Irish Fiscal Rules

Anonymous1987

Some of the regular readers here will be happy to hear that the government is looking at setting fiscal rules and limits and possibly an Irish version of the UK Office of Budget Responsibility;

Brian Lenihan, the Minister for Finance, has asked an Oireachtas committee to examine the case for the so-called national fiscal rules, which legally impose tighter fiscal discipline on national governments.

Lenihan also asks the committee to look at the case for introducing independent sources for economic and fiscal projections. An independent body for budgetary matters was recently set up in Britain, and the minister wants to see how it might work here.


He has asked the committee to finish its work by September 15.

http://www.sbpost.ie/news/ireland/lenihan-proposes-national-fiscal-rules-to-limit-budget-deficits-50014.html

Initial thoughts, seems like a good idea but how independent can a fiscal authority really be? Secondly how rigid should these rules be? While they introduce an element of certainty to fiscal policy how would you strike a balance between fiscal rectitude and economic shocks like the present crisis?

Slippers 2

Anonymous1987 wrote: »

While they introduce an element of certainty to fiscal policy how would you strike a balance between fiscal rectitude and economic shocks like the present crisis?

Include a clause which specifies how low unemployment must get for these rules to apply?

Reillyman

^Sorry mate if this is off-topic, but I was just looking at the links in your signature. I've seen loads of similar articles and youtube videos all of a similar nature.

What I don't understand is why the info is being presented as a big secret/conspiracy, as if it is shocking or as if people don't know it. I mean, I'm studying LC Economics and even in that course we have a whole chapter dedicated to the origins of money and it explains the exact same things that your links did. Just wondering what the story is with that?

Slippers 2

Reillyman wrote: »

^Sorry mate if this is off-topic, but I was just looking at the links in your signature. I've seen loads of similar articles and youtube videos all of a similar nature.

What I don't understand is why the info is being presented as a big secret/conspiracy, as if it is shocking or as if people don't know it.

It is shocking that most money is issued by commercial banks (as liabilities against themselves) and used to buy assets (loan contracts, mortgage contracts) when it could be issued by a public body like the ECB and donated to the sixteen governments. I'd say people arrive at the 'big secret' view because the present system benefits so few people that we wouldn't still be using it if it was widely understood. For instance, lots of people still think that the government gets to spend any new money that is issued.

Reillyman wrote: »

I mean, I'm studying LC Economics and even in that course we have a whole chapter dedicated to the origins of money and it explains the exact same things that your links did. Just wondering what the story is with that?

Textbooks often make the mistake of saying that (with a 10% reserve requirement) the first bank, receiving a deposit of $100 of central bank money, lends $90 and the second lends $81 and the third $72.9 and so on until there are customer accounts approaching $1000. The bank can't lend that $100 to its customers because they don't have accounts at the CB. Instead it issues $900 of commercial bank money and lends this. Neither is it discussed what would happen to public and private debt levels if the $900 were donated to the economy instead of lent.

If there was a 100% reserve requirement commercial bank money would function as deeds to central bank money.

Think of it this way:

If there is a mixed system of central bank money and commercial bank money with a 5% reserve requirement and the governtment issues €15m, the money supply will be €300m. However, the government only got to spend €15m before it had to start taxing, and the people only got €15m from the government and had to borrow the other €285m from the banks. The people have €300m and debts of €285m.

With a 100% RR the govenment can issue all €300m. They can increase services or reduce taxes by €285m. The people have €300m and no debts.

Reillyman

Slippers 2 wrote: »

Textbooks often make the mistake of saying that (with a 10% reserve requirement) the first bank, receiving a deposit of $100 of central bank money, lends $90 and the second lends $81 and the third $72.9 and so on until there are customer accounts approaching $1000. The bank can't lend that $100 to its customers because they don't have accounts at the CB. Instead it issues $900 of commercial bank money and lends this. Neither is it discussed what would happen to public and private debt levels if the $900 were donated to the economy instead of lent.

Maybe in most textbooks, but in ours (LC Economics Denis L. Grady) it explains all about the reserve ratio, how they get $100 of deposits and create loans of $1000 or whatever.

Slippers 2 wrote: »

If there was a 100% reserve requirement commercial bank money would function as deeds to central bank money.

Think of it this way:

If there is a mixed system of central bank money and commercial bank money with a 5% reserve requirement and the governtment issues €15m, the money supply will be €300m. However, the government only got to spend €15m before it had to start taxing, and the people only got €15m from the government and had to borrow the other €285m from the banks. The people have €300m and debts of €285m.

With a 100% RR the govenment can issue all €300m. They can increase services or reduce taxes by €285m. The people have €300m and no debts.

Correct me if I'm wrong, but if there was a 100% reserve requirement, how would money be created? Maybe its the Neo-Liberal way we are taught in schools but I've always understood money=debt and vice versa?

Slippers 2

Reillyman wrote: »

Maybe in most textbooks, but in ours (LC Economics Denis L. Grady) it explains all about the reserve ratio, how they get $100 of deposits and create loans of $1000 or whatever.

Does the explanation use more than one bank?

Reillyman wrote: »

Correct me if I'm wrong, but if there was a 100% reserve requirement, how would money be created? Maybe its the Neo-Liberal way we are taught in schools but I've always understood money=debt and vice versa?

The central bank would change the number in the government's account to a bigger number (or print notes and hand them to the government).

There are two reasons that people say money is debt.

An account at a bank is a debt of the bank. It is a record of how much money the bank must give the customer when they ask for it (how much money the bank owes the customer). Page 151 of Bank of Ireland's annual report shows customer accounts as liabilities of €84.812bn. The bank has debts to it's customers of €84.812bn. We swap these debts (bank-accout-money), and those of other banks, amongst ourselves as our main form of money.

The other reason is the assets that banks use to back the money they issue are the debts of their customers, which they buy using the money they issue. In the report these assets are reported as 'loans and advances to customers' of €119.439bn. New money enters circulation when it is borrowed from a bank. It leaves circulation when it is paid back. It only continues to circulate as long as someone owes it to the bank.

Reillyman

Actually I just looked over it there and it just goes on about fiduciary issue and fiat money. It uses the Bank of England issuing notes as an example so I suppose it doesn't go into much detail, I'd say it was probably our teacher that told us all about this now that I think of it.

So all-in-all are you basically saying that all money should be backed up by liquid assets such as a gold standard?

Slippers 2

No. I'm saying that all commercial bank money (accounts at commercial banks) should be backed up by government fiat money ("central bank money"). I suppose it would be a bit like a gold standard with a 100% reserve requirement except that instead of gold it would use accounts at the central bank.

Edit: For anyone else reading this thread, I've since changed the second link in my signature. At the time it was this.
Edit2: and the first one was this, in case I change it after editing expires on this post.

Torakx

Some nice posts here.
I have a thread on the topic of fraction reserve banking and the basic running of the monetary system.Its a couple of pages and i am still lsowly researching more stuff from the last few posts.
If anyone would like to help me out id appreciate it.
Im basically trying to prove to myself that the banking system isnt a fraud or pyramid type scheme..So far im not doing so well lol
Heres the thread anyway if anyone is interested in helping me settle the issue.
http://www.boards.ie/vbulletin/showthread.php?t=2055878724

thebman

On topic great if implemented properly, not worth a crap if implemented with 30 different loop holes.

noodler

I met an economist recently who felt the whole idea of an Fiscal Council of some sorts was a bit pointless. One argument being that there was apparently something similar in the 80s here.

The main one though was that they only provide reassurance if people honestly feel the Government is corrupt, fudging the numbers etc and that that isn't the case with Ireland.

EDIT:

He does seem to be in the minority though, Philip Lane, the IMF, Regling / Watson etc all advocate it.

Time Magazine

noodler wrote: »

I met an economist recently who felt the whole idea of an Fiscal Council of some sorts was a bit pointless.

[url=http://ideas.repec.org/p/tcd/tcduee/tep0607.html
]Krogstrup and Walti (2008) "Do fiscal rules cause budgetary outcomes?" Public Choice 136:1:123-138.[/url]

Abstract: This paper focuses on the observed empirical relationship between fiscal rules and budget deficits, and examines whether this correlation is driven by an omitted variable, namely voter preferences. We make use of two different estimation methods to capture voter preferences in a panel of Swiss sub-federal jurisdictions. First, we include a recently constructed measure of fiscal preferences. Second, we capture preferences through fixed effects with a structural break as women are enfranchised. We find that fiscal rules continue to have a significant impact on real budget balances.

noodler

Time Magazine wrote: »

Krogstrup and Walti (2008) "Do fiscal rules cause budgetary outcomes?" Public Choice 136:1:123-138.

Abstract: This paper focuses on the observed empirical relationship between fiscal rules and budget deficits, and examines whether this correlation is driven by an omitted variable, namely voter preferences. We make use of two different estimation methods to capture voter preferences in a panel of Swiss sub-federal jurisdictions. First, we include a recently constructed measure of fiscal preferences. Second, we capture preferences through fixed effects with a structural break as women are enfranchised. We find that fiscal rules continue to have a significant impact on real budget balances.

Well is a council the same thing as rules and would a Council's advice be taken? Would it be binding?

The argument I was attempting to outline above, whether I believe it or not, was that a council may be little different to the ESRI or other independent forecaters who either:

a)habitually make mistakes
b)can only offer the advice to the Government

Time Magazine

I think there is something substantively different from the ESRI, a well-respected-but-private organisation, offering policy advice and a statutory body rallying against the government.

I'm thinking of the Competition Authority as a guide here. Sure, their advice to government is typically ignored, but they have exerted considerable influence in reforming many markets. They certainly have had a noticeable effect on competition. I imagine a fiscal authority would play a comparable role.

noodler

Time Magazine wrote: »

I think there is something substantively different from the ESRI, a well-respected-but-private organisation, offering policy advice and a statutory body rallying against the government.

I'm thinking of the Competition Authority as a guide here. Sure, their advice to government is typically ignored, but they have exerted considerable influence in reforming many markets. They certainly have had a noticeable effect on competition. I imagine a fiscal authority would play a similar role.

Well I would advocate it because it wouldn't be overly costly plus there is some empirical evidence in the paper you listed and a paper by Lane I read (or was he just citing the paper you mentioned?).

There are some issues, Lane metioned Sweden or Finland (I think Sweden) as an example but it is chicken and the egg stuff as to the causes of their fiscal fortitude.

Anyway if it is just advice then I would worry, yet if it is more then than that then would there be representation issues? "Who are these people we didn't elect telling our Government to lower social welfare? etc"

Anonymous1987

noodler wrote: »

There are some issues, Lane metioned Sweden or Finland (I think Sweden) as an example but it is chicken and the egg stuff as to the causes of their fiscal fortitude.

I don't see how that is an argument against a fiscal council. If fiscally conservative nations are more inclined to set up a fiscal council, it doesn't mean that setting one up will not make them more fiscally conservative, just that they were more inclined to do so if the first place. It certainly can't hurt to do say either way.

noodler wrote: »

Anyway if it is just advice then I would worry, yet if it is more then than that then would there be representation issues? "Who are these people we didn't elect telling our Government to lower social welfare? etc"

I'd imagine such a council wouldn't be immune to government pressure no matter how it is structured. Nevertheless, I doubt it would be like social welfare needs to reduced by X, more like we have to reduce our expenditure/raise our taxes to achieve a Y reduction across the board.

noodler

Anonymous1987 wrote: »

I don't see how that is an argument against a fiscal council. If fiscally conservative nations are more inclined to set up a fiscal council, it doesn't mean that setting one up will not make them more fiscally conservative just that they were more inclined to do so if the first place. It certainly can't hurt to do say either way.

Ah no, of course not. I didn't mean to imply that it would be misleading to the extent that it would be a negative, just the impact may be negligable without sorting more deep-rooted problems.

Anonymous1987 wrote: »

I'd imagine such a council wouldn't be immune to government pressure no matter how it is structured. Nevertheless, I doubt it would be like social welfare needs to reduced by X, more like we have to reduce our expenditure/raise our taxes to achieve a Y reduction across the board.

That sounds almost pointless if it were like that - I mean there is a 3% rule at the moment that isn't adhered to?

Anyway, I need to know more about how the UK version works and what it recommends.

Anonymous1987

noodler wrote: »

Ah no, of course not. I didn't mean to imply that it would be misleading to the extent that it would be a negative, just the impact may be negligable without sorting more deep-rooted problems.

Fair enough.

noodler wrote: »

That sounds almost pointless if it were like that - I mean there is a 3% rule at the moment that isn't adhered to?

Anyway, I need to know more about how the UK version works and what it recommends.

Yeah depends how rigidly it's enforced I guess. It would probably argue for general pro cyclical policies rather than just keeping within the 3% SGP though.

Time Magazine

noodler wrote: »

There are some issues, Lane metioned Sweden or Finland (I think Sweden) as an example but it is chicken and the egg stuff as to the causes of their fiscal fortitude.

Anonymous1987 wrote: »

If fiscally conservative nations are more inclined to set up a fiscal council, it doesn't mean that setting one up will not make them more fiscally conservative, just that they were more inclined to do so if the first place.

Read the abstract. The authors use two instruments to by-pass "voter preferences as an omitted variable" bias.

noodler

I can't tell if their electorate variable is taking into account stated preferences of a subsection of the Swiss electorate (some sort of survey for example) or merely who they vote for.

If it is the latter, then surely that is a little strange. More so in the Irish example, but has any party in Ireland got a particular reputation for fiscal restraint?

The possible negative effect on public investment is interesting if expected.

Anyway, isn't there a difference between fiscal rules and a fiscal council?

Surely the rules would be "no deficit beyond 3% of GDP" whereas a council might look at the "best" way to spend a budget (if going 3.5% of GDP one year is expected to contribute 0.5-1% of GDP growth then surely it should be debated?)

I'll read it again tomorrow.