What are fiscal councils, and what do they do? Post author By Philip Lane Post date April 21, 2011 Lars Calmfors and Simon Wren-Lewis write on this topic in this VOX article. In turn, this is based on a more detailed paper which is available here. Categories In Uncategorized 20 Comments on What are fiscal councils, and what do they do? ← The Euro and Zombie Banks → The Business Cycle and the Financial Cycle 20 replies on “What are fiscal councils, and what do they do?” The “Diversity” section is especially interesting in the Irish context. If a fiscal council were set up in Ireland, would it have a wide monitoring role, or a more specific function, e.g. to examine the effects of the sale of State assets? If it is the second, then over time, it’s function would diminish. Also, how used to implementing independent or unpopular advice are the Irish political class. Take the example of the McCarthy Report, or the Croke Park agreement. Even worse, if the council came to be viewed as a gadfly, then it could easily be sidelined. Any fiscal council worth its salt would have to be empowered and resourced by, and answerable to, Parliament – and, crucially, totally independent from government. Dismiss anything that falls short of this as it will be nobbled, sidelined or emasculated by government – or even worse captured by external forces in the way that the US Fed, SEC and Treasury wre captured by the Neocons, the financial goons and their ‘useful idiot’ economists in the late 1990s. Neither link does a very good job of explaining how a fiscal council is any different to a Quango, and whether or not they are to be stocked with the same economists who talked us all into this mess. What’s the point of any body or board if it’s stuffed with ideologues. Some clarification on whether the public exchequer should bother with these expenses is in order. The devil will be in the detail as is the case with any important bureaucratic reform. Apologies for appearing lazy, but can anyone point me to the most up to date version of the fg proposal and confiation that same is on the programme for government (I am using iTouch). A Fiscal Council is a very good idea. What the Council can do is provide credible calculations, as the Congressional Budgetary Office does, of different possible scenarios on a non-partisan basis in respect of choices that have to be made as part of the democratic process. But this would require a revolution in thinking in the Irish political system. Something on the lines of the Dutch system would be best. (Thery never joke about money!). The ESRI could be folded into such a system without the need for extra resources provided its mandate was radically reformed . The one major problem that would have to be overcome is the fact that economic commentary in Ireland can best be viewed as a form of light entertainment. Maybe a number of external appointees could be found to get the system up and running and to give it the required credibility internationally. @ Zhou_enlai Programme for Government P.23 “We will establish an independent Fiscal Advisory Council (FAC), separated from fiscal decisionmakers in government, that would undertake official fiscal macroeconomic projections and monitoring. The Fiscal Advisory Council functions would include identifying and advising on cyclical and counter-cyclical fiscal policies and structural deficits; the cyclical or temporary nature of particular revenues; and the need to maintain an appropriate and effective tax base. The Fiscal Advisory Council will be independent of Government and will report to the Dáil and the public. The modeling assumptions and inputs of the Fiscal Advisory Council will, as far as possible, be open to public scrutiny and its outputs would be freely available to external bodies, including in particular, the opposition parties.” http://www.socialjustice.ie/sites/default/files/file/Government%20Docs%20etc/2011-03-06%20-%20Programme%20for%20Government%202011-2016.pdf Thanks Gavin Kostick Some additional information: Lars Calmfors has in February resigned from chairing the fiscal council in Sweden (will step down when the mandate ends). He has denied it was due to disagreements with the finance minister. The given reason is to get more time for research. One of the disagreements was regarding who they’d report to, the finance minister or the parliament. The request to report to the parliament instead of the finance minister was made together with a request for more funding from the finance department. http://www.finanspolitiskaradet.se/english/swedishfiscalpolicycouncil.4.6f04e222115f0dd09ea80001437.html & some Irish connections: He’s been interviewed on Irish radio (RTE) about the Irish situation, October 24 2010. He is the professor who in November last year publicly said that it is not certain that a bilateral loan from Sweden to Ireland would be paid back in full. A Fiscal Council sounds very neat and dandy. We move a little bit of control of fiscal policy from the (not to be trusted) politicians and give it to the (expert) economists. But will this improve the quality of government? A similar motive lay behind the decision to make central banks institutionally independent. How successful has that been in Ireland? Very unsuccessful I would say. Consider the most recent three governors. Maurice O’Connell gave warnings of a bubble as far back as April 1999 when he said that there was evidence that the excessive rise in house prices had been partly driven by the ready availability of mortgage finance on generous terms. Did he do anything about it? No. Instead, on retirement, he joined the board of Depfa Bank which later went bust leaving a reported hole of €102 billion: from crying “wolf” to running with the wolves. O’Connell’s successor John Hurley presided over clear symptoms of a bubble yet he failed to diagnose it. His blithe dismissal of the dismal portents of the collapse of Irish banks’ share prices in 2008 revealed a grave unwillingness to face the implications of unpleasant facts. After the repeated failures of Central Bank governors who had originated in the Department of Finance, many greeted the appointment of Patrick Honohan with euphoria. But, examined objectively, has his performance been any better than that of his predecessors? 1. He presided over last July’s stress tests which gave all our banks a clean bill of health. Three months later those stress tests were embarrassingly dumped. 2. He asserted that the debts resulting from Anglo-Irish Bank were “difficult but manageable.” Three months later he led the Irish delegation which negotiated the EU/IMF/ECB bail-out. 3. He presides (still) over March’s stress tests which included as a stress scenario (meaning, in Honohan’s words “adverse and unlikely”) a 50% fall in residential property prices from peak. The mega-auction last Friday week indicates that property prices have already fallen 65% from peak. 4. Nor do the March stress tests appear to have addressed the losses to banks resulting from tracker mortgages: a search in the CB stress test document for the word “tracker” renders very meagre results indeed. And this at a time when one bank is offering a 10% discount on accelerated tracker mortgage repayments. Implication: that bank faces a greater than 10% loss on its tracker mortgage book. The suggestion of the Fiscal Council is that it will improve economic decision making by increasing the role of “experts” at the expense of “politicians”. But, based on the independence of our Central Bank from political influences (enshrined in EU treaty law), that appears a rather far-fetched hope. And that’s before we get to the question of just how an independent fiscal council should adjudicate in an expressly political dispute such as that between UK Chancellor George Osborne (who wants accelerated fiscal retrenchment) and UK Shadow Chancellor Ed Balls (who offers a classic Keynesian warning against too much retrenchment too soon). The behaviour of the three gentlemen above was described by TK Whitaker (himself a former CB governor) when he wrote that “The economic situation is more serious that we have been admitting officially. We have deliberately not been too pessimistic in public for fear of undermining confidence and also in the hope that as the months went by things would show a sufficient turn for the better. This hope is not being realised – indeed, it was not soundly based – and we now have to increase the corrective measures. We should also, without being alarmist, be more forthright about the nature and extent of our problems. We would be deluding ourselves if we continued to make reassuring comments on their temporary nature … There is a basic difficulty of a more lasting character and it is time we did something more effective about it.” Whitaker wrote that in October 1965 in an internal DoF memo that is quoted in Dermot Keogh’s biography of Jack Lynch. It described the situation then and it describes the situation now. The crisis may change but the official mind-set doesn’t. That is the mind-set which will probably dominate the new Fiscal Council. Unlike a negligent central bank, a fiscal council is unlikely to do a lot of harm. But it is unlikely to do much good either. @Jesper, I don’t know, but I would expect that there are enough solid parliamentarians in the Riksdag to ensure that the fiscal council reports to parliament – and to it alone – and that the finance ministry is mandated to ensure that it has sufficient resources. Perhaps the 20 or so Swedish Democrats – whom everyone in Sweden seems to wish to disown – will tip the balance in favour of parliament against the government on this matter 🙂 Having read through the various papers, the issues that come to the fore are somewhat obvious and not that numerous. The first is the fact that there is bound to be tension between government and fiscal council (FC) if the former perceives the latter as interfering in the democratic decision-making process, including the government’s right to make economically stupid decisions (at least in the eyes of the Fiscal Council). The second is that only two basic functions can be envisaged for the FC (i) monitoring the adherence to fiscal targets and (ii) advising on the financial, taxation and probable economic impact of particular government measures. It seems to me that the possibility of conflict with regard to the first function can be avoided if the process of budgetary forecasting and monitoring is first clearly established i.e. the system the FC is supposed to monitor is first clearly agreed. With regard to the second, as any commentary will be a mixture of fact and opinion rather than a mathematical process, the credibility of the FC can only be built up over time, the bedrock of that credibility being (i) guaranteed legislative independence (including full right of access to official data and an obligation on the part of the institutions of the state to cooperate with it) (ii) the possibility for all democratically elected formal party formations to seek opinions from the FC on proposed government measures. The thinking as reflected in the programme for government is muddled. “As far as possible, open to public scrutiny” are the type of weasel words which would be totally foreign to a Scandinavian audience, for example, where every citizen – at least in Sweden – has the right to view all official files (a fact which tends to make them rather thin, but that is another story). The approach of the new government is rather like deciding the characteristics of the horse before agreeing the the type of cart it is supposed to pull. The Swedes do not not seem to have thought the process through either. There is open written conflict between the government and Lars Calmfors, the first saying that the FC should evaluate the impact of the budgetary goals as set but not the goals themselves, the FC maintaining precisely the opposite i.e. that it is not possible to separate the two (see page 21 of Calmfors article). In any case, the resources of the FC in Sweden are far too limited. What is needed is the Dutch approach. It might even produce a capable Minister for Finance. There is no need for a constitutional change; simply include the lucky man in the government’s list of nominees for the Senate. And no need for additional large expense as the resources exist already in the ESRI and some other quangos. But that would be too simple. http://en.wikipedia.org/wiki/Gerrit_Zalm P.S. The long-running debate on this blog, under the various threads, as to who to blame for Ireland’s current difficulties, has an echo, I have just noted, in the current career position of Gerrit Zalm as head of ABN-Amro, now a fully state-owned bank, a fact of which I was unaware. http://en.wikipedia.org/wiki/ABN_AMRO The Dutch just get on with it. It is time that we did the same rather than indulging in the argument of “now look what you made me do” more appropriate to the kindergarten than adult discussion. @ DOCM I incline to think the debate needs to be Janus faced – in order to see forward we must be able to look back. @ Cormac Lucey. You’ve covered a lot of ground in your post – may I slow over a piece of it for now: You say: “1. He [Governor Honohan] presided over last July’s stress tests which gave all our banks a clean bill of health. Three months later those stress tests were embarrassingly dumped.” The Governer’s defence of this, expressed variously but particularly with Vincent Browne, was (a) The mess in the paperwork of the banks they was much worse than they had anticipated, implying the banks were either very sloppy and/or devious, and (b) These stress tests actually had a broad and nuanced range of possibilities, but people did not want to hear, % balance of probabilities, they just wanted a number. He didn’t, to my notice, argue that these stress tests in lines across Europe, were simply designed as a publicity exercise to perk up the confidence fairy, without revealing too much of the sorry state of the EU banking system. This is what many people seem to think to be the case. Our bansk were then unable to hide their disastrous state, and round we went again. He was then, also with VB, much more forceful that he stood over the March Stress tests. He is still a nuancer, but on the basis that the facts he had are now deeper and broader, the independence of the reviewer and the extreme levels set for the testing, he was clear that he fully expected not have to be having the same conversation as last time, further down the road with VB. I would think that if, as you suggest, these March stress tests prove inadequate, then his reputation in his role as Central Banker will be in difficulty. Or rather, he seemed to me to be betting his reputation on these stress tests standing up. But this also leaves us with the upcoming European Stress Tests. Governor Honohan is on the ECB of course. The difficulty is that now Irish Banks have been taken seperately, the European Banks may get on with more of a softer approach, leaving them to stagger on to 2013, while the Irish state keeps on coughing up. I wonder what would be best for the ordinary European citizen – complete, transparent disclosure now, or a fudge hoping for the best later? @DOCM A question that interest me is why there is no capability in Ireland for non-parliamentarians to address a full session of parliament. We have our leaders occasionally address the full session of the US Congress, there’s no equal facility for anyone to address either the Dail or the Seanad directly. At best they can be question in committee, but that is a limited audience. Having a Fiscal Council that advises the MoF or even the Finance Committee is not going to be much use if the lobby fodder just vote through the whip. @Paul Hunt, it would probably be better if the fiscal council reported to the parliament but with the Swedish FOI it is not that important – all of their findings that they communicate to the finance minister is freely available so the parliament does have access. The difficult part is the amount of resources and that is closely tied into what functions it is expected to have. Too much funding can be as damaging (or actually even more) as too limited funding: -too limited funding might lead to unability to fulfill function -too much funding might lead to the council getting a bias towards keeping their position (and funding) instead of fulfilling their function The function is a matter of preference (& costs): -can the fiscal council assume that the details are in general correct & therefore focus on the big picture? -should the fiscal council look at the details and also the big picture? It is tricky to get the balance right. Should the fiscal council duplicate some of the work of the finance department to verify if it was done right? If so, which work? If a fiscal council is seen as an auditor then one view might be: Anglos auditors probably found plenty of small things wrong but might have forgotten to look at the big picture – more funding to the auditor probably would not have helped to avoid disaster but would probably have found more small things to correct…. & as for Sverige Demokraterna, I’m not a fan of them but: Their dissenting voice is causing a cozy consensus (group-think?) to be debated and while some don’t like the debate, it is making Sweden better 🙂 I wouldn’t hesitate to claim that some of the ones calling Sverige Demokraterna populists are themselves elitists 😉 @ Hoganmayhew I agree and I think that the issue is covered in my comment. There is no point in putting an extra hand to advise on the bridge of the ship of state, if there are no moves by those at the tiller to prevent it from going on the rocks. @ DOCM & Hoganmahew Or is it as simple as saying that even now TDs should be given reports from the CB, CSO, ESRI? Not that they should swallow them whole, but that this is the info we have? Or put it another way, are all TDs on the email list for reports froms these (and other) bodies? @Gavin Kostick “Or put it another way, are all TDs on the email list for reports froms these (and other) bodies?” Are they competent to read anything more than whinging constituency letters from their favoured voters? @Jesper, I’m all in favour of cosy consensuses being debated. Indeed I believe they should be challenged with considerable verbal force. It’s what makes me so immensely popular in certain quarters 🙂 Comments are closed.