Wednesday, 26 January 2011

Not just for Section 23: Economic analysis and the Budget

Tom McDonnell: There has been much commentary in the last week about the Government’s decision to roll back on its commitment to end the Section 23 property tax breaks. The Government has instead committed to an economic analysis of the impact of ending the tax breaks. Although TASC called for the abolition of these reliefs in its pre- Budget submission, economic analysis of budgetary measures is in many ways a welcome development.

The larger issue here is the continuing failure to undertake economic analyses of all budgetary measures. For example, an announcement pointing to a forthcoming econometric analysis of the impact of €6 billion in austerity measures is glaringly conspicuous by its absence. The absence of serious analysis was a causal factor in the economic crash, and it would be criminally negligent not to learn from past mistakes.

At least six months before each annual budget, the Government of the day should produce a long list of the measures it is considering for the forthcoming budget. Each of these measures should then be subjected to a full cost-benefit analysis by independent economists. Opposition parties should have their own opportunity to submit proposals for analysis. The cost-benefit analysis should seek to quantify the impact of the proposal across a variety of indicators. Sample indicators include (but are not limited to) the impact on:

• Economic growth (short and long-term)
• Employment
• The exchequer borrowing requirement
• Economic equality, for example which groups will gain and which groups will lose
• The at risk of poverty rate and other poverty related indicators
• Quality of life indicators, for example health outcomes
• Aggregate stock and composition of productive physical capacity
• Aggregate stock and composition of human capital
• The national innovative capacity
• The environment

The results of each of the cost-benefit analyses should then be independently peer-reviewed and submitted to the Government two months in advance of the budget. Existing policies, for example tax expenditures, should be subjected to regular ex post analysis. All policy measures should be reviewed twelve months after implementation, and then again every two or three years.

In the run-up to the budget the Government’s chosen set of budget proposals should be submitted to an independent Fiscal Council, set up for the express purpose of ensuring the parameters of the budget are counter-cyclical and consistent with the principle of macroeconomic sustainability.

The Government of the day should also seek to ensure that the principle of multi-annual budgeting becomes standard practice. The publication of multi-annual budgetary frameworks, of the type outlined in the National Recovery Plan, need to become semi-annual events.

None of this in any way precludes or infringes on political or economic debate. Political parties will have different positions on the relative importance of the various indicators and these differences will lead to divergent policy choices.
Impact analysis will improve accountability and transparency in budgetary decisions and will make it more difficult for interest groups to lobby Governments to sneak through legislation that benefits their narrow sectional interest at the expense of the wider society.

An indicative timetable might look like this:

January to March: Passing of Finance Bill through the Dáil
April: Publication of ‘Four Year Budgetary Framework’
June: Publication of Long list of budget proposals
June-October: Cost benefit analyses of the long list
October: Publication of ‘Updated Four year Budgetary Framework’
November: Parameters of the current year’s proposed budget audited by independent fiscal council and findings published
December: Budget

The fiscal council should be a purely advisory body, entirely independent from political parties and from powerful vested interests. For example, this would automatically exclude all economists working in the financial sector (or, indeed, for other sectional interests). Lobbying a member of the fiscal council should be made illegal. Ideally, the head of the fiscal council should be an economist of international renown.

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