I’ve been pointed to a very useful review of NZ’s fiscal policy that explains how the country manages so well with neither a fiscal rule nor a fiscal council. The NZ government is required by law to maintain ‘prudent levels’ of public debt but, beyond that, it is left to individual governments to decide what that means. Accountability and scrutiny is achieved largely through transparency and “broad social consensus on fiscal responsibility” and, so far, that has largely worked. The weakness identified by the review is that the government pursues time-inconsistent policy and saves too little in booms to offset the expenditure in recessions. The UK, despite a series of fiscal rules, suffers from similar problems.
The review considers whether a numerical fiscal rule might help and makes the point that
..it might weaken the Government’s ‘ownership’ of the debt target, and its preparedness to save revenue windfalls… It might create incentives for governments to comply with the rule through policies that would weaken other parts of the balance sheet.
In other words, once there is a rule then the game is compliance with the letter, not the spirit, and that can actually weaken fiscal governance.
The review is also lukewarm on the idea of a NZ fiscal council, pointing to
…the operational independence of the Treasury in the preparation of the forecasts and other documents of its responsibility, its well-established non-partisan reputation, its increased openness to outside inputs, and its strong record of relatively (compared to other national forecasters) accurate and unbiased macroeconomic and fiscal forecasts.
How does HM Treasury stack up against that assessment and should we be thinking about its role in fiscal sustainability rather than allocating the entire burden to the OBR?