where we are and present some ideas on things we need to do to work our way out of the hole. I do not expect those providing this forum to expand it to cover how we govern ourselves, beyond highlighting economic policies, in various ways. The fact that this forum exists is a eloquent statement of belief in political aspects of macro-economic policy making and review. @zhou_enlai “Limiting what elected representatives can do is to limit democracy and self determination.” I disagree completely with this view of democracy. It seems that you are implying that elected representatives, individually and collectively, have a “divine right of kings” – with no limit on the scope for excess and arbitrary interference. This cast-of-mind got us into the trouble we are in now. Revolutions in what is now the USofA and France replaced the divine right of kings with written constitutions backing up the rule of law. I believe firmly in the rights of citizens, under laws made under a written constitution, as opposed to the liberty of subject implied in much of government thinking and action here. I also believe that elected representatives are no more that fellow-citizens to whom we have delegated our power – for a limited time until elections take place. Elected representatives are limited by the same laws as the rest of us, as are civil and public servants. Philip’s paper is a proposal for checks and balances on managing public finances in ways that may limit the sense of entitlement that elected representatives manifest in various ways. @D O’B It is a long time since I studied the divine rights of Kings and although I have Kelly’s Short History of Western Legal Theory and Hobbes’ Leviathan at home I think I will be leaving the topic be for the moment. I think there are reasons why elected representatives in and out of government would welcome a Fiscal Policy Council as suggested by Philip Lane. It would help them to examine and question DoF policy and it would also help them to withstand pressure from lobby groups and others. However, I don’t know if Philip Lane’s porposals go as far as “to limit the scope for excess by the powerful.” Rather, they are more in the spirit of checks and balances which yourself and Paul Hunt favour. I agree with Philip Lanes aspirations and I don’t disagree with his solutions. My reservation is that one should focus first and foremost on the elements that are achievable and effective. The reaction of those in the ESRI, DoF and Central Bank who attended the talk led me to the conclusion that changes to the budgetary procedure were the best policy. Of course, no representatives of the political classes, other than the ICTU representative, were there to give a view. @Zhou, I think any difference between us arises from your view that the process you describe could be bolted on to the current structure, whereas I would contend that structural reform of the balance of power between the Dail and Government is required. I’m not denying that what you are proposing would be an improvement; it is be necessary, but unlikley to be sufficient. I expect we may have to agree to disagree. @Paul Hunt I don’t know if we need to agree to disagree. I also think the role of the Dail and the role of deputies needs to be properly examined and reformed. I just think that is a broader topic though it is related. I understood Philip Lane’s proposals to give the Dail more power. They would enshrine greater scrutiny of DoF budgetary projections and performance by TDs who would have the benefit of proper expert analysis. Such expert analysis would be opened to the Dail and could not be avoided through guillotine. @Zhou, I am pleased that you recognise the need for Dail reform and I understand your focus (in our earlier response to Donal) on what is effective and achievable. But we need the political classes to engage. @Donal, Censure noted and accepted. I suppose it’s because I see a seamless garment – however tattered and torn – whereas others are more comfortable with compartmentalisation. http://www.reuters.com/article/idUSLDE61824V20100209 Cash not to be used …… @Philip Lane Good work. and complements others from John F, KW, et al on this site ……[similar to a few more I’m brushing up on macro …]…. of course, needs to be addressed in combination with political, institutional, behavioural, historical, and other realities …….. Essentially looks like we need ‘new fiscal framwork for Ireland in Europe, and new fiscal framwork for Greece in Europe, and new fiscal framework for Austria in Europe,,,,,,,, and new fiscal frameworks for all countries within the EuroZone …….. and this demands co-ordination and multi-lateral cooperation in reaching agreements …………. this is the next difficult step ………….. ‘little irelanders, little greeks, little austrians, etc might not agree ……… but if Euro to succeed I see no other way ……….. Perhaps moot if Brussels decides to usurp more of this role itself? non entirely fanciful, post-lisbon, post greek-default.. http://www.independent.ie/national-news/policies-that-fg-ignored-revealed-by-lee-2062794.html If true, it is so sad that George Lee is so out of touch. The euro may collapse as may the EU. His policies then become natural. Otherwise they are simply weird. Distinguished support (http://www.timesonline.co.uk/tol/comment/letters/article7026234.ece) for a central proposal in this paper. http://www.independent.ie/business/irish/lenihan-to-consider-plan-for-eu-oversight-2066457.html Wow! Who’d have thought that the EU would use the crisis to take over the economy and sideline all the gombeen men? Oh, yes, I said they would….. I almost wish I had voted in the Lisbon treaty thing! Sovereign debt is the matter of the sovereign. Not the Oireachtas, it seems! […] What is so different about Taiwan? Well, firstly and most importantly, Taiwan is running a huge current account surplus, as it almost always has, so small scale and large scale stimulus programs were going to be possible when a downturn came. Here’s one: Taiwan introduced a voucher system in early 2009 in response to the downturn. The voucher was for around 75 euro, and allowed millions of Taiwanese people the chance to increase their domestic consumption over the period of the downturn. No doubt this measure kept many businesses afloat during the period, and kept expectations from falling lower than they might have otherwise. A large current account surplus, a counter-cyclical fiscal policy, simple expansions of public works schemes and textbook Keynesian demand stimuli, coupled with the export-led recovery buoyed by other economies’ stimulus programmes (notably China and the US, Taiwan’s two biggest trade partners), and a demonstrable lack of a housing bubble, mean that our Taiwanese cousins are back in the black after 9 months. Ireland unfortunately must endure several years of nil-to-sluggish growth before getting out of its doldrums. Taiwan is a mirror for what Ireland ‘could’ have done with its Tiger riches. I think it is a case study for the kind of fiscal rules Philip Lane would like to put in place for Ireland. […] Comments are closed.