Today I've got an opinion piece in The Australian, supporting Chris Bowen's call for the independent Parliamentary Budget Office to be tasked with preparing budget forecasts and figures.
The Coalition has already shown a worrying tendency to cook the nation's books, so it's time that power was taken out of the hands of governments altogether.
Treasurer Joe Hockey trashes economic forecasts, The Australian, 16 September
THEY called it “political monetary policy” — the tendency for interest rates to be cut in election years, fuelling a bubble that then had to be contained. In a series of important research papers in the late 1980s and early 90s, Harvard’s Alberto Alesina and co-authors showed that allowing politicians to set interest rates was causing a political business cycle.
Research such as this has underpinned the move across the developed world — including in Australia — to have interest rates set by independent central banks rather than by politicians.
Alesina argues that having an independent agency set interest rates and keep an eye on inflation brings two important benefits. First, independent central banks are less sensitive to sudden and short-term political pressures than elected governments. As a result, they tend to behave far more predictably — something that promotes economic stability. In particular, central banks have no incentive to manipulate monetary policy in the run-up to an election. They also don’t alter policy dramatically in the way that often happens after a change of government.
Second, as former US Federal Reserve chairman Ben Bernanke once noted rather dryly, central bankers tend to be far more “hawkish” on inflation than governments. Alesina and others have shown that countries with an independent central bank generally sustain lower rates of inflation as a result.
The international experience with monetary policy shows that a little bit of independence goes a long way towards generating better economic outcomes.
As opposition Treasury spokesman Chris Bowen outlined in a speech to the National Press Club last week, the Coalition government’s abuse of Treasury forecasting means it is now time for more independence in the budget process as well.
Thanks to the Charter of Budget Honesty introduced by Peter Costello, the pre-election economic and fiscal outlook statement provides an objective overview of the nation’s finances at the time of each federal election. By detailing the true state of the nation’s books, the statement stops that old wheeze of incoming governments claiming an undiscovered “budget black hole’’ to justify scrapping their election promises.
The statement released before last year’s election showed a deficit for 2013-14 of $30 billion — less than 2 per cent of Australia’s gross domestic product. But that figure didn’t sit well with Joe Hockey’s overblown rhetoric about a budget emergency, so he simply adjusted it when it came time to release his first mid-year economic update in December.
As Bowen has noted, the Treasurer tacked on new spending decisions that blew out the deficit by $17bn, then claimed that figure was Labor’s fault. He also changed the way projections of debt and deficit are calculated, increasing net debt by $260bn and turning a projected $34bn surplus for 2023-24 into a $12bn deficit.
To put it bluntly, Hockey’s actions trashed the integrity of the Treasury forecasting process. There is a clear need for reliable economic forecasts and projections to guide policymaking for Australia’s future; it is now equally clear that these will not be forthcoming from this Coalition government.
That’s why it is time to hand responsibility for preparing economic forecasts to the independent Parliamentary Budget Office. By having this stand-alone office prepare forecasts for key economic indicators such as inflation, unemployment, terms of trade and GDP, we can ensure these important figures are no longer treated as political playthings.
A government that does not fear accountability and transparency would not be afraid of outsourcing the forecasting that underpins their budgets and economic statements. Furthermore, a party that really values long-term economic stability above short-term political gain should welcome more integrity in the budget process.
As part of the reforms announced by Bowen, Labor would additionally ask the PBO to prepare an annual report on whether the budget is in structural deficit or surplus. We would also ask it to take charge of publishing the five-yearly intergenerational report. Both documents will help governments look over the political horizon with confidence to better meet Australia’s policy needs in the years ahead.
As the great American senator Daniel Patrick Moynihan famously said: “Everyone is entitled to his own opinion, but not to his own facts.” Hockey has every right to come up with his own policies, but he shouldn’t get away with also conjuring up his own forecasts.