The process of deciding which party to vote for in a general election is a bit like deciding whether to switch service providers.
Think about it. Mobile phone operators offer you all sorts of combinations of calls, texts and data. Health insurance providers offer packages that vary according to what is covered, in which hospitals and in which sorts of wards. Political parties offer different combinations of policies covering all of the big issues, such as health, tax and childcare.
Those who have investigated the possible benefits of switching between providers will tell you that the decision-making process is complicated. They will also tell you about the helpful websites that help you compare what is on offer from the competing providers.
The examples of the service-comparison websites lead naturally to a suggestion on how the political parties might present their policies in the run-up to the general election, or at least those policies that involve public spending and taxation.
Before setting out the proposal, I need to provide some extra context.
Ireland’s fiscal policy is now governed by a set of rules. These rules were introduced as part of European Union efforts to improve fiscal governance after the economic and fiscal crises, but they also have a counterpart in Irish domestic legislation. The rules are complex for the most part, but one of the rules currently in operation has a relatively simple rationale underpinning it.
Under the EU expenditure benchmark, annual public spending can grow only in line with the underlying growth rate of the economy, unless taxes are raised to fund additional spending.
This simple rule has a number of appealing qualities: public spending is allowed to increase, but sensible constraints are imposed. If the Government is unable or unwilling to increase taxes, public spending can only grow in line with the economy. If the Government wants to increase spending above this, it can do so but only by increasing taxes.
And, if the Government wants to reduce taxes it can do so, but this reduces the scope for spending increases.
Avoids past mistakes
Without a rule of this type, there is a risk of repeating mistakes, such as allowing expenditure to grow based on what turns out to be unsustainable revenues.
The expenditure benchmark also forces the Government to make real choices on behalf of the citizens on issues of taxation and spending. It is better to have annual budgets that are consistent with a sustainable medium-term plan for the public finances rather than periodic forced adjustments, which are disruptive.
Given its simplicity and potential power, I believe there is scope for using the logic of the expenditure benchmark to assist voters in understanding and comparing policies across political parties.
In order to put this idea into operation, the parties would be asked to accept an authoritative estimate of the underlying growth potential of the economy out to 2020-2021, to cover the period of the next Dáil.
The Department of Finance produces estimates of this figure on a regular basis, using a method agreed at European Commission level. Usually there is controversy surrounding the estimate for a given year, though estimates over a longer term are less controversial and typically cluster around an annual growth rate of 3 per cent.
The department could then convert this figure into the implied allowable growth rate in public spending under the expenditure benchmark. All of this could be checked by the Irish Fiscal Advisory Council if an independent input was sought.
If all parties accepted the department’s estimate of the spending increase that would be allowed without tax changes, we would have the beginning of a common framework to assist in policy comparisons. If the spending plans of the parties exceeded the estimated allowable amount, they would have to set out the corresponding tax measures. The tax and spending measures would be costed by the Department of Finance.
In fairness to political parties, they often cost their proposals and take account of projected growth rates in their manifestos. But they have never been asked to present their proposals using commonly agreed parameters as proposed here.
Hence, there is an opportunity for a qualitative improvement in the way political parties’ plans for the public finances are provided to voters. This could be done as suggested here or with reference to other fiscal rules.
Proposal challenges
While the expenditure benchmark would add to voters’ capacities to make informed decisions, some challenges remain in assessing the parties’ proposals.
For example, a party might argue that it has a policy idea that would lead to an increase in the underlying growth rate of the economy. Similarly, parties might argue that the policies of others will reduce growth.
Perhaps the parties would be willing to allow an agency to assess the economic impact of their policies, in addition to the more straightforward budgetary implications that I have discussed already. This is the approach taken in the Netherlands, for example.
In truth, this would be a complex and controversial task. But maybe we could start with the more modest proposal.
Prof Alan Barrett is director of the Economic and Social Research Institute