Testing advisory council’s fiscal clout

Professor John McHale

The Fiscal Advisory Council has got up Government noses but has it stimulated serious thought, asks Kyran FitzGerald.

IS the Irish Fiscal Advisory Council simply a group of well-meaning pointy-headed economists foisted upon the rest of us by the supposedly departed troika, whose advice can be safely ignored by the Government? Or is it a body with real heft, one that can assist in the transformation of decision-making in this country?

Well, the truth probably lies somewhere in between.

The new body has managed to get up the noses of the Government, but has it managed to really stimulate serious thought in the precincts of Leinster House, where short -term electoral considerations have assumed a new prominence ahead of the upcoming local elections?

Achievement of the 3% deficit target on time — as the council argues — is all fine and dandy, but it will be cold comfort to a swathe of FG and Labour councillors faced with the chop from the voters next summer.

Last week, the Fiscal Council managed to both pat the Government on the back and slap its wrist at the same time.

It described the current fiscal stance of the Government as “conducive to prudent economic and budget management” yet went on to suggest that there are “few buffers in place to safeguard against slippages on the expenditure side”.

It has made clear its disagreement with the Government decision to opt for more modest retrenchment in Budget 2014.

Most controversially, it suggested that there was now a 50% chance that the cherished 3% deficit target would not be reached by the due date of 2016 — compared to a chance of just one third before the budget.

The economic establishment by and large endorses the council’s view, but some economists disagree, pointing to the need to protect an economy which has been repeatedly battered by cutbacks.

The council and its chairman, Professor John McHale, insist that real gain has been secured from the pain. Its outlook is almost Presbyterian, but it is one that is not shared universally by economists across Europe where there is a real debate under way about the effectiveness of austerity.

At a conference in Stockholm on the Euro crisis, most economists present warned their Governments against trimming their budgets too much in the short term.

The recently retired director of Dutch fiscal council the CPB, Coen Teulings, has suggested the current emphasis on fiscal rigour among politicians in northern Europe is dictated by baby boomer memories of the 1970s, when governments pursued Keynesian policies in the mistaken belief that the changes wrought by the 1973 oil spike were temporary, or cyclical, rather than permanent.

Teulings believes that governments may now be erring on the cautious side and once again, be committing serious errors. Says Teulings: “The research shows that the fiscal multipliers (effects of retrenchment) are big — much bigger than we thought — providing an argument for avoiding fiscal tightening.”

Prof McHale and colleagues would stress that Ireland faces special issues due to the scale of its debts and deficit, in its effort to convince the markets.

The council has also questioned the decision of the cabinet to leave the bailout without a back-up.

Interestingly, this view has been questioned by several leading commentators, including UCD’s Colm McCarthy, a man not known for tip-toeing around governmental sensibilities.

The council has yet to make a winning case for even sharper tightening.

Speaking privately, one market economist opines that the council, while being a very good idea in principle, is enduring inevitable teething problems.

“The former finance minister Charley McCreevy exercised a near-feudal control over his territory, but now there is extraordinary oversight of government. The council is effectively a watchdog. What does it do? It barks — but if it barks 24 hours a day, it is not a watchdog.”

In his view, the council needs to build credibility. He points to recent row-backs from hawkish positions and downbeat predictions by the council. The fiscal progress achieved by the Government has been more substantial than the council perhaps anticipated.

But the council members may contend that their job is to keep the politicians on the straight and narrow.

Indeed, many politicians are incapable of behaving other than like drunks passing a bar as election time approaches. They need a strict mammy to keep them in line.

The council can serve as a substitute mammy, or at least as a sort of fiscal babysitter.

What is clear is that the concept of the fiscal council as a provider of independent assessments of government budget plans has caught on internationally.

Holland has had a fiscal council called the Central Planning Bureau since 1945 — its first director, Jan Tinbergen later won the Nobel Prize for Economics.

Most “successful” European countries have one.

The US has had in place since 1974 a body called the Congressional Budget Office, to act as watchdog. It has a staff of 250. Its job is to provide “objective, non- partisan and timely analysis” and it regularly ‘scores’ policy proposals — no doubt with the aim of seeing off damaging vote-catching ideas.

Germany has its Council of Economic Experts, or “wise men” which gets by with a staff of just 30.

Britain, as recently as 2010, set up the Office of Budget Responsibility. It forced the chancellor to back-track on his projections late in 2011.

Prof McHale and his team have shown a willingness to enter into vigorous debate with the Government, but they must also display independence of the Troika institutions which have promoted them.

The Irish Fiscal Advisory Council has already produced a really interesting paper on the State balance sheet, putting estimates on the assets and liabilities, actual and contingent, of the country.

It needs to do more such work and prove itself to be intellectually creative, as well as pretty accurate, on the mark, in its projections. It must do so with a very small support base. This will not be an easy task.


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