Fiscal Policy and Democracy

Categories Domestic Affairs, Politics
Fiscal policy and democracy

I would like to put forward an argument for the decentralisation of fiscal policy in modern democracies in the light of inherent deficit bias and thus the arrival at a point beyond which fiscal action becomes limited due to spiralling government debt. It would be useful, in my mind, to outline a separate fiscal institution responsible for budget setting and tax rate selection that is independent of democratic process. The need and reasoning for this follows an argument based on the fickleness and short-term stupidity of the common voter who blindly follows the short-term outlook for the economy.

Say what you like about the intelligence of the common man, but it is clear that many, if not a majority, will expect a loosening of the Conservative government’s pursestrings pending a full economic recovery from the mire of 2008. Such a loosening; however, would place the government, and likewise the people who vote in their favour in the same bracket as bankers for their contempt for avoidable risk. For an analogy, consider a cash-strapped car-owner who suffers a breakdown and has to borrow money to fix it.  After fixing the car it is clear to the trained eye that it will breakdown again in the following months regardless of the manner in which the owner uses it. The owner saves up several months of wages to pay off the loan but then is left with a choice; either A) continue saving (at close to the rate he has been having to for the last few months), or  B) blow all his money from now on as he had before the breakdown. Under choice A he will be able to consume only minimally but still have enough reserves for if (and when) the car breaks down again. Under B he will have a short-term spike in consumption but will then find himself back at the start of the scenario when the car breaks down for a second time.

“…it seems almost obvious that a decentralised, appointed, fiscal body is the optimal policy response to a decade of fiscal devastation.”

It’s fairly easy to see from that analogous example that choice A is both the most responsible and, in the long term, beneficial course of action for the owner to take. Much like a continued period of government austerity would be responsible after the economic recovery. However, we have an election in 2015, and further cuts will definitely not be a vote winner with a public who has been bombarded with a hyperbolised austerity rhetoric by the media for several years. I fully expect to a see a party in power after 2015 which buckles to public pressure and loosens the pursestrings as soon as the deficit hangs close to zero.

We have to be sensible and observe that this is not the way that fiscal policy should be practiced. Its primary function is to stabilise the economy – not make it more volatile. In essence, the ‘austerity’ we are under at present is simply a responsible ‘skipping’ of a period which should cycle between spending and saving as the economy grows and recedes. If the required adjustment back onto the normative cyclical path does not occur then we only have democracy and public pressure to blame.

Therefore, it seems almost obvious that a decentralised, appointed, fiscal body is the optimal policy response to a decade of fiscal devastation. This would free up governments to become more of a regulatory rather than an active force in the economy and allow the public to  make decisions on the quality of their representation based on how the government budget is spent, rather than how much is spent in total.

(N.B. as a side note I’ve heard arguments for a democratically linked fiscal policy that jump up the intrinsic value hole and assert that the utility gained from autonomy outweighs that lost from an unstable economy. I contend that the average citizen isn’t really that bothered about democracy in specific policy issues – they’re far happier to elect whoever offers them more in a manifesto (or stick to party lines) and let the decisions be made. Taking away some aspects of fiscal policy from the elected government is not likely to reduce the intrinsic value of democracy to the average voter.)

 

 

Currently studying Philosophy, Politics and Economics at St Annes College, Oxford University. I have a keen interest in applied economics, food and most types of sport.

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