News Stephen Kinsella

Thursday 18 September 2014

Budget planners could learn from Bank of England

Published 13/08/2013 | 05:00

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New Governor Bank of England Mark Carney
New Governor Bank of England Mark Carney

CAN you feel it? As the silly season passes us by and ministers get back from their holidays, the traditional pre-budget floating of possible budget policy ideas has started in earnest.

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Leaking away like a broken fridge during a heatwave, amongst other acts of unpleasantness, ministers and civil servants have already mentioned the reduction of old-age pensions, widow's pensions, and perhaps the 'bursting' of the cap on student numbers in classes as potential policy changes.

No one, not even those on the Economic Management Council, know which policies will materialise in October's Budget, because in the end the Budget is in equal parts a mixture of good policy and hard bargaining between coalition partners with one eye on the next election.

Readers from other countries may find this a little shocking, but the public reaction to various measures is tested using the media via leaks. The technical term is 'kite-flying'. Potential proposals are floated like kites on the breeze. Some float up, some crash down.

The process has the virtue of softening up the public for the (now) inevitable cuts and setting their expectations correctly in the short term. And when it comes to Ireland's budget, lobby groups get access to the finance minister to try and soften up unpleasant measures in the weeks following Budget Day and the introduction of the Finance Bill in the Dail. It's all a bit messy, costly and noisy.

Which, somewhat oddly, brings me to central banking. The new governor of the Bank of England, Mark Carney, has instituted a new doctrine for the bank called 'forward guidance'. It is the idea that by telling the public what the bank's policies will be into the future, the public will have confidence in investing and saving for the medium term.

For example, Mr Carney has said he won't even think about raising interest rates until unemployment is at 7pc in the UK. Right now it is 7.8pc. Everyone can see the unemployment rate, and so can plan accordingly. Mr Carney's forward guidance has changed everyone's expectations, his statements have given them some stability in their decision-making, and this will change the real economy.

Now compare Mr Carney's behaviour to the Irish fiscal planning funfest. Disorganised and noisy, the process leaves households uncertain and worried. Imagine being a pensioner and worrying your pension may (or may not) be cut by up to €10 a week. What's the rational reaction to that threat? It is rational to lobby, to make noise, but also to save if you can. When households save, they don't spend, and overall demand in the economy falls.

Rightly or wrongly, we have one big target in Irish fiscal policy: to cut over €3bn from government spending in 2014. The Government's budget deficit will decline to 2.2pc of national output by 2015 if it implements all of the agreed cuts and tax increases totalling €3.1bn in 2014 and €2bn in 2015.

The Budget comes two months earlier this year, in October. This means the Government will have two months' less data to forecast with, and so September's data will be crucial in formulating government policy.

The budget date is moving forward to fall in line with the European semester and what is called 'enhanced monitoring and surveillance for euro area member states'. The idea is to increase the amount of information euro area states have about each other's tax and spending plans to avoid budget imbalances from growing in one state, because if they get into trouble, the other states have to bail them out. That's the nature of a fiscal and monetary union.

The European Commission needs a level of oversight into the budgetary process that ordinary citizens – and even backbench members of the governing parties – don't have. The last two budgets were seen in Berlin before being heard in Merrion Street.

The public needs strong forward guidance in spending and tax issues, particularly when it comes to austerity measures. So Finance Minister Michael Noonan could say something like: unless national output grows by more than 1.5pc in 2013, we will reduce government current spending by €1.5bn, capital spending by €0.5bn, and increase various taxes to the tune of €1.1bn. But if we do see growth then we will re-examine those decisions.

There is a movement in Europe towards 'performance budgeting', which focuses spending outputs and outcomes, a bit like forward guidance.

If performance budgeting was combined with an enhanced parliamentary oversight of the allocation and deployment of taxpayers' money, I think Ireland's pensioners and widows would be better off. The only losers would be the papers, because the silly season would last a bit longer.

Stephen Kinsella is a senior lecturer in economics, University of Limerick.

Irish Independent

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