Independent Fiscal Policy Redux

Eminent economist Brad Delong despaired at news of George Bush’s second electoral victory four years ago:

The American political system . . . appears incapable of setting out the central fiscal [or budgetary] policy issues in ways that give voters a chance to make informed judgments . . . even between candidates whose programs are serious and those whose programs are mathematically impossible jokes.

Bereft of any “magic plan”, Delong conceded one glimmer of hope. Though monetary policy was still far from perfect, the new commitment to central bank independence had delivered a record period of strong and stable growth.

Delong proposed a similar shift in fiscal policy with an independent Fiscal Stabilisation Board having some role in managing the fiscal stance; the budget deficit or surplus, just as central banks now manage the monetary stance; interest rates. Deputy Governor of the US Federal Reserve Bank, Alan Blinder, had outlined similar ideas.

Back then Australia had already been the first country to debate the issue. Keen to entrench continuing reform and alarmed at Howard’s apparent lack of economic reform vision, the Business Council of Australia (BCA) proposed a suite of “macroeconomic reform” policies; including more independent fiscal policy.

The BCA argued that both budgetary responsibility and flexibility would be enhanced if parliaments legislated to enable small across-the-board changes to be made to company and personal income tax rates. This power could then be exercised with some input from an independent Central Fiscal Authority.

Of course, as now, governments could change the fiscal stance using tax and spending changes of their own choosing. However, the scope for across-the-board tax changes would sit in the background rather like interest rates do today, both broadening the options available to manage the macroeconomy and constraining the government to deliver responsible and appropriate policy.

The BCA was agnostic about how much independence to give the Central Fiscal Authority. After all, the simple provision of public advice - as the Productivity Commission provides on tariff changes - would usefully raise the cost of political irresponsibility.

But after a generation in which reform became a national policy reflex, a Great Complacency was setting in. I remember the delegation that put these ideas to political leaders on both sides; their thoughts already turning to their next electoral auction. 

Independent fiscal policy advice would cramp their style. The conversation turned to more immediate concerns. BCA delegates left the meeting wondering who’d come up with this idea anyway. It was your correspondent dear reader; now older, humbler, but (alas), no wiser.