EU on right path with peer review on budgets

ECONOMICS:The EU has agreed new procedures for collective scrutiny of national budgetary and economic policy ideas, writes DAN O'BRIEN

WITH SO much brouhaha over banks and bonds this week, it was easy to overlook other important developments. In Brussels, Brian Lenihan was not only talking to the European commissioners who approve bank guarantees and oversee the restructuring of financial institutions in receipt of taxpayers’ money, he was also discussing less immediate, but no less important, issues with fellow finance ministers.

Apart from trying to agree ways to tax banks and their activities, the ministers – known collectively by the ugly acronym Ecofin – began putting flesh on the bones of a more intrusive peer review of each others’ economic policies.

The idea is to stop governments doing obviously idiotic and corrupt things, as Irish and Greek governments respectively have done, at enormous cost to their citizens.

Tuesday’s deal, the first of a number of changes, outlines new procedures and timelines for the collective scrutiny of national budgetary and economic policy ideas. In keeping with Europe’s unlimited capacity to generate gobbledygook, this has been christened the “European semester”.

The name notwithstanding, I am thoroughly in favour of the move, both in practice and in principle.

In practice, the need for such before-the- fact scrutiny is now unavoidable if the euro is to survive in the long term. The previous reliance on after-the-fact scrutiny and non- credible threats of sanction has not worked.

The bailout of Greece is the ultimate proof of this, but the failure of the Stability and Growth Pact was obvious as long ago as 2004, when France and Germany persuaded the other members to change the rules so they themselves could avoid censure for their fiscal misdeeds.

It is not only the need to redesign the euro’s basic ground rules that make these changes so essential – they are a good thing in and of themselves.

In principle, rules-based arrangements that are transparent and well-designed make all forms of human activity fairer, smoother and more efficient. If political history has been about anything, it has been about the creating of such institutions so that the exercise of power is circumscribed, thereby lessening the chances of it being misused and abused.

In the current European context, limiting stupidity and ensuring best practice through the use of rules that are well-designed is the way to go. This includes increasing peer pressure and introducing greater transparency in the formulation and implementation of government policy.

The recent history of capital spending in Ireland is one obvious example of why this is needed. In the days when we were one of the poorer EU countries, much of the capital budget came from richer countries, via Brussels. Clear-cut rules, rigorously enforced, meant all proposals had to be subject to serious cost/benefit analysis so money was not wasted on pet projects of governments, used to buy off interest groups or for any of the many other dubious purposes which fertile-minded politicians can come up with.

However, once these funds dried up, good habits were largely abandoned, and decisions on capital spending became less influenced by the need to achieve social and economic objectives and more about political gain. Decentralisation and the national spatial “strategy” are but two examples.

External mechanisms of scrutiny are particularly necessary because the willingness to create effective domestic arrangements to exercise such functions is so weak in this State.

Take, for instance, the most directly relevant issue – the setting up of an independent fiscal council. Such an entity, which many other countries have already put in place, can do a number of technocratic (not political) things to ensure the public finances are well managed.

Ahead of a budget, it can provide the economic and budget forecasts for finance ministries. This reduces the risk of projections being excessively optimistic, thereby allowing governments either to avoid politically painful reforms and/or spend more than is prudent. Post-budget, it can be mandated to give its views on whether the overall budget package stacks up arithmetically.

In any circumstance, such councils can contribute to the longer-term sustainability of public finances. In our current dire straits, a timetable for setting up an independent fiscal entity could, even in the very short term, help bring down the cost of borrowing by giving added credibility to the unavoidable and extended budgetary consolidation process under way. Anything that can be done in this regard should be done, and with all haste.

Brian Lenihan indicated earlier in the year that he favours establishing such an entity. Unfortunately, rather than getting on with setting it up, he batted the matter to an Oireachtas committee. The Finance and Public Services Committee is now commissioning a report.

If the Minister for Finance had made a binding commitment to implement the committee’s finding, this process might have some value, but he has not. This is a classic delay tactic, and a waste of taxpayers’ money.

A fiscal council could be designed in short order with all the available literature that exists. It could be up and running in jig time if the political will existed to drive the project (the coalition across the water took just weeks to establish their Office of Budget Responsibility, even if they have made a hames of it).

Despite blowing the public finances for the second time in a generation, there remains almost no desire to make any kind of structural change that would address the root cause of the problem. What is it they say about not learning the lessons of history?