The political battle over delegating decisions over monetary
policy to central banks has been fought and won. There may be serious concerns
about accountability in some countries, and mandates in others, but there seems to be a political
consensus in most places that delegation in this respect is a good thing. (I
know some readers disagree with this consensus, but this post is a question
about what could happen, rather than what ought to happen.)
There is no major country which delegates decisions over
aggregate fiscal policy. I stress aggregate here: I’m not suggesting decisions
about particular tax rates or types of spending could be delegated. Instead an
independent fiscal institution could set a target level for the budget deficit,
and leave it up to the government how that target was achieved. Furthermore the
choice between meeting the deficit target using tax changes or spending changes
would remain with politicians, so key questions about the size of the state
would stay under democratic control.
I’m reminded of this question not by the impending UK autumn statement, but because I have just received my
copy of a new collection of essays edited by George
Kopits. Its title is “Restoring Public Debt Sustainability: The Role of
Independent Fiscal Institutions”. The story behind the book is interesting in
itself. Its basis is a conference in Budapest organised by the former Hungarian
Fiscal Council. Although a few fiscal councils [1] existed a decade ago, in the
last ten years many more have been established, and that included one in
Hungary that George chaired. All such councils are advisory - none can tell
governments what to do. The meeting in Budapest was I believe the first
international gathering of these councils, as well as a few academics that had
a particular interest in these institutions. (It is what led me to create this website.)
The conference was a prelude to both success and failure. The
failure was that soon after the conference the Hungarian Fiscal Council was effectively abolished by a new government. For
that government this act was a good indication of things to come, as others have documented. The brief story of Hungary’s
Fiscal Council is told in one of the chapters of this book. However, the
success is that, with George’s help, the OECD took on the task of holding
regular gatherings of fiscal councils, and it has issued a statement of
principles which are an appendix to the book’s introduction.
A few of the essays in the book touch on the question I posed
at the beginning of this post, including my own, which compares the delegation
of monetary and fiscal policy. In a sense the demise of Hungary’s fiscal
council explains why most of the discussion at the conference was happy to see
such councils as advisory only. Giving governments advice they may well not
want to hear is difficult
and dangerous enough, and so fiscal councils need to be well established
(and therefore less vulnerable) before we can think of going any further. One
step at a time.
Yet once these councils have been established, it becomes
easier to imagine the possibility that delegation could go beyond advice to actual
control. Take the UK case for example. The government sets its fiscal mandate
(cyclically adjusted current balance in 5 years time), just as it does the
inflation target. The OBR then tells the government what it needs to do to meet
that mandate. So, having set the mandate, the amount of aggregate discretion
left to the government in each budget is limited. It would seem quite a small
step to let the OBR decide how quickly the mandate should be achieved. Another
small step would be for the government and OBR to negotiate over the mandate
itself (just as the central bank and government negotiate over the inflation
target in New Zealand).
Small steps, but much too large in political terms right now,
as I once discovered when giving evidence to the Treasury Select Committee.
(See the second footnote to this post.) Yet in ten or so year’s time, when more
of these councils are well established, I can see things might be quite
different for two reasons. First, when the recession is finally over there will
be a clear consensus that a slow (and state contingent) reduction in net debt
levels is required, yet some governments may start to waver from this task for
short term political gain. Second, it will have become even clearer that
governments, by undertaking austerity at just the wrong time, inflicted
substantial damage on their economies, and that maybe everyone would be better
off if they were not given that opportunity again.
[1] I use the term fiscal council to cover much the same set
that George calls Independent Fiscal Institutions. His term is probably more
accurate, but I still prefer fiscal council!
