The idea of an independent budget office has been gathering steam for a while. Nicholas Gruen has been a long-term advocate of the creation of such an office, as has Christopher Joye. The controversy about the process of costing parties’ policies under the Charter of Budget Honesty has caused the argument to flare up, with the libertarian twosome Chris Berg and Sinclair Davidson joining in the calls for a budget office that reports direct to Parliament.

As I see it, there are a few different (perhaps complementary) conceptions of the role of such an office, in ascending order from the ‘weakest’ to the ‘strongest’:

  1. it could be responsible for costing parties’ policies in an election campaign;
  2. it could be an alternative source of economic and fiscal forecasts and projections, allowing us to evaluate the veracity of the Budget;
  3. it could appraise the likelihood that fiscal balance targets will be met given prevailing Government policy settings;
  4. it could be responsible for adjusting parameters (like tax rates) up and down in response to the business cycle, much like a fiscal equivalent of the RBA’s role in monetary policy; and/or
  5. it could set fiscal parameters within which the Government of the day must operate, for example stipulating a fiscal balance target.

So, a Parliamentary Budget Office (PBO) could be anything from a modest institution that performs independent costings through to a bureaucracy that would have the effective power to overrule the Government of the day. Most commentators seem to favour the creation of an office at the ‘strong’ end of that spectrum.

I think that would intolerably undemocratic.

I can see the benefit of an institution at the ‘weak’ end of the spectrum. The Charter of Budget Honesty seems to entrench the benefits of incumbency, allowing the Government of the day to have its policies costed by Treasury and Finance in private prior to the election being called, and then submit those same policies back to the public service to confirm the veracity of their own costings. Oppositions, on the other hand, have virtually no chance of developing policies that are as rigorously costed as the Government’s, because they lack access to the models of the Australian economy and the tax-transfer system that Treasury and Finance rely upon. I should note, in passing, that I have little sympathy for the current Opposition, as it was the Coalition that introduced the Charter of Budget Honesty and used the asymmetry it generated as a political weapon against the then-Labor Opposition at successive elections.

So, option 1 seems reasonable to me. Parties would be free to have their policies costed, without having them publicly disclosed, by the PBO prior to an election being called. This would allow them to refine their policies and amend their costings prior to public release. Then during the campaign, parties could choose to submit their policies to the PBO and have their costings released. I would strongly favour this remaining voluntary, as it is under the existing Charter for Budget Honesty. If voters wish to choose a party that has not publicly released independently-verified costings then they should be free to do so. Parties that choose not to participate in the PBO process will be crucified by the media and will suffer an electoral penalty as a result, so I think this is a sufficient incentive to encourage full participation by all viable parties.

Paul Kelly seems to also  favour a weak-form PBO that would “operate as an independent entity set up by statute servicing the parliament and estimates committees and providing costings during the campaign period”. Option 1 is fairly uncontroversial.

I don’t have any major philosophical objections to option 2, a parallel forecasting office, provided its role remains purely advisory. It could conduct its own forecasts of macroeconomic aggregates, from which forecasts of Government revenue and expenditure could be derived. It would provide these forecasts to Parliament and to the public, and we could have a public debate about the veracity of the Budget. Fine. I do think that perhaps this could end up being a glorified make-work program for economists and public finance experts. We already have two public institutions (Treasury and the RBA) that generate forecasts of future economic performance.

Would it be better to simply require that the RBA make public, as part of its Statement on Monetary Policy, a fuller range of forecasts of macroeconomic aggregates for the next four years? It currently publishes forecasts of GDP and non-farm GDP growth, as well as CPI inflation and underlying inflation. It could extend these beyond the two-year time horizon, and supplement them with a wider range of forecasts for things like WPI, household consumption, private business investment, final demand, exports, imports and so on. It presumably already maintains these forecasts. Releasing them would be a lower-cost option than creating a new economic bureaucracy.

I don’t support the stronger end of the spectrum, options 3 through 5. They threaten the power of the democratically elected Parliament to an extent that is unacceptable to me.  Nicholas Gruen, on Twitter, said “it doesn’t erode democracy any more than property rights or courts do. Democracies come with structures, this is one such”.  I disagree. Clearly he’s right that we have all sorts of institutional and constitutional checks on the will of the democratic majority. I disagree that the creation of a body that would have the potential to veto Government spending, or adjust tax rates, or set the overall fiscal goals of the Government, would be only a minor erosion of the sovereignty of the Parliament.

Supporters of a strong-form PBO might at this point exclaim “aha! but we already have an independent monetary policy authority! Is that not anti-democratic, too?” Clearly it is, to some extent, but I am willing to tolerate it. I don’t regard monetary policy as being as central to the business of elected Government as taxing and spending. I also believe that monetary policy is more easily devolved to a technical, bureaucratic institution, given that it effectively has one target (underlying inflation) and one policy lever (the overnight cash rate). Fiscal policy is much more complex, and setting fiscal parameters involves choosing between a range of competing economic ends, like reducing unemployment vs reducing the deficit.

The whole idea seems to imply that the conduct of fiscal policy can be independently, objectively assessed in some way, that there is some non-ideological set of ‘correct’ policy prescriptions. What would a PBO say in the event that we faced the situation prevailing in the US, Japan and much of Europe, with large budget deficits, weak growth forecast and deflationary fears? Would it advocate deficit reduction, or renewed stimulus? Both of these opposing options are advocated by respected economists, so which way would the PBO fall? It’s my strong argument that choices like these should be the province of elected representatives relying on expert advice, not bureaucrats. Macroeconomic policy-making is not an infallible science, it is inherently political, and it aggravates me to see it represented otherwise.

EDIT: In the original version of this post I implied that Sinclair Davidson would favour a system in which the PBO could disallow political candidates from office. Professor Davidson has made no such suggestion. I withdraw the comment and apologise for it. See the comments for further explanation.