Setting a standard in fiscal reform and oversight Post author By Philip Lane Post date March 12, 2010 I return to the case for a new fiscal framework in today’s Irish Times: you can read the column here. Categories In EMU, Fiscal Policy Tags Ireland: fiscal reform 28 Comments on Setting a standard in fiscal reform and oversight ← Elderfield Speech on Financial Regulation → When Sports Help Economies Score 28 replies on “Setting a standard in fiscal reform and oversight” Apart from the kind of commentary which a Fiscal Council could provide, do we not also need to impose actual fiduciary responsibility on the Executive, with personal – and severe – legal consequences for a cabinet which can be shown to have neglected their responsibilities. It might be difficult to make a Fiscal Rule that’s tight enough, but it would be good to aim to have a rule which could put a cabinet in the dock in an upgraded version of the Commercial Court. If they’d been found to have “Governed Recklessly” then they could be severely sanctioned by the court. Hugh Sheehy Good point! Accountability is the key. But we trust them, after all we put them into office and can vote them out. There is no single body devoted to investigating negligence or fraud on the part of ministers or senior public servants. Every state, bar Tasmania, has a body that checks upon matters the police do not, in Australia and at the federal level too. But in Ireland, everthing is so well run that it is unnecessary! Crooked Australians eh! Must be all that English convict blood….. I predict there never will be, until it is imposed by the EU, if they want it! Philip, Fine article. Great idea. Is it possible this might become part of the recommendations from the Banking Inquiry? From last week’s edition of The Economist: “Economists like nothing better than giving advice to governments. But why do they, of all people, imagine that anyone listens? In their models economists assume that governments, like other actors in the economy, have objectives of their own, which they seek to advance as best they can. They are not disinterested servants of the public good. So governments will ignore a recommendation from their advisers unless it suits them, in which case they would have done it anyway.” The idea really seems sound and the statistics in the paper do make a good empirical argument that the countries adopting such a model have more adaptive fiscal policies but, and sorry to hark on about it again, I still see the main issue as resolving the independence of the council with the issue of representation. “The simple deficiency of structural budget deficit statistics is that we cannot measure it. It is entirely made-up, based on the an estimate of what the budget deficit would be if the economy was operating at a normal level. Because the economic crisis has destroyed our pre-2008 notions of what normal levels of output are, it has also destroyed any notion that we can estimate the structural or underlying position of the public finances.” http://blogs.ft.com/money-supply/2010/03/04/britains-structural-deficits-disease/ Paul raises an important point–to what extent will policy makers be compelled to accept the advice or recommendations of such a fiscal council? Running the story backward a little, when the data in the early 2000s clearly supported the kinds of policies Philip advocates in his piece, would then Minister McCreevy have listened to a fiscal council during the boom, “if I’ve got it I’ll spend it”, years? Only if he had been compelled, tacitly or otherwise, to do so. @Stephen Kinsella If the council had the courage to face down populist governments and to not just state the facts but state them loudly and repeatedly and incessantly then it would work. It would need though to have national and international economists with backbones of steel, great reputation and all the data (especially tough with our canon law establishment) to pass the McCreevy test. The members would therefore need to be elected by the academic economist community in Ireland – not selected by our Vatican establishment. Opus Dei (the Dept of Finance) are likely to furiously resist. To be realistic about how seriously the governing classes take advice from any source, check out the Ombudsman’s speech widely reported in Irish media earlier this week http://www.ombudsman.gov.ie/en/SpeechesandArticles/Ombudsmansspeeches/Name,11772,en.htm It is clear that an office of state, modelled on the Swedish institution, is being ignored by the Oireachtas and the Government in one case which is outlined in this speech. Similarly, the scope of Freedom of Information (FoI) has been limited and narrowed by the very people that are supposed to pay attention to a Fiscal Council. IMO, we need a complete remodelling of how we govern ourselves – based separation of powers between the executive and the representative functions here, with separate elective paths to both postions of power and coupled with checks/balances to limit the scope for excess by the powerful in all sectors. As an aside, I favour keeping the existing PR electoral system for elections to both the exectuive and representative sides fo government. While waiting for these changes (some of which need constitutional change), we can do a lot along the lines of ensuring that we, the general public are much better informed about public finance. A Fiscal Council of the type proposed by Philip would help greatly in this aspect. The key concept advanced in the article is … …??? Our economy, and our political structures, are in deep trouble. They have been purposely directed into this midden by a mixture of skilled incompetence, barefaced arrogance and chicanery. So, how do we exit from this predicament. Short answer: we do not! Well, not with any of the existing financial and political structures, and most certainly not with our current economic Model-in-Use (Permagrowth). Which brings me to my principle criticism. Not a single commentator bothers to state what their Model-in-Use actually is. In ‘normal’ times such an omission would pass un-noticed. But we are no longer in ‘normal’ times. Now if any of you who read this disagree with me, please say so, and then put up your arguments as to why my opinion (such as it is) is faulty. Read Chris Horn’s piece in the IT to-day? Not a mention of an economic Model-in-Use. But he does mention ‘sustainability’. Now what does that term imply, I wonder? We have a massive debt overhang that cannot, neither physically nor mathematically be cleared off, absent a level of aggregate economic activity which EXCEEDS the exponential increase in that debt level. Now this IS a predicament. You had better have something more innovative than verbal spin to extract us from this predicament. @ PL: Your a prof. You teach undergrads. Do you inform them that we live on a finite sphere, with finite resources, with a finite level of ‘growth’? And what these ‘finites’ mean for aggregate economic activity – in the medium term. In the long term they mean substantial population ‘die-backs’. But lets just consider the next decade. B Peter Recommended: Leading the Way to a Low-energy Future, http://www.theoildrum.com, [11-03-2010]. Brian Woods “We have a massive debt overhang that cannot, neither physically nor mathematically be cleared off, absent a level of aggregate economic activity which EXCEEDS the exponential increase in that debt level” …..unless we have inflation, at some stage, again, in the future, ever. We were worse off in the 80’s I suspect. And oh, look, we got out of that. We all run the danger of overshooting on the way down (well, JohnTheOptimist aside) @All Alan Dukes: “… the “unthinking, close-it-down attitude” response to many around here in terms of policy discourse. Un_Thinkers United – Methinks. Cogito! & Seven days a week, according to Seven_of_Nine, who thinks 2_of_7 to be somewhat thoughtless in terms the two-legged stool school of policy formation on the long term economic valuation (LTEV) of a cowboy_ferengi_zombie. “Just do it! Close it down!” she says; “Logical”, Spock responds; “Not in my programme” buts in the doctor; “insufficient data” notes Data. “Time to get out of here” – Janeway. @Oliver Cynicism aside, clearly there’s an issue with the way recommendations by such a council are made, and how they are received. The case where the government is set to clearly break sets of rules or recommendations by the fiscal council, to the detriment of the council’s stated goal of medium term fiscal stability, has to be addressed. In particular, the ‘escape’ clauses of such a council need to be pretty explicit. Overall however I think the proposal has real merit, and should be implemented. @Hugh Sheehy “Apart from the kind of commentary which a Fiscal Council could provide, do we not also need to impose actual fiduciary responsibility on the Executive, with personal – and severe – legal consequences for a cabinet which can be shown to have neglected their responsibilities.” Fully agreed. We need to end the axis of unaccountability where the most that ever happens is that a public servant retires early. Neither Sargent nor O’Dea had to resign because of their departmental responsibilities. Irish politicians almost never do. Sometimes they may be removed. One rare occasion was when Bertie Ahern removed Frank Fahey. Poster dglsouthwest on another forum says that on page 259 of his work of art Bertie said: “Frank Fahey had got us caught up in a bit of difficulty about the ‘Lost at Sea’ scheme and so now seemed a good time to get him out of the spotlight.” We are now in the astounding but little commented situation where the government is at war with the Ombudsmans office. http://www.irishtimes.com/newspaper/ireland/2010/0205/1224263813136.html Careful now – Fahey pointed his canon lawyers at Eamon Keane the other day. @Stephen Kinsella The more the Irish political vatican is subject to independent oversight the better. But you’re right, of course our politicans will try to cheat. This council will have to be hard hitting from the start. Permanent, relentless criticism – no cosyness whatsoever. @ B Lucey: Thanks. I presumed that inflation (increasing the Money Supply) was a non-runner from a social/financial perspective. Though it is one of the unpleasant options that are available. I would prefer (if that’s the correct term to use) a debt default myself. Amputate the gangrenous limb before it proves fatal. The 80s were an interesting case. That was just prior to the Era of Debt, CDSs, MBSs and all the rest of the financial ‘magic’ trash. I recall paying 16.5% on my mortgage! This time it IS different. We have +1B extra in the global workforce. The s**t has truely hit the fan! I have been reading Building Ireland’s Smart Economy: A Framework for Sustainable Renewal 2009-2014. Real cute! Land of Oz stuff. Folks, please forget about this Council idea. What we need is Reality. Now, would that the Red Pill or the Blue Pill? I forget which one I need to take so that I can remember! B Peter. @Brian&Brian Inflation doesn’t work: http://www.nakedcapitalism.com/2010/03/guest-post-we-cant-inflate-our-way-out-of-the-debt-crisis-so-what-can-we-do.html according to the smart people quoted in the piece above. Or rather, it does, but it has the same effect as borrowing – it shifts the cost into the future. Ten years of sustained mild deflation japanese style ought to do it. Might not even take that long given population is above replacement rate (whereas Japan was facing into demographic deflation anyway without the bubble bursting). @ Philip Lane, I read your Irish Times piece this evening, and I found it very good. It kept reminding me of my fishing trips to the Loughs in the west of Ireland for some reason though. When out in the boat, you get enormous waves on lakes like Mask etc. Sometimes people put large weights into the bottom of the boat, if they are expecting the kind of rocky conditions I describe. It flattens out the ride a lot. What I find is that any small things, which are not held down in the boat are liable to go flying, if you hit a wave in just the wrong way. I guess, that is what has happened with the European region lately. What I do with all of my small stuff, when out fishing, is I have a hold-all sack for it, and that holds everything I need together to some degree. As this would apply to fiscal policy: I noticed in the article you said a number of external over-see-er(s) would be a good idea. But my idea, to fast forward development of fiscal policy council, would be to apply the fishing boat analogy. You have a number of big dead weights already in the boat, that is the European region. Those are the Germans and French, who provide a good bit of dampening of effects of hitting waves. But the problem is, the fisherman is getting distracted by all of these small objects hopping around his vessel. He is in danger of losing concentration in steering the vessil and hitting a rock. I imagine the right idea, is the hold-all sack, for all of the small but very necessary items for a successful fishing expedition. (Assuming the European commission still thinks of the PIIGS as useful in some way) There should be a central fiscal policy commission, staffed by members from all the PIIGS set up, so as to provide the dampening effects as necessary for the smaller states. Then the fisherman, can get back to some productive fly fishing, and catching whatever will bite. BOH. http://designcomment.blogspot.com/2010/03/row-boat.html So, let me see if I understand this correctly. Lehman did “Repo105s” to dress the balance sheet.The bankruptcy examiner Anton Valukas makes it clear that “The balance sheet manipulation was intentional, for deceptive appearances, had a material impact on Lehman’s net leverage ratio”. http://www.bloomberg.com/apps/news?pid=20601087&sid=aGeWL3bkusWQ&pos=3 So, take a look at the Rattigan video. And when you’ve finished with that can you enlighten me on why we don’t have a bankruptcy examiner for Anglo Irish Bank, and while your thinking about that can you imagine any reason (any reason at all will do) why Alan Dukes thinks it is his business to tell the Irish people that they have to suck up €15bn of losses because he says it will cost more if we don’t. Who gave Alan Dukes the printing press? http://www.zerohedge.com/article/ratigan-and-spitzer-discuss-repo-105-conclude-civil-cases-will-be-brought Of course I’m just an old cynic. Lucky for us Citizen Alan is going to “turn around” Anglo Irish Bank and make a “profit” for the Republic. Silly me. On the subject of fiscal reform and oversight…….. Things in Greece may be worse than we think. The rumours coming out of Brussels yesterday are that Germany and France are going to have to stump up some cash and will be letting us know about it next week. They just need to find a way around the German courts first……. and other small problems like that. The UK appears to have washed its hands of the problem (that is, they can’t afford to help)? I told you the towel tax was a good idea. @Joseph. Well spotted. It appears that Germany and France are working hard to find some way of providing funding support to the Greeks that won’t be subject to challenge in the German Constitutional Court. It is likely any support of this nature will be conditional on very stringent obligations and the whole package will be structured more broadly to deal with the fiscal area deficiencies of the Euro project. More powers for Eurostat to ensure no repetition of the dodgy fiscal accounting of the Greeks (and some others?) are being advanced, but this relatively weak and post hoc and I would not be surprised if something more robust in terms of a Eurozone fiscal oversight panel were not proposed. Philip Lane’s proposals in the Irish context may be prescient, but they may be overtaken at the Eurozone level. If this were to happen it would highlight the perverse workings of the democratic process in the EU – elected governments being forced to do something that is in the interests of their citizens (or to cease damaging the interests of their citizens) by an unelected elite. @Greg Very “UNTHINKING” of you – Alan is not impressed. With Alan Dukes, aka 2_of_7, taking over from ex-chair of Anglo who is exBig-4 who is exchair of DDDA (where’s dat report?), who sat with Shawnee the first ex-chair (friendly with Fingers & Spectacles on the three card tricks on the millions and the billions: now you see it – now you don’t), who still sits with Maurice who is exchair of BoI and on NPRF committee (and who gave Irish Supreme Court the Harvey Smith while, allegedly on DCC board in 2007) which is being raided to prop up BoI & Anglo & Fingers & AIB – and Spectacles still in her chair while the really BigChair takes a stroll in free_mawrkett_eering Chicago – it is probably a good job that the Great UnWashed UnThinking Joe and Joans of the great UnEnlightened Citizenry do not look up from reading about the grand affairs of Drop_Kick_Jonny who rents to NAMA the space to srude_ify the citizens while simultaneously popping his debts into same (win-win) as AIB rewards its lieutenants for getting billions gratis from the citizens as the word goes out that all is ‘above board’ and ‘all boards are above board’ by the scrude citizenry who should be supinely grateful for serf_dom in the New Open Innovative Republic where ‘Governance is Governance is Governance by US Upper_Echelons’ and the only moves are sideways to other boards. Governance Reform is a precondition for Fiscal Reform. There is no evidence of the former at the moment stat sig *** I suspect that the solutions to Ireland’s current difficulties will not arise out of any domestically sourced council. The EU is sovereign now. They must be looking on and testing everything the have received from all their member states. There will be added scrutiny of tthe IFSC as well as NAMA. The respectability of a council will not be enough for the moment, but it might be an idea for the future. It would report to the EU. It might have to have a large component from the C&AG’s office. I have suggested before that that office has hidden matters and been willing to be steered according to what have been decided by others to be national interests. That would have to cease and all members of any council would have to be seen to be independent of the jersey crowd. Some things are too important to be left to Paddy as Paddy is simply inept (always the claim once things are revealed) or else marching to the beat of a strange drum. Silencing that drummer is also not possible for Paddy to do. Too many Knights spoil the broth? As a former eircom shareholder I can’t tell you how happy I am that AD will be in charge of AngloIrish. Any day now Anglo Irish will be sold for a song to a European bank but the liabilities will somehow remain the taxpayer’s problem. Re the above stat sig*** on Corporate Governance inertia A little evidence has emerged on the Island …. Today’s Irish Times Board members sacked over tendering Minister Murphy on the ball. Minister Murphy? Ah. Yes. http://www.irishtimes.com/newspaper/ireland/2010/0313/1224266197967.html @Paul Hunt “…..it would highlight the perverse workings of the democratic process in the EU – elected governments being forced to do something that is in the interests of their citizens (or to cease damaging the interests of their citizens) by an unelected elite.” We in Ireland are well used to the benefits of such perverse workings arising from EU membership eg 1) getting rid of the marriage bar on womsn working in certain public service positions; 2) some rebalancing towards equity in in some social welfare payments; 3) upgrading of drinking water standards – even if people in Galway and other places did not quite notice that over the past few years; 4) First introduction of a form of Freedom of Information through the 1990 EU Directive on Freedom of Access to Information on the Environment. 5) etc. I suspect that these were the unintended consquences landed on us by the governing classes drive to get Agricultural/Social/Regional fund support and access to EU markets for FDI Are we about to get more of the same arising from being part of the €urozone? Donal O’Brolchain The EU certainly have improved our lives and not merely economically. They have their own pronlems with corruption, as the auditors have pointed out. Whereas the C&AG has never found any fraud? Clearly standards have increased in some areas. The EZ is also forcing better standards as we can see from the drip drip of realignments leaking to the MSM as the ECB tells the government what it can and cannot do. http://www.nytimes.com/2010/03/15/opinion/15krugman.html?ref=opinion Krugman Krap. Some economists are just national tools. Comments are closed.