The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Saturday, May 22, 2010

British cede power over budget to independent authority. Is Australia next?

In a potentially important development, which could presage future change locally, the UK Government has transferred power over the setting of budget forecasts to a new “Office for Budget Responsibility” (OBR). I think that this is broadly similar to ideas proposed here by Dr Nicholas Gruen and Malcolm Turnbull.

In addition to supplying the economic projections on which any budget would have to be based, the OBR will have a mandate to appraise the probability that the government will actually meet its own fiscal objectives (eg, cutting the deficit), which would doubtless be a useful innovation for all constituents.

As The Economist notes, this move is similar to the independence granted to most developed country central banks around the monetary policy setting process (in Australia and the UK such independence was only relatively recently enshrined in 1996 and 1997, respectively).

There is no reason why the Rudd Government should not follow suit (indeed, I would have thought Lindsay Tanner would love it). The prospect of an OBR-like-constraint on fiscal policy could be a powerful election idea that would be well received by a skittish electorate that is focussing more and more on economic sustainability. Anyways, here is some of what The Economist had to say:

"THE parallel is beguiling. Within days of taking over the Treasury in 1997 Gordon Brown ceded his grip on interest rates to a new monetary-policy committee (MPC) at the Bank of England. Less than a week after George Osborne, in his turn, became chancellor, he announced plans to hand over power to a new Office for Budget Responsibility (OBR)...

Disregarding its views would be risky. As Mr Osborne said this week, he has deliberately created a rod for his own back by removing his right as chancellor to have the final say on budget forecasts.

The OBR’s clout will come from the independence of the three-man committee chaired by Sir Alan Budd, who was one of the founder members of the MPC. The other two are Geoffrey Dicks, a City economist, and Graham Parker, a former fiscal-forecasting specialist at the Treasury. The new body will be able to draw on that department for economic models and manpower...

One big change that Sir Alan will introduce is highlighting the uncertainty of fiscal forecasts. Like the central bank with its inflation projections, the OBR will stress not just the most likely path for the budget deficit but also what the chances are that it will be bigger or smaller. That in itself will be a sobering lesson."