Fiscal transparency needs more bite
Thu 21 Apr 2011 by Infometrics Ltd in Government

In this column last week my colleague David Grimmond warned that vote-buying fiscal largess cannot be sustained as age-related spending in health and superannuation gobble up increasingly larger chunks of public resources.   In my view politicians will not meekly revert to being responsible fiscal managers full of caring about the burden on taxpayers beyond their political lifetimes.   History has shown us that governments invariably put off hard decisions until crises are triggered, often forcing sharp and disruptive changes.   Something else is needed to remind those with their hands in the fiscal chocolate box that bingeing today requires purging tomorrow.   One possible solution is an independent fiscal watchdog with the power to publicly comment on the soundness and prudence of government fiscal decisions.

New Zealand’s requirements for setting and accounting for government tax and spending plans are generally recognised as being among the most transparent in the world.   Governments are required by law to publish quality public accounts and forecasts of the economy, state their fiscal intentions, and face the scrutiny of Parliament.   Fiscal transparency is certainly a vast improvement on the days when, as former Prime Minister Robert Muldoon once stated, New Zealanders wouldn’t know a deficit if they tripped over one.   In addition, in the Treasury New Zealand has a competent fiscal advisor that is relatively independent by world standards.   Behind the scenes Ministers of Finance get quality forecasts and fiscal advice about the short, medium and long-term implications of their tax and spending plans.   Why, then, the need for an independent fiscal watchdog?

The problem is that governments do not sufficiently feel the shame of dodgy fiscal decisions.   This stems from the dual role of the Treasury as advisor to the government on fiscal matters and public communicator of the fiscal and economic position.   The roles are conflicted.   While on the one hand the numbers are there for all to see, on the other, what the numbers really say about the prudence and sustainability of specific policies are not spelt out.  Treasury Economic and Fiscal Updates tend to blandly comment on forecast movements in key fiscal and macroeconomic variables.   They focus on influences outside the government’s control such as economic developments overseas or natural disasters, but say little about the effects announced government policies are likely to have on the fiscal and economic outlook.   The Treasury will be publicly silent or less than candid when it believes government fiscal policies are daft for fear of damaging its relationship with the government.   This is not a criticism of the Treasury, but of the environment in which it needs to operate.

Ideally the media should be an important scrutiniser of government fiscal policies.   However, this takes some effort and requires specialist knowledge.   Generally, the media prefers to focus on the immediate winners and losers of fiscal decisions and on side-shows such as abuses of ministerial expenses and expensive ministerial cars.   Quality commentary on the wider trade-offs and potential long-run effects of fiscal decisions is mostly lacking in mainstream media.

An independent fiscal authority can help improve the transparency of fiscal decisions and make governments sweat more about whether they are doing the right thing for future taxpayers.   The role of a fiscal watchdog would be to objectively assess the quality and sustainability of government fiscal decisions and publish its judgements.   It can also provide authoritative judgements on whether policies are consistent with the fiscal objectives the government sets itself and whether its explanations for missing fiscal targets are credible.   Independent fiscal bodies are becoming more common overseas, with Austria, Belgium, Britain, Canada, Denmark, Hungary, Netherlands, Slovenia, Sweden and the United States having established such institutions.

To be effective a fiscal watchdog needs broad political support and to be seen as independent and credible, in much the same way as the Reserve Bank of New Zealand is in relation to monetary policy.   The example of the Reserve Bank shows these traits can be achieved through good institutional design and governance.   By appointing a mix of academics, public finance experts, financial analysts, and ex-politicians on long-term non-renewable contracts, various expert views could be taken into account.   To achieve political neutrality, appointments could be made by the government on the recommendations of the Treasury or Parliament’s Finance and Expenditure Select Committee.

By increasing fiscal transparency, a fiscal watchdog would raise awareness of the long-run costs of fiscal policies and increase the reputational costs for governments of not meeting their fiscal objectives.   It would be a valuable addition to New Zealand’s fiscal setup at a time that we desperately need governments to reign in their populist tendencies and get a grip on public finances.   Otherwise we’ll be waiting for the next fiscal crisis and the sharp and disruptive adjustments that will entail.

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