An umpire for fiscal policy?

Khyaati Acharya
Insights Newsletter
29 May, 2015

Superannuation was in the news again this week following the government's budget announcement.
 
Labour leader Andrew Little demanded tighter eligibility requirements of the universal pension scheme. Finance Minister Bill English's response was that no such change was necessary.
 
Under one condition: that government remains fiscally prudent. Forever.
 
Therein lies the problem.
 
No government can commit to fiscal prudence for longer than the electoral cycle.  That is because no government knows if it will survive the next election. Worse still? Even prudent governments could eventually be seduced by fiscal extravagance.
 
This is why independent mechanisms, such as a fiscal council, are necessary. They can ensure that governments do not stray beyond what is fiscally sustainable.
 
In 2014 The New Zealand Initiative released Guarding the Public Purse: Faster Growth, Greater Fiscal Discipline. In this report we noted that “even the prospect of an incipient fiscal surplus saw spending increases in the 2014 Budget and promises of more spending by nearly all political parties during the election campaign.”
 
That is the problem. Large surpluses invite expensive programmes. These often last much longer than the revenue surge.
 
As countries attempt to put a leash on fiscal profligacy and improve policy-making incentives, fiscal councils have become a global phenomenon. Perhaps it is time New Zealand got one too.
 
Such non-partisan, public bodies prepare fulfil a variety of roles. They do macroeconomic forecasting; they check compliance with existing fiscal rules; and they advise the government on policy.
 
Experience with fiscal councils in Sweden, the Netherlands, Belgium, the United States, Canada and the United Kingdom is positive. Such bodies can help improve fiscal transparency and accountability.
 
A few years ago, a Treasury working paper discussed the possibility of establishing an independent fiscal council for New Zealand. Former IMF Director Teresa Ter-Minassian also suggested there was scope for a New Zealand fiscal council. However, she proposed a council with a limited role given Treasury’s good record of operational independence.
 
Despite such support, the idea of a fiscal council has not yet gained much traction.
 
But it is an option worth serious consideration. Inevitable demographic change will increase the need for greater expenditure control. Even more so when the spending decisions of future governments remain a mystery.
 
Any good game needs an independent umpire. With fiscal policy, it is no different.

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