Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 19 November 2014

Avoiding Fiscal Fudge

There has been some recent disquiet in the UK about politicians before the election failing to offer voters a clear account of how they would achieve their fiscal plans. The Financial Times has taken the lead, but others have concurred. A point I have stressed is that each party’s aggregate fiscal plans are quite different, even though Labour in particular seems to want to hide this fact. But the complaint I want to focus on in this post is about something different - it is about failing to make it clear how plans will be achieved in terms of detailed policy changes.

While I think journalists and bloggers are right to complain, I think it is even more productive to suggest what can be done about it. Politicians do what they think is most likely to get them votes. In a time of austerity, they have calculated that any bonus they might get by being transparent will be more than offset by votes they will lose from coming clean on specific cuts or tax increases. This is hardly a unique UK phenomenon - the phrase ‘magic asterisk’ comes from the US, and Paul Ryan managed to fool quite a few ‘serious people’ by deploying it before the last US election. If the factors that enter this calculation do not change, neither will the behaviour of politicians.

In 1996 I wrote a paper with the title of this post. It was the first time I proposed setting up an independent fiscal institution, or fiscal council, like the OBR. One of the few examples of such a body at the time came from the Netherlands. Those who complain about lack of transparency on fiscal matters before elections should really examine what happens today in that country. There the Dutch equivalent to the OBR offers to cost the fiscal plans of any opposition party before an election. They take up this offer, because failing to do so would be seen as a clear sign that plans were not credible. The detail that the Bureau for Economic Policy Analysis (CPB) go into is extraordinary, as I noted at the beginning of this post: here (pdf) is an example.

So in the Netherlands we have a situation where the fiscal plans of each party before an election are transparent, detailed and independently costed. There is no fiscal fudge. To use a bit of economics jargon, it is a political economy equilibrium which each individual party finds it too costly to depart from. In most other countries we have an alternative equilibrium that involves plenty of fiscal fudge, from which it would be too costly for any individual party to try and break. Is there something peculiar about the Netherlands that means their set-up could not work elsewhere? I have heard excuses along those lines, but none which I find convincing.

So how might we get from where we are now to something like the Dutch example? Well it so happens that in the UK we have a unique opportunity if Labour forms the next government. Ed Balls recently asked the OBR to cost their post election plans, but this would involve an extension of the OBR’s current mandate, and George Osborne did not want that to happen. Of course political advantage was behind both the request and the refusal. However, given the request, if Labour forms all or part of the next government, it will be very difficult for them to reject extending the OBR’s remit in this way. Those who complain about lack of fiscal transparency should help make sure this happens. Of course the details of how the OBR might do this need to be worked out, and it may not be appropriate to do it exactly as they do in the Netherlands. But the UK also has another piece of good fortune on this front: the previous director of the Dutch fiscal council, Coen Teulings, is currently a member of the economics department at Cambridge, so is easily on hand to give advice. We should not miss this opportunity to end fiscal fudge.  


13 comments:

  1. Simon you say that political parties in Holland "take up this offer" of having their policies costed "because failing to do so would be seen as a clear sign that plans were not credible."

    In Australia the parties prefer not to bother with that. This is particularly true of the conservatives because they believe - rightly - that the electorate credit them with being the superior economic managers - so it's 'their issue'. There isn't a lot of evidence of this, but that's the way the electorate thinks - the right are 'dad' and look after the bills and the left are 'mum' and look after caring.

    In Australia the right leaning parties get a tame accountant to put out a document which is a curious form of words that gives the politicians something to wave around and sound credible - their numbers have been 'checked' by an accountancy firm (though when you read the fine print of the accountants disclaimers, they've done no such thing.)

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    1. Which is why a single, publicly recognised and trusted institution that does this is crucial, together with a major party that is willing to ask it to undertake this task. That can move us from the bad equilibrium that Australia and most other countries are in, to the better Dutch equilibrium.

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    2. Making it very hard or nearly impossible for politicians to induce in misdirection and disinformation could solve lots of problems. Hopefully, the institution in question would be independent, enough so you do not get problems such as GOP's insistence on biasing the CBO with dynamic scoring. Ordinary citizens do not have the time or resources to screen public speeches about fiscal plans-- and journalists have an awful record too -- so I'd like to see more of these councils.

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    3. Alas it doesn't work that way - not in Oz anyway. Remember those days when parties laid out their plans well before an election so the people could understand the policies and consider them? Well they don't do that anymore - not here anyway. They drip feed them out during the election campaign so that they have some new announcements for the titillation of the media every day. Remember the media is there to provide entertainment - not ideal from the perspective of the health of the democracy it's true - but there are bottom lines to be delivered, careers to be made and scoops to be had.

      At least as this system has evolved in Australia, the bad news (how you're gonna pay for all the good things) is all packaged up in a large parcel and announced a few days before the election - together with an accountants' letter with some bumph saying "We've looked at these numbers and have verified that, according to the methodologies and assumptions made by the party, the costings are appropriate." The weasel words ensure they've said nothing, but this allows the party to claim that some accounting firm has 'checked' their numbers. The accounting firm gets paid. What's there not to like?

      But in this timetable the independent agency simply doesn't get a look in. And once a party sees it can get away with this kind of approach, as our conservatives have in the last two elections, it's hard to see any going back. We certainly haven't had any at this stage.

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  2. The extenion of the OBRs remit is necessary going forward for whichever political party is in power, as Labour are probably as likely to succumb to the temptation of 'fiscal fudge' as the Conservative led coalition currently have.
    But, might the OBRs remit extend beyond 'fiscal fudge' and also address 'fiscal deception' on the part of government...something Chris Dillows has highlighted this week?
    http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2014/11/camerons-lousy-defence.html

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  3. Anything would be an improvement on the "I'm nicer than him, look at all these bad things he's done, so vote for me" politics we have in the UK.

    Thank you for highlighting this issue of George Osborne blocking the OBR from assessing Labour's Fiscal plans. The only reason he can have for blocking the idea is that Labour's ideas make more sense than his do!

    Oops! There I go, falling into the "he's nicer than him" trap again...

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  4. I wonder if the LibDems will say anything about this, given that they have some (titular) role in this government.

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  5. Does the IFS do this? If not why not - it would also count as a "publicly recognised and trusted institution", no?

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    1. I don't think the public give the same amount of importance to what, to them, sounds like a hundred and one other 'think tanks' and political pressure groups; at least the OBR has some semblance of official acceptance and status in their minds.

      Perception is all.

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    2. I think the IFS do a great job, and they are respected as an objective source by those who know about these things, but otherwise I have to agree with fifthdecade above.

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    3. Well my assumption is that this "disciplining through vetting by experts" mechanism must run through the media, i.e. voters will hear about parties being positively/negatively assessed not directly but via TV, newspapers etc. While there would undoubtedly be some additional power in assessments from an official body, it seems to me that the IFS is not seen by economic journalists as "just another think tank" - it seems to me (though I don't follow the UK media that closely) to be frequently described in favorable terms by them (independent, widely-respected, non-partisan, authoritative etc.). So given that Osborne isn't going to let the OBR do it, the IFS could be a good second-best alternative. Think of the NBER in the US, a private body that has been to some degree granted quasi-official status by the media, albeit in a different matter (the declaration of recessions).

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  6. To expand your equilibrium political economy comment one step further. There is a equilibrium permanent solution to the government budget deficit problems too.

    http://ssrn.com/abstract=2519730
    Or http://mpra.ub.uni-muenchen.de/59712/
    Or http://econpapers.repec.org/paper/pramprapa/59712.htm

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  7. This paper shows there is a hidden ugly side of Keynesian proactive fiscal policies of "stealing money". Just look at Japan. They just had another "surprising" recessions.

    Stealing is never good. Therefore, no generational theft is the equilibrium (or optimal) government fiscal policy. The paper spends lots of efforts to separate the public investment for the future from current consumption.

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