It has been said that figures rule the world. Maybe. I am quite sure that it is figures which show us whether it is being ruled well or badly. Goethe

Despite the hoopla at the time, the 1994 Fiscal Responsibility Act (FRA) was an extension of the 1989 Public Finance Act (PFA) which set out new standards for the government accounts. The accounts are retrospective describing what has happened. The FRA required each government to set out its intentions. (Its logic is such that the FRA is now incorporated in the PFA.).

You should not confuse the principle of the FRA with the particular intentions. There is a lot of unease about the exact fiscal responsibility parameter of the current government. But compared to 25 years ago, we now know what this government thinks it is doing.

This column is not about the parameters but about the principle of holding the government to account, something which is steadily being extended to a richer range of measures. (That they are in an act of parliament does not mean it is appropriate for them to be in a constitution as Geoffrey Palmer and Andrew Butler suggest in their A Constitution for Aotearoa New Zealand. One wonders just how a Supreme Court, presumably as economically literate as the two authors, would rule on ‘the principles for responsible fiscal management in the conduct of fiscal policy and [the] regular reporting on the extent to which the Government's fiscal policy is consistent with those principles’.)

Many statutes are management rules. If they are broken, the courts do not incarcerate miscreants. Instead it is left to the public and parliament to hold them to account; They are likely to do so in a practical sensible way. For instance, when New Zealand suffers another global financial crisis or another major natural catastrophe we will not be surprised if the government breaks its fiscal responsibility parameters. Commonsense says that it should.

The caveat is important because this column reports proposed extensions of the range of targets. They need to be seen as guidelines to the government’s intentions. Insofar as the government fails to meet them, it is parliament and public opinion which holds the government to account – not the courts.

(The operation of the1989 Reserve Bank Act belongs to the same stable. The Governor and the Minister of Finance sign a Policy Targets Agreement which sets out the targets the Reserve Bank operations should focus on.)

The most innovative recent example is in the Prime Minister’s Child Poverty Reduction Bill which sets out targets for the reduction of child poverty. However, the bill does not explain how the targets are to be attained; that is the operational responsibility of the government. The effect of the bill is that it holds this and future governments accountable. The effect of the Bill is to introduce an explicit concern of equity in fiscal policy, widening the focus to social issues and not just ‘balancing the budget'.

The parallels between the Child Poverty Reduction Bill and the Fiscal Responsibility Act are obvious. In each the government is required to set future targets. In each the government chooses the benchmarks and pursues the means of attaining them. There is no explicit penalty for a failure. Again, it is left for public opinion and parliament to assess the government's success or otherwise.

There has been much public discussion about the degree of inequality in New Zealand. As best as I can judge, it has three major public concerns:

            (i) That the existing income (and wealth) distributions are not fair. This is an ethical concern reflecting a vision of the sort of society which New Zealand should be.

            (ii) That the existing income (and wealth) distributions threaten social coherence and social stability.

            (iii) That poverty among children affects their opportunity and life choices by compromising their health and educational attainment. This is not only unfair, but it results in poorer future economic and performance in the future.

Should not we target economic inequality on some wider indicators? Unfortunately inequality is hard to measure; there are many different indicators and they can contradict one another. That can be true for child poverty too. My main reservation about the bill is that in its current form it is equivalent to enacting the Fiscal Responsibility Act before passing the Public Finance Act. Without quality statistical standards it is too easy to corrupt the targets. .

We need an expert work program to develop the standards. What I can promise is that success in reducing child poverty will also reduce most sensible measures of economic inequality. (It may not affect those on high incomes much.)

The parallel with the PFA suggests that the exact targets should not be in the statute. Rather, each government should be required to set out its own targets outlining its intentions.

Another ongoing development is that the Treasury is proposing to assess policy through a Living Standards Framework (LSF). To be honest, I am a little unclear what exactly is involved. I think this is because the Treasury is evolving its ideas rather than having any preordained end to where it is going.

The Minister of Finance says that the LSF will influence the 2019 budget. So far there are about 60 indicators. If he goes through all of them, then the budget should be presented at midnight, to assist insomniacs. If he selects only some of them – well, that will tell us something, wont it?

I am not antagonistic to the exercise. I have argued that Treasury – indeed every government department – should have a set of indicators that should be used to check against their policy advice. Too often the departmental advice was framed around only a single concern – GDP (efficiency) in the case of the Rogernomic Treasury – with no attention to other policy issues such as equity, differential impacts on social groups, the quality of life  or the environment.

This represents the increasing recognition that GDP, which only measures aggregate material output, is an incomplete way of assessing wellbeing. The LSF represents a maturation of economic understanding – albeit one that many economists (sadly not all) understood aeons ago.

So while I am unsure what exactly the Treasury is doing I welcome the development. (This column will try to keep you informed as the framework evolves.) More generally, it represents a movement from narrowly evaluating economic and other policies even if it is too soon to tell where it will lead.

On the other hand, I am confident that if we get the Child Poverty Reduction Bill right – it will require considerable amendment to do so – there will be a big step forward in the incorporation of equity into economic policy.

PS. As I completed the final edit I came across Brian Fallow writing of the Zero Carbon Bill, which I have yet to examine closely. It looks as though it belongs to the same stable as the indicative policies discussed above.

Comments (6)

by Pat on June 15, 2018
Pat

"We need an expert work program to develop the standards. What I can promise is that success in reducing child poverty will also reduce most sensible measures of economic inequality. (It may not affect those on high incomes much.)"

That sounds like a statement that has some detail behind it.....is there?

by Brian Easton on June 16, 2018
Brian Easton

Yes, Pat. 

by Pat on June 16, 2018
Pat

Tirole?

by Brian Easton on June 17, 2018
Brian Easton

Apologies Pat, I was too brief. In formal economics, any shift of income to the poorest in society reduces inequality. Children and their parents/guardians are, by far, the largest group of the poor.
If you don’t trust formal economics you will recall that the big hike in inequality in New Zealand was in the early 1990s associated with the cuts in the incomes of family with children.
Theses are simplifications of a substantial body of theory and research largely done in New Zealand (which does draw on the international literature).

by Pat on June 18, 2018
Pat

Ok....thanks for the clarification.

Have read some of that work but got the impression from your article you were refering to something as yet unreleased....although reducing inequality may be as simple as increasing (or reinstating) the income of the poor in real terms, the past 25 odd years seem to indicate that is a political impossibility....thats why the phrase "it may not affect those on high incomes much" caught my eye.

My recollection of the years prior to 'the mother of all budgets' was of a salary band considerably more compressed than recent times.....and would suggest that wages/salaries are even stickier on the downside, even without inflated asset prices, so would expect some wage relativity to continue, certainly in the absence of regulation.

Anyways, thanks for introducing Jean Tirole (to me at least) in your previous piece.

by Brian Easton on June 19, 2018
Brian Easton

Ah!, Pat. Got a better understanding of your concern. What I am covering myself for, is that the income transfer is entirely from people in the middle income bracket to the poor, but there no or little transfer from top incomes. 

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