Making Fiscal Policy Flexibly Independent of Government
Nicholas Gruen1997, Agenda: a journal of policy analysis and reform
The art of good government is to constantly review practices to see where improvements can be made. The guiding principles should be to design systems that make it clear what the medium-term goals are, to choose goals that can be communicated easily to the public and accepted as being rea sonable, and to ensure that the system is transparent so that people can judge whether policy changes are consistent widi the goals. (Ian Macfarlane, Governor of the Reserve Bank Australia, 1996) CONOMIC reform consists not only of achieving desired economic outcomes but also of building economic institutions that systematically improve the chances that desired economic outcomes will be achieved in the future. Un fortunately, the first of diese tasks often displaces die second. Yet insdtudonal re form can have large and long-lasdng benefits. Institutional reform frequendy involves distancing some area of economic activ ity from die day-to-day workings of government. The Industries Assistance Com mission (IAC), established in 1974, is die paradigm example in Australia. While it remained a stricdy advisory body, it exerted a strong influence on policy. Its radonale was diat it offset die invidious incentives diat governments faced: the few individuals who stood to benefit gready from industry assistance were well organised and capable of exerting considerable political pressure, while die many who stood to lose were poorly organised politically and often unaware of dieir losses. Odier economic reforms have reflected a similar rationale. For example, the corporatisation of government business enterprises has distanced governments from day-to-day commercial decisions; and over die last two decades the Reserve Bank of Australia has built up respect for its independence and its much enhanced role in managing monetary policy. Would institutional reform likewise improve the man agement of fiscal policy? In this article a possible reform to the institutions of fiscal policy is oudined, which would help guard against fiscal irresponsibility at the same time as substantially improving die scope for fiscal policy to be used in the man agement of the economic cycle.
