A Parliamentary Budget Office: why and how?

VNP / Phil SmithAs the election nears, the slew of policy announcements grows. And predictably, trailing those are accusations of shoddy maths and dubious costings.This pattern has become a regular part of election campaigns - along with the familiar question: who should check the numbers?There appears to be growing agreement that New Zealand could benefit from greater independent scrutiny of financial costings and plans. But should it focus on election promises or scrutinise governments' own fiscal forecasts and provide Parliament with another check on the Executive?The answer, as always, is it depends on who you ask. While Labour, National and the Greens have all expressed support for greater independent scrutiny of political promises, the parties diverge on what that scrutiny should look like.Minister of Finance Nicola Willis has pledged support for what she describes as a "light touch" costing unit that would help parties cost policies during election campaigns.Labour has also indicated it supports establishing an independent costing function, while the Green Party has long advocated for a Parliamentary Budget Office with broader responsibilities.When The House spoke to Green MP Ricardo Menéndez March last year, he argued opposition parties lacked the resources to properly cost their own policies."Parties who don't have access to Treasury have very little resource to actually cost their own policies. If we want to propose amazing radical things, like more of our health system being in public hands, [we should] be able to communicate to the public how much that will cost."But some commentators view policy costing as tangential, arguing the bigger issue isn't election promises at all but rather the lack of an independent body capable of scrutinising the government's own fiscal forecasts and holding the Executive to account.Treasury prepares several fiscal forecasts throughout the year, including the Pre-Election Fiscal Update (PREFU), the Budget Economic and Fiscal Update (BEFU), and the Half Year Economic and Fiscal Update (HYEFU).Because Treasury is government's principal economic adviser, reporting to the Minister of Finance of the day, Treasury is required to base its forecasts on stated government policy intentions; therefore some argue the forecasts are all problematic.It means that if a government says a temporary spending programme will end several years from now, Treasury must incorporate that assumption into its forecasts. Governments can use this to improve the official projections.Dr Eric Crampton, chief economist at the New Zealand Initiative, says an independent Parliamentary Budget Office, reporting to Parliament rather than ministers, could publicly test the government's assumptions.Dr Eric Crampton, chief economist at the New Zealand Initiative.Supplied"So in cases perhaps where an independent office might be sceptical that some forecast spend might end at the end of the forecast window, an independent office could put through a projection saying, well, we don't find it likely that these spending items would actually be cut in the last year. And here's what the accounts look like if they don't," Crampton said.The current system perpetuated debate around so-called "fiscal cliffs", where government spending is forecast to end despite political pressure to continue it, he said."If the government of the day said that a politically attractive project that would be difficult politically to end in three years' time will in fact end in three years' time, the modelling that an agency like Treasury has to put up has to believe that assertion."Crampton believes scrutinising government finances and fiscal forecasts should be the primary function of a Parliamentary Budget Office, which he said should be established "with a fairly narrow role, [and] establish its credibility in just testing the levels of spend, looking at the forecasts, ensuring consistency with budget rules".He acknowledged policy costing had merit as an ancillary function but said it presented practical and political challenges."It is the kind of thing that makes a Parliamentary Budget Office potentially more attractive to take up, especially around election years. There could be merit in it in providing sort of a neutral baseline across, but it is always fraught."Crampton identifies several challenges, including disagreement over which experts should cost policies, whether parties would present policies in a way that could be fairly evaluated, and the potential for parties to release policies too late for these to be assessed."There's no magic bullet," Crampton said.Victoria University of Wellington adjunct professor Ian Ball, who was heavily involved in developing New Zealand's financial management reforms in the late 1980s while working at Treasury, agrees the primary purpose of a Parliamentary Budget Office should be to strengthen confidence in government finances rather than scrutinising party manifestos."Very broadly, it's … analogous to the independence that has been given to a lot of reserve banks," Ball said. "Its main function is to provide assurance about the quality of fiscal policy and fiscal reporting."Like Crampton, Ball also sees a problem with Treasury's forecast assumptions being constrained by a government calling any probable continuing policy "temporary"."The Treasury is not in a position to include in the forecast the assumption that that will be continued. The forecast then is deficient."An independent body could publicly point out where official forecasts appeared to understate the government's likely spending path, he said.Ball is, however, more sceptical than many politicians about giving a Parliamentary Budget Office responsibility for costing opposition policies."Policy costings are always going to be contentious politically. So that makes it harder for the organisation to maintain an independent status."Instead, he argues its credibility would rest on remaining an impartial source of advice to Parliament."There are different ways it can have independence, but probably the easiest way is for it to be a parliamentary budget officer, like the Auditor General, who is clearly independent in terms of carrying out his functions."Ball also sees a Parliamentary Budget Office as only one part of a broader package of reforms to strengthen Parliament's oversight of public finances. While many overseas agencies also cost political parties' policies, he suggests importing other institutional changes should take precedence."In the UK, for example, the chairman of their equivalent of the finance and expenditure committee is always selected from the opposition," Ball said."The FEC, as it is in our case, would [ideally] operate in a way that hopefully was more representative of the more independent and non-partisan method of operating. In New Zealand, I think, it doesn't really work like that, and part of the reason is that the chairman is from the governing party and in a way, that's reflected in the actions of the committee."Crampton also suggested other ways Parliament could strengthen scrutiny of the Executive, including increasing the number of MPs. He argues a larger Parliament would strengthen select committees and improve Parliament's ability to hold governments to account."New Zealand runs a unicameral parliamentary system with a fairly small Parliament with an awful lot of people in the Executive … [which] is pretty dominant relative to Parliament.""The actual cost of [increasing MPs] is pretty low relative to the amount of money that the government is spending, right? So strengthening Parliament relative to the Executive could mean that you get a bit more thorough deliberation over policy before it gets enacted."Independent fiscal institutions now exist in many comparable jurisdictions around the world, yet despite more than a decade of discussion in New Zealand, no Parliamentary Budget Office has yet been established."We did come pretty close, where Treasury had worked up a model for one a few years ago, but then Covid hit and everybody got busy with other things. I would like to think that that kind of policy proposal could be resurrected and brought in in more normal times," Crampton said.Whether that happens or not may depend on if the current cross-party interest survives beyond an election campaign. For now, there appears to be growing agreement that New Zealand could benefit from greater independent scrutiny of public finances.Where opinions diverge is over what that scrutiny should involve: a "light touch" unit that checks election promises, or a broader Parliamentary Budget Office empowered to independently scrutinise governments' own fiscal forecasts and provide Parliament with another check on the Executive.*RNZ's The House, with insights into Parliament, legislation and issues, is made with funding from Parliament's Office of the Clerk. Enjoy our articles or podcast at RNZ.