SUBSTANTIAL CHANGES to how fiscal or budgetary policy is formulated and implemented were recommended by an Oireachtas committee yesterday and broadly welcomed by Minister for Finance Brian Lenihan.
A report by the committee, which received all-party support, set out a formula for avoiding “short-termism or capture by political elites”.
It recommends the creation of two independent budgetary bodies of experts who would assess policy and produce annual reports that would feed into a multi-year budgetary process.
Mr Lenihan attended the publication of the Report on Macroeconomic Policy and Effective Fiscal and Economic Governanceby the Joint Committee on Finance and the Public Service.
He said an economic advisory council, as recommended in the report, was a “national priority”, although it should not be the preserve of economists.
He said he was not in a position to commit the Government to all the proposals in the report, but said it was working on similar proposals to be included in the upcoming four-year plan.
The plan would include “fiscal rules” as outlined in the report, and was itself a move towards a multi-year budgetary process.
The report envisages ways to promote counter-cyclical budgetary policies in the context of euro membership. Running substantial surpluses during growth periods could allow for the establishment of a “rainy-day fund” that would be used during downturns.
“This would avoid the need to go to markets in recessions and deliver a positive in terms of the interest costs on debt,” the report says. Governments could raise taxes in a boom and create subsidies in a downturn.
Independent macroeconomic forecasting would form part of the new process, with the requirement for “excellent data”. The Department of Finance should improve its modelling and surveillance capacity by setting up an intra-departmental economic analysis unit that would be more fully engaged in full-time macroeconomic analysis, the report says.
Such a unit, however, was open to political influence. Consideration could be given to the establishment of a new independent body such as the UK’s office for budget responsibility or the congressional budget office in the US.
The report says the series of bodies mandated to promote sustainable, counter-cyclical policies would assist government which finds it difficult to run such policies because “political groups lobby for spending when monies are available” and “the markets force governments to tighten spending in a recession”.
Included in the report is a paper by Trinity College Dublin professor of economics Philip Lane on improving macroeconomic stability, which fed into the committee’s work.
The committee’s report follows from the two reports on the banking crisis published this year.
One of those, the Regling and Watson report, said the Government’s pro-cyclical fiscal policies during the boom years formed the backdrop to the collapse of the banking system.
