As longstanding followers of this blog will know, I have a particular interest in what are called either ‘fiscal councils’ or ‘independent fiscal institutions’. As I have been and will be preoccupied with other issues for a while, I thought I would try and squeeze in one post on recent developments both in the UK and abroad.
In the UK we had Dave Ramsden’s Treasury review (pdf) of the OBR. The most positive aspect of the review is the recommendation for more resources. I guess the headline news was that the OBR would not be asked to cost opposition policies before elections, as the Dutch fiscal council has done for some time, and as the Australian PBO now does. I would have liked a different decision, but my disappointment is mitigated by three factors:
- the report does recommend the “OBR should ensure greater availability of tools and data to allow third parties to cost alternative policy options”.
- in the UK we have the IFS, which does do this and currently (and rightly) has a quasi-official status
- the level of the fiscal debate in the UK media is currently so poor that I’m not sure how much such a development would improve things.
This last point raises something of a paradox. People like me hoped that fiscal councils like the OBR would improve the public debate. This paradox reflects in part the particular nature of the OBR, which would not be allowed to say - for example - that the fiscal charter is economically illiterate (i.e. no economist agrees with it). Fiscal councils in some other countries can do that, and indeed were set up to do that. This is a gap the IFS cannot fill. I guess the OBR will not be allowed to comment on the economics of different fiscal rules until the UK gets a more sensible rule. I think it is quite likely that if the OBR was able to say such things, we would not have had this particular fiscal charter and we would all be better off as a result.
With the rapid growth in the number of fiscal councils around the world, the case for some kind of international network has become much stronger. It is therefore good news is that one is about to be established for those in the EU. There are at least two important roles such a network can have, apart from the obvious one of spreading best practice.
First, it can help establish and maintain independence for individual fiscal councils, which may be put under various kinds of pressure by their national governments. Sometimes this pressure is just verbal, and often indicates that the council is doing its job. I have just come back from Ireland, where the Irish fiscal council criticised a pre-election giveaway by the government. Its chairman John McHale also suggested that it might break the Commission’s fiscal rules. The government then revealed that it had obtained agreement from Brussels, but had not told the fiscal council. It managed to spin this as an error made by the council, which journalists dutifully parrotted. Substantive criticism was thereby deflected. That kind of thing from governments is only to be expected. It becomes more serious when governments react to criticism in financial or even existential terms, as has happened in Canada and Hungary. In those cases, the council needs all the defence it can get.
Second, a network can act as an important pressure group on the Commission. The Commission itself has recently established an Advisory Fiscal Board, which if nothing else can increase the dialogue between the fiscal councils and the Commission. I talked about the dual system of fiscal monitoring within Europe here, and how I hope we will see a gradual reduction in central control and more discretion given to national governments monitored by strong national fiscal councils. If Daniel Gros is right and German hegemony is coming to an end, then maybe it might just happen - one day.
I put on this blog my confusion why 'economically illiterate' rather than 'economically innumerate' has become the cliché in the public discourse about economics.
ReplyDeleteLooking at Google ngrams for the term 'economically illiterate', the collocation comes first from America in the late 1910s - my guess would be around the setting up of the Fed? - the term peaking in usage by the late 1930, falling precipitously by the late 1950s, a rise again to the late 1970s, and then a fall off until 2008 when ngrams stops - and Lehman begins.
For British English, the ngram is different. There is very little use of the idiom from its origin in this country in the late 1920s up to around 1960, the depression seeing it used surprisingly sparingly, but from 1959 there is a steep rise up to the mid-1990s, a fall back to the early 2000s, and then a rise again to 2008.
I expect in both the UK and US 'economically illiterate' has been used more since 2008 than in the few years previous to that year.
Simon, you say, "... the level of the fiscal debate in the UK media is currently so poor ...". It is not just the media, the Ramsden review of the OBR I would put in the same circular folder.
ReplyDeleteAs soon as I read the "public sector borrowing" phrase, I just know there is little point in reading further. Ramsden has no understanding of the difference between a currency ISSUER and a currency USER. Hence he confuses the fiscal power available to the UK Treasury, a sovereign currency ISSUER, with the Eurozone; where its members all are USERS of a foreign currency; the Euro. (For younger members, the Euro used to be called the Deutschmark.)
Eurozone members ARE like households. They have to issue Bonds (Gilts in UK) and get them "monetised" with Euro currency, that the ECB (and the 19 member central banks it controls) ISSUED (that is, spent into existence) previously.
The OBR / IFS perpetuate the neo-liberal myth, that the UK government accounts are the same as a household; particularly that the UK Treasury has to borrow before it can spend. It does not have to borrow its own "unit of account" from anybody; OR, issue Bonds / Gilts to finance its spending, it chooses to do so. There are cheaper ways of subtracting fiscal assets from the economy (inflation control), without having to give free money (interest on Gilts) to Banks and Insurance companies.
So, exactly what these IFIs are supposed to do that will not be politicised at source on day one, is unclear to me. There again, a credit rating agency, issuing a credit rating for a sovereign nation that issues its own currency, is totally irrelevant. Then there is the Stability and Growth Pact; utter nonsense etc etc etc.
"issue Bonds / Gilts to finance its spending, it chooses to do so"
DeleteI dosen't really "finance the spending."
Government spends from its cash buffer. It gets some of it back as taxes. The rest it gets back when it issues bonds for reserves.
Spending only increases reserves in the commercial sector temporarily on an intra-day basis because the debt management office is constantly shuffling them back by issuing Gilts to refill the buffer.
So spending causes an increase in Gilt holdings - but only because of the institutional framework that is in place. You have a small amount of reserves that just bounces around the place as a buffer. What you really spend is Gilts.
This is just basic Treasury operations that you do with ANY financial institutions. Similarly in commercial banks they make loans and then backfill the funding by issuing bonds and shares or accepting deposits. But you know what your cash buffer has to target because loans take weeks to complete and in aggregate you know roughly how many will complete on average and therefore you can project your funding requirement really quite accurately for weeks in advance.
It's the same with government.
Ultimately all this talk is a lot of hot air.
The entire conclusion put forward follows from the premise that the bond markets can decide things.
However if it is clear to the markets that the government believes it ultimately controls the Bank of England and the understanding is that the Bank of England will prevent yields from rising, then they will not rise.
Any bond that drops below par can be purchased by the Bank of England and cancelled. That means that the private sector gets less back than it paid out for the bond.
And that is a tax. Show me a financial person that will voluntarily queue up to pay a tax and I'll show you a unicorn.
So it matters not what the bond market thinks. It matters whether the government decides to voluntarily tie its hands.
The control function that stops you spending as much as you want is the bank stopping your cheque. Nobody will stop a government cheque because they have neither the authority, nor the bottle to do so.
The government always has money in the account to spend and the cheques will not bounce. Ergo it can always buy anything in Sterling.
acorn1 November 2015 at 01:56
ReplyDelete"Eurozone members ARE like households."
Exactly so. And that is why the Suabian housewife has to be their model, no matter what SWL says. If he realized that, his comments on the Eurozone might be a bit more intelligent.
"in the UK we have the IFS, which does do this and currently (and rightly) has a quasi-official status"
ReplyDeleteThe IFS are idiots. £12 million of cuts does not reduce the deficit by £12 million. You lose tax revenue further down the line. And if it did increase the deficit - so what? People are saving and/or paying down bank loans.
If we are to have one of these AND it is given quasi-status, let it monitor real resources and cost them that way.
Will the fiscal council see cutting bank lending or banning things as ways to free up real resources? It won't will it?
ReplyDelete