Debt, deficits and democracy

By:
17 Sep 12
Ian Ball

Fiscal policy can’t be outsourced to independent bodies in the same way that monetary policy can. Instead, politicians must be forced to be more accountable and transparent – to allow voters to make decisions based on accurate information

In August 2011, the United States economy hit its debt ceiling and a temporary, if conventional, solution was put in place. The Budget Control Act of 2011 increased the debt limit by $400bn, bringing a quick fix — a ‘band aid’ resolution to the 2011 debt-ceiling crisis, a crisis that had, at least theoretically, threatened to push the US government into sovereign default.

Fast forward to approximately the same time this year. The US Treasury Department recently reported that the national debt had topped $16trn. The world’s eyes are currently on the 2012 presidential election. The candidates — incumbent President Barack Obama and former Massachusetts Governor Mitt Romney — while polarised on many issues, agree that the national debt is a huge problem.

When faced with the daunting task of which candidate to vote for — with respect to the area of fiscal responsibility — on what do voters base their decisions?

A recent article featured in the Economist, Democracies and debt: Voters are now facing a harsh truth, discussed the contradictions of democracy and the harsh truths faced by voters. Voters are often tempted by politicians’ promises to send money in their direction, and as a consequence they may be tempted to vote for those very candidates who are the most fiscally irresponsible.

The article identified as a possible solution to this dilemma the removal, from elected officials, of the responsibility for fiscal policy, similar to the way monetary policy has been ceded to central banks in many countries.

However, rather than excusing elected officials from responsibility, politicians should instead be forced to be more accountable and transparent, and be presented with more powerful incentives to behave in a fiscally responsible manner.

Information is the fuel that powers a democracy.  In the fiscal arena, the information available to voters in most countries, developed or developing, simply does not provide the necessary power.  Electors are forced to make voting decisions with seriously deficient information.

Many appear to believe that the public debt is the best, or even an adequate, measure of the obligations a government faces, hence the frequent references to debt to GDP ratios as a measure of fiscal strength. In fact, debt tells only part of the story. The fuller, and richer, story encompasses assets, liabilities, contingent liabilities and net worth.

Truth be told, the accounting of the US Federal Government is not bad at all – certainly better than many other jurisdictions.  Notwithstanding this, the set of fiscal arrangements taken as a whole do not seem to inhibit the political decisions that lead to $16trn in debt, and a much larger number if non-debt liabilities and obligations are included.

There is an urgent need, not just in the United States, for institutional changes that will make it more difficult for elected officials to ignore the full set of factors — liabilities, contingent liabilities, and obligations like Medicare, as well as assets and other external factors — when they make either political promises or budgetary decisions.

What is needed is significant institutional reform – reform that provides politicians with more powerful reasons to focus on long-term fiscal sustainability, and provides voters with better information about the current fiscal position and the implications of the fiscal policies the candidates are presenting.

The accrual basis for accounting, budgeting and appropriations is a necessary but not sufficient element of such reforms. Financial statements should be prepared, and audited, against independently determined accounting, and auditing, standards.

Of equal importance in an electoral context is well costed and independently assessed forecasts of the fiscal and economic implications of candidates’ policies.  Also important are well defined and publicly disclosed principles of fiscal management and control, against which progress is tracked on a quarterly, or ideally monthly, basis.

Throughout the democratic world, voters often elect candidates who prove to be careless with their financial management. Steve Forbes once commented that when it comes to the national deficit, voters will put things in order.  Apparently, this is not true.  In fact voters may exacerbate the problem — in significant part because they are not equipped with the information needed to make an educated and informed choice.

  • Ian Ball
    Ian Ball

    Professor of Public Financial Management at Victoria University of Wellington and emeritus chair of CIPFA International

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