Five Go Mad on Fiscal Rules.

We have a new fiscal council. Congratulations to the five appointees, they’ve got a lot of work to do. Which of course begs the question–what should they be doing?

There is a fair amount of guidance from the literature (mostly written by Philip Lane in the case of Ireland) and the Oireachtas report into the creation of a fiscal council (also written by Philip).

The daddy of fiscal councils is the Swedish Fiscal Council. It’s chairman, Lars Calmfors, and Oxford’s Simon Wren-Lewis, have written at length on what they think fiscal councils should do.

Briefly, a fiscal council should be an independent body that conducts some of the following activities to a greater or lesser degree:

* Ex ante and ex post evaluation of fiscal policy, including fiscal rules;

* Evaluation of the attainment (or non attainment) of fiscal objectives like a primary balance target, decreased public sector net borrowing,

* Evaluation of fiscal sustainability;

* Evaluation of forecasting by the DoF (and perhaps the ESRI);

* Evaluation of the budgetary process, in particular for transparency;

* Explain the fiscal position to the public.

I believe the people appointed by the Minister have the capacity to perform these functions.

The question is will be they able to do all of them, given their resourcing, their mandate, the constraints this and successive governments will be under because of the EU/IMF conditionality agreements affecting our fiscal stance, and their size?

Another worry, expressed by commenters in a previous thread on the announcement of the council, is that the council is set up at the behest of the IMF and has no real mandate within the DoF and government to affect the budgetary process. The council could be seen as simply a credibility enhancing exercise for the markets, or worse, a toothless quango.

Then there’s the question of the council’s independence. Calmfors and Wren-Lewis argue that fiscal councils should not be instated underneath the wing of the Department of Finance, but rather be housed underneath the Oireachtas. The Council will be surely staffed with DoF support also. What will happen when the council say something that is contrary to the interests of the government in power? Given the individuals on the council, I’ve little doubt they’ve the balls to go up against the government when required, but will the council’s structure give them the teeth (so to speak) to affect a wayward Minister for Finance? Even the Swedish fiscal council saw its resources threatened when it argued publicly with their Minister. The Hungarian Fiscal Council got shut down when it disagreed with their Finance Minister. It should also be noted that Greece has had a fiscal council for years.

Only time will tell whether these issues can be answered. I think three things will help the council both do its job better and allay concerns simultaneously.

First, there is a need for transparency and accountability. The council should be visible in public debates, and its reports should be part of the budgetary process. The council should make public its models and assumptions (especially around targets, fiscal rules, and fiscal sustainability). The council’s work should be peer reviewed by international experts at the end of every 3 year term of office. The council should be free to avail of any and all external expertise required to do its job.

Second, the council’s budget and remit should not be the exclusive purview of the Minister. You can’t be biting the hand that feeds you.

Third, the council should have a clear process for the revision of its fiscal rules and targets over, say, two cycles. The important thing to know is that the council *don’t know* what a correct target set might look like for the Irish economy at the moment. Echoing Bertrand Russell, I do not think the council can start with anything precise. They’ll have to achieve such precision as they can, as they go along. This means adjusting things like fiscal rules on expenditure in a credible way. They’ll need a methodology for doing this.

Finally, is there evidence these councils have any real impact? There is a small literature on the evaluation and impact of these councils, particularly a cool study looking at the Belgian fiscal council, and they do seem to be beneficial.

So, here’s hoping.

(Oh, and if you’re wondering where I got this blog post’s title from, wonder no more.)

Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

24 thoughts on “Five Go Mad on Fiscal Rules.”

  1. The first thing they should do is to remind themselves that this crisis is not mostly fiscal.

  2. Clearly there is a lack of expertise in the Department of Finance, Central Bank and related agencies. The five look qualified to me and hopefully they will have a positive influence on the incumbents.

    Know how is in short supply in the vicinity of Dail Eireann. Look at China governed by a meritocracy of engineers, scientists and Phds. In Canada an economist Prime Minister and an accountant Minister of Finance. In Ireland being able to drink til 3 in the morning is the essential qualification. And let us not forget getting a passport renewed in five days by your Minister is a true measure of the man’s competence.

  3. @ Mickey Hickey

    You may have a point there some where but I’ve visited China on a number of occassions and I certainly wouldn’t want to live/work there.
    Leader of Iran, Mahmoud Ahmadinejad, has a PHD in transportation engineering and planning, not too bothered about living/working there either.

    This guy – Kostas Karamanlis – was in charge of Greece while they colluded with Goldman Sachs to fiddle the national stats and he has a Masters.

    Belgium has no government with a coreesponding lack of qualifications and it’s doing alright.

  4. How will this new body dominate the chorus of economic commentary already emanating from:

    Locally:
    The Department of Finance
    The Central Bank
    The Economic & Social Research Institute
    The National Economic & Social Council
    Assorted ‘chief economists’ at various banks etc

    Internationally:

    The European Central Bank
    The IMF
    The Commission of the EU
    The OECD
    The three rating agencies,

    not to speak of the flow of discussion on this Blog?

  5. From the press release anouncing set-up:

    “I am particularly pleased that Professor John McHale has agreed to act as Chair. He will have a key role in setting up the Council and in helping to define its remit and its independent character.” M Noonan.

    So, the 5 nominees under John McHale are invited to define the Council’s ‘remit and independent character’. Nothing to stop the posters here knocking in their suggestions.

    I’m a fan of public clarity, so I’d start with the process of set-up, with the 5 nominees making some kind of document indicating remit, structure and best practice, making a presentation of that to gov., and public. ‘This is what we think it should be and why.’ Then work with gov., for implementation and outcome. Compare and contrast same. No need to be shouty, just good robust debate.

  6. @GK

    The remit is simple: “Never Again” should this happen to our country.
    Anything that caused this to happen should be part of it.
    Obviously, this doesnt involve an investigation of horse racing just because of the tent at the Galway Races.
    One more point: A large part of the reason for this formation has been because of a vacuum in Govt where people who were definitly paid well to do their jobs took the easy career route and said less or nothing.
    Any contrarian seems to be pushed out of the tent, but this is a non thought out understanding of good teamwork. It seems to be an Irish condition that contra’s are left out rather then brought in to help….

  7. So I will leave Mr.Lane Mr.Ahearne and Co. in their comfortable world, it hasnt been going so well though has it? Maybe time to listen to others.

  8. One deficiency in the composition of the council is that there is no non-economist.

    We all reflect our experiences which are often limited beyond a particular profession or sector.

    The late American journalist and author David Halberstam highlighted “the difference between intelligence and wisdom,” and said “true wisdom…is the product of hard-won, often bitter experience.”

    For example, those who are regarded as the brightest may not be the best advisers for a political leader to have.

    David Halberstam in the “The Best and the Brightest,” his scathing indictment of the Washington policy makers who crafted and escalated the Vietnam War, asked: “If they were so very smart, how could they have got it so wrong?”

    Frank Rich wrote in The New York Times in Jan 2009: ‘In his 20th-anniversary reflections, Halberstam wrote that his favorite passage in his book was the one where Johnson, after his first Kennedy cabinet meeting, raved to his mentor, the speaker of the House, Sam Rayburn, about all the President’s brilliant men. ‘You may be right, and they may be every bit as intelligent as you say,” Rayburn responded, “but I’d feel a whole lot better about them if just one of them had run for sheriff once.”

    James C. Thomson, wrote in a 1996 obituary on President Kennedy’s National Security Adviser McGeorge Bundy, his former colleague at the White House:  “In 1968, after I wrote a critique of Vietnam policy in The Atlantic, Mac chastised me for betraying LBJ’s trust. We didn’t make up for eight years. By then I was running Harvard’s Nieman Fellowships for journalists, and Mac came to talk to the fellows.

    He was crisply articulate, but there was one persistent young man, who resembled Trotsky, needling Mac with questions about the war. Mac finally cut him off saying, “Your problem, young man, is not your intellect but your ideology.”

    Later, as we were clinking highballs, the Trotsky look-alike cornered Mac: “What about Vietnam?”

    Bundy: “I don’t understand your question.”

    Trotsky: “Mac, what about you and Vietnam?”

    Bundy: “I still don’t understand.”

    Trotsky: “But Mac, you screwed it up, didn’t you?”

    Glacial silence. Then Bundy suddenly smiled and replied: “Yes, I did. But I’m not going to waste the rest of my life feeling guilty about it.””

  9. @ MH: Neil Sheehan, “A Bright Shining Lie: Jonh Paul Vann and America in Vietnam”, or if one prefers something closer to Trotsky, Igor Gouzenko, “Fall of a Titan”.

    Looks like we have been in this place several times before, and “no one noticed!”. 😉

    Brian Snr.

  10. Tip of the hat to a fellow Frank Rich reader.
    My first read every Sunday.
    I havent followed him since he left the times…..
    I think he went to New York Magazine

  11. @ Mickey Hickey

    Clearly there is a lack of expertise in the Department of Finance, Central Bank and related agencies. The five look qualified to me and hopefully they will have a positive influence on the incumbents.

    The problem isn’t “qualifications”, or “know how”. The problem is banana-republic ethics which means entirely unaccountable politicians, “business leaders”, police etc. who can break the law as they please and get away with it.

  12. John McHale discussing this in RTE here:

    http://www.rte.ie/news/av/2011/0708/media-2997266.html

    ‘Discussion Papers’ mentioned.

    If I could throw one into the pot – I’d like to see an accuracy study on all the fiscal forecasters for the 5 or 6 years or so, and then a continuous assessment of same.

    So @ Peter Stapleton

    This lot:

    “The Department of Finance
    The Central Bank
    The Economic & Social Research Institute
    The National Economic & Social Council
    Assorted ‘chief economists’ at various banks etc

    “Internationally:

    The European Central Bank
    The IMF
    The Commission of the EU
    The OECD
    The three rating agencies,”

    Should be tracked by the new Fiscal Council

  13. @EWI
    It takes generations to get the bred in the bone genetic tendencies out of a population. Something of the magnitude of 20% unemployment lasting two or three years and offshore, tax haven bank accounts with tens of millions deposited by the T and T and cabinet members. I have difficulty accepting that we are doomed for the next century therefore I pretend to myself that things will improve. As Bacon or Pope or some other British poet/philosopher said “Hope springs eternal in the human breast.”.

  14. It takes generations to get the bred in the bone genetic tendencies out of a population. Something of the magnitude of 20% unemployment lasting two or three years and offshore, tax haven bank accounts with tens of millions deposited by the T and T and cabinet members.

    A good place to start would be in having a free and robust press, so that the actual facts will be inquired into and reported, without fear or favour. In this regard, the first quivers in the foundations of the Murdoch media empire do look promising.

  15. Will the fiscal council discuss the different methods of debt reduction or will it simply look at the overall picture?

    Will it look at the tax increase / spending reduction split?

    On the spending side will it discuss, for example, that unless you reduce wages you are almost surely going to have to reduce the level of services and the number of employees because wages are such a high proportion of spending.

    I suppose pointing out that hiring freezes in the public sector are way of protecting insiders at the expense of younger people and the unemployed will be beyond their remit – could the ESRI publish something on the effects of hiring freezes that would follow on from their work on public private wage differentials.

    On the revenue side, will they be able to discuss the efficiency and equity of different taxes?

    Are these kind of issues beyond their remit?

  16. I’m a little bemused that Dr. Bini-Smaghi’s witterings (next post) about the need for increased centralised EU governance – that totally fails to take account of the current lack of democratic accountability at a national or EU level – has attracted much more traffic than this post.

    On one level it may be that many people recognise that, since it looks like the Troika will be calling the shots in this area for the foreseeable future, the establishment of this council doesn’t mean an awful lot.

    On another level, it may be that some people, irrespective of the role of the Troika, see this as just another optical illusion. This, unfortunately, is what it is. And it is the third of sequence of optical illusions, following Minister Varadkar’s decision to attempt to convey the impression that he is going to take the Oireachtas Cttee on Transport seriously and Minister Bruton’s announcement of a Competition and Consumer Council which will neither enforce competition or protect consumers.

    This is par for the course and nothing will change until the Dail decides to enforce the powers that people have delegated to it to scrutinise and restrain government and hold it to account. We’ll be waiting..

    In the meantime, my main regret is that appointments to all these existing and newly created statutory bodies and government agencies such as this council, the NESC, the Board of the Central Bank and other quangos are removing those with knowledge, capability and expertise from full engagement in public discourse – at a time when this is so badly needed.

    I can think immediately of the Irish-based members of this council and the independent members of NESC (John McHale is wearing two hats) and of Alan Ahearne and John FitzGerald at the Central bank, but there are many others.

    And it’s bad enough that they, apparently, have to operate under constraints that restrict the ability to offer genuinely independent and disinterested views and analysis, but, to some extent or other, they have all been sucked into the ‘government-machine’. If the government machine secures – and silences – most of the available expertise it reduces the number and calibre of those who can contest and dispute in an appropiately robust, adversarial and evidence-based manner the policy nonsense that governments frequently advance. And it is oh so easy for the government spin-machine (feeding briefings to a pliant and supine media) to dismiss, denigrate or villify any of those outside the machine who raise their heads over the parapet.

    The whole effort is to close down any debate that might lead to a re-consideration of any proposals or policies advanced or to amendment of those – or even a rejection.

  17. @Paul Hunt

    Maybe there is a tendency for people to turn into Paul Krugman’s ‘Very Serious People’ when they get these kind of positions.

    They stop saying anything in a clear manner for risk of being seen as too political. They also stop saying things that are politically unpalatable or more accurately they stop recommending anything that is currently outside the scope or range of the current political debate. They try to have policy influence by never taking a view that would be considered extreme or beyond the spectrum of current ‘Serious’ opinion as they think that would undermine their credibility and thereby reduce their (or the institutions) influence and power. They think their credibility is everything so they never risk making a call that is not within the current consensus range of ‘Serious’ opinion. (You can see this also in that new institutions like these are particularly conservative as they feel they need to build up a ‘serious’ reputation.)

    Ironically, the result tends to be that they never really exercise any significant influence or power because they become like Roy Keane’s dead fish going with the flow.They look and sound important and influential but really they are just slaves to whatever ideas are currently in vogue and as a result end up being very poor watchdogs.

    You need a dog that barks at intruders irrespective of whether or not it pisses off the neighbors

  18. @ Paul Hunt & Christy

    If you listen to the radio interview, John McHale talks about coming to a memorandum of understanding with the DoF.

    It seems to me the creation of this MoU will be critical in setting up the effectiveness of the council. I am of the opinion that the embryonic council should do the work of setting out its own best practice. I would be inclined to make this discussion public, and look for clarity on the decision making process. Members of the council should be open to resigning if they think the whole thing is a white-wash.

    I’m intruiged by the ‘capturing’ which is often mentioned on the blog. I’d suggest no unminuted or solo meetings, going for lunches or casual chats. The whole era of government over a round of golf is over. Well, should be.

    I don’t know how much good it did, but I’d look at Danny Blanchflower’s minority disagreements as a way for dissent to be voiced.

  19. The provision (d) in the FAC’s Manadate is an affront to democracy

    “(d) to perform such other functions, including an assessment of the implications of budgetary plans for economic growth, investment and employment, as may be assigned by the Minister for Finance.”

    A publicly-funded body such as the FAC should always include such an assessment, not simply at the Minister’s discretion. Otherwise it simply becomes a ventriloquist’s dummy for Ministerial policy.

    The Dutch CPB and US CBO both do this as a matter of course, as well as making assessments of opposition parties’ proposals on request (by either those parties themelves or the government).

  20. @Gavin Kostick,

    (Btw, thank you for the link to the John McHale interview; I finally got to listen to it.) I realise anyone making noise about this council now will be told to wait and see what MOU will be drawn up, what Framework for Fiscal Responsibility the Government will present in legsialtive form later in the year, etc. It’s the usual story. The impression is conveyed that full consideration is being gven to all relevant matters and that, if people have patience, it is more than likely that their concerns will be addressed. And, as usual, decisions are made behind the scenes and finally communicated publicly as a fait accompli. Any concerns raised by people at the outset will have been addressed alright – by being ignored.

    Why do we continue to accept this bullshit?

    This council is a creature of the DoF. It will report to the Minister and the DoF. The (small number of) staff, apparently, will be seconded from other parts of the public service. If they are to have any smidgen of relevant knowledge and capability that means they are most likely to come from the DoF. Any serious players in the DoF with capability and ambition will be extremely unlikely to interrupt their career progression to move to an ephemeral body such as this. The odds are that those who would be willing to move across are those who are facing the door, or who should be shown the door, or who want a cushy glide path towards the door. And, irrspective of thier calibre, they will be infected with the DoF mentality.

    The emphasis seems to be on providing a signal to the markets and on how little this will cost. If it’s worth doing, it’s worth doing well – and that means paying for it. And paying people with knowledge and capability (even if they are from outside Ireland) who are not tainted by the DoF mindset. In addition, the members should also be paid properly (or their employers should be compensated appropriately for the time they devote to this activity that normally they would apply to their existing employment).

    And to top it all, the council will simply provide assessments to which the Minister will respond with: ‘Thank you very much for these assessments which have been conducted and presented to the highest academic and professional standards. Ireland is well-served by the contribution of such an erudite assembly. Now bugger off back to your sand-pit and let me decide what needs to be done. I’ve been elected to govern; you’re (barely) being paid to offer opinions.’

    The only way this might work is if it were to be under the control of the Dail and the Finance and PS Cttee and properly resourced and staffed. I know people will say that it would just become a political football, TDs wouldn’t be able to engage with it effectively and the Government would get its way in any event. But the only way the Dail might be forced to up its game is to give it some independent responsibility.

    Btw, I also liked John’s observation that the council would require ‘teeth’ to express its reservations if the government ignored its advice. If this is going to be a ‘watchdog’ it’ll just need to bark. Giving responsibility for it to the Dail might compel the Dail to grow some teeth to bite the government when it, as it inevitably will, ignores the advice offered or wilfully represents and misinterprets it.

    And I still notice David bristling a tad on broadcast interviews when he keeps being confused with Danny the late Spurs footballer.

  21. Ireland is most likely going to be outside the castle walls when the barbarians arrive.

    http://blogs.ft.com/the-a-list/2011/07/11/true-europeans-now-need-a-plan-b/#ixzz1RoX6m3wx

    “A Greek default may be inevitable, but it need not be disorderly. And, while some contagion will be unavoidable – whatever happens to Greece is likely to spread to Portugal, and Ireland’s financial position, too, could become unsustainable – the rest of the eurozone needs to be ringfenced.”

  22. @Stephen Kinsella,

    Thank you. But there seems to be little interest in reforming the systems of governance in a meaningful fashion – in particular those systems that failed so catastrophically in the run-up to this bust. It’s business as usual. Not surprising I suppose when the fingers of those in government have been kept away from the levers of power for 14 years. It seems we’re expected to simply trust their good faith and good intentions.

    I work on the basis of ‘trust, but verify’. The means of transparent verification are being closed down inexorably and very few people seem to give a damn.

Comments are closed.