Why doesn’t NZ need a fiscal rule?

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. Read more

School choice and paternalism

There is a very interesting report out from the Social Market Foundation that investigates the characteristics parents value in a school. The core result is that less-wealthy families do not choose schools on the basis of academic achievement:


This leads the SMF to express concern that school choice may not lift educational achievement because some parents do not consider it important. They then recommend Government intervention to promote the primacy of academic success. The line they’re treading between free choice and paternalism is a fine one. One the one hand, they want free school choice to improve the quality of schooling. On the other hand, they have a prescriptive view of what school quality means. Read more

Performance pay for the public sector?

In December last year The Work Foundation released a comprehensive review of performance-related pay in the public sector:

PRP schemes can be effective in improving outcomes across the three public services for which evidence is available (health, education and the civil service), although the central conclusion is that the outcomes from PRP are mixed, which much dependent upon organisational and occupational context and scheme design and implementation. Where positive effects have been found, effect sizes are sometimes small and may also be short-lived. As well as evidence gaps across much of the public services, the weight of evidence also varies, with the more robust evidence coming from education and health rather than the civil service. Cost-effectiveness data to assess the value for money of PRP interventions is also rare.

The implication is that performance-related pay isn’t a quick fix: it requires careful development to fit it to the context, and organisations might take a while to adapt to it and see benefits. Without more examples in the public sector it isn’t possible to say whether it will prove cost-effective.

Alesina on austerity: round 2

Alberto Alesina has returned to the fray with a new paper that shows how tax rises are far more damaging than tax cuts. With a new dataset covering the recessionary years, this is the most up-to-date evidence on fiscal consolidation available. Importantly, they are unable to discern evidence that the ZLB caused the effects of fiscal policy to be greater. Of course, this isn’t the final word and it’s only one piece of evidence, but I’ll be reading it closely over the next few days.

Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases. The difference between the two types of adjustment is very large. Our results, however, are mute on the question whether the countries we have studied did the right thing implementing fiscal austerity at the time they did, that is 2009-13.

The Economist’s misguided lecture to macroeconomists

In a bizarre leader article The Economist praises microeconomists for their use of data to better predict people’s behaviour and recommend macroeconomists do the same:

Macroeconomists are puritans, creating theoretical models before testing them against data. The new breed [of microeconomists] ignore the whiteboard, chucking numbers together and letting computers spot the patterns. And macroeconomists should get out more. The success of micro is its magpie approach, stealing ideas from psychology to artificial intelligence. If macroeconomists mimic some of this they might get some cool back. They might even make better predictions.

I’m tempted to label this as obvious baiting but the misunderstanding is deeper than that. Read more