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Wanted: fiscal baby sitter

By Nicholas Gruen - posted Thursday, 3 February 2011


Should the Government impose a tax surcharge to fund rebuilding after the floods? To the extent that it can’t find the money from further savings, yes. But it could prove politically scary. Why weren’t we told of such possibilities at the election. As I’ll explain below, the government could have done with some hand holding from official experts when explaining its fiscal stimulus. It looks like it could do with some similar help here.

For over a decade I’ve been putting the case for developing independent institutions to help steer politicians’ decisions on the size of the budget deficit/surplus, just as the Productivity Commission helps steer micro-economic reform by providing public expert advice or the RBA itself steers monetary policy.

But when the Business Council first proposed it to John Howard, he was winding down from his one really big austerity drive - the 1996-7 budget. Ever more flush with funds as the naughties wore on he didn’t need anyone else, much less someone with an official imprimatur to point to his own profligacy in shovelling money to middle Australia.

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Governing well means prospering politically with good policy. And that requires a strategy for the medium term to enable nimble responses to short term exigencies. The endless improvised giveaways as the coffers swelled were part of Howard’s undoing - highlighting his own lack of policy vision.

The new ALP Government could have done with some official steering, being unable to summon the resolve to really pare back its opponents’ excesses in its first budget. It’s been hamstrung in defending its fiscal stimulus ever since. Though the ALP Government mostly followed the advice of its own fiscally conservative bean-counters in Treasury, the electorate’s suspicions were easily aroused. Wasn’t this supposed to be a crisis? Doling out even more money somehow didn’t look serious enough.

With relief the government moved onto the next phase of The Plan which was broadly successful in employing people to build community and household assets. But the speed with which it was rolled out produced various highly telegenic snafus.

Voltaire observed that if God didn’t exist it would be necessary to invent him, and so it was with independent fiscal authorities. As the government defended itself, the Treasury - which should be an apolitical and confidential advisor to government - was sucked into the vacuum created by the lack of an independent fiscal authority as the Government countered that it was only following advice.

In these circumstances, on her first day in the job, new Prime Minister Julia Gillard felt pressured into turning the budget forecasts of budget surplus by 20012-13 into a high profile election promise, a quick political fix that was fraught with future risks. If our economy recovered well and good. If the world had plunged into another recession - if Chinese growth had faltered - the same logic that saved us from recession might dictate that we take our time to return to surplus.

The ALP could have firmed up its reform and fiscal credentials heading into its re-election campaign without making itself a hostage to fortune. It could have killed a few birds with one stone - meeting its short term political need with an institution that could serve Australia’s medium term policy interests by announcing its establishment of an independent fiscal advisor and pledged to follow its advice on the pace at which we should return to surplus as events unfolded. Alas it was not to be.

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But when an idea’s time has come it’s hard to stop it coming. Reflecting the logic outlined above, institutions to stiffen the independence of fiscal policy are proliferating around the world with both the IMF and the OECD taking an interest. The new Coalition Government in the UK recently established an Office of Budget Responsibility and the OECD commented from the sidelines that experience in Canada, Korea, Austria, Hungary, and Sweden argued for giving the Office more independence by locating it outside Treasury.

Now part of the price of its deal with the Greens and independents to hang onto government is a Parliamentary Budget Office which, like similar offices in the US and Canada will help provide independent scrutiny of official Government fiscal policy. Its mandate is likely to be improving fiscal transparency by assisting Parliament with financial analysis rather than offering policy advice. Nevertheless more than a straw in the wind. It’s a start.

Given the health of the economy a tax levy makes sense to fund rebuilding after the floods. But despite the precedents set by the Howard Government, that’s looking like a hard message to sell. Perhaps an independent fiscal advisor could help?

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This article was first published in the Australian Financial Review on January 25, 2011.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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