This week we are looking at who should decide on fiscal policy. In particular, what should we make of arguments that experts – not politicians – should set the size of the budget deficit?
We’re back from our Easter break, and since we were last on the airwaves a book has been published by a certain former UK Prime Minister arguing – among other things – that elected politicians are unduly constrained by unelected technocrats, and that ministers should be freed from such fetters in order to enable them better to represent the will of the people. Not least, the book argues for scrapping the UK’s Office for Budget Responsibility, which currently offers advice on the likely implications of different fiscal policy decisions.
Well Liz Truss is – for better or worse – not our guest on today’s podcast. But the person who is has thought a great deal about how – and by whom – fiscal rules should be set.
That person is Stefano Merlo, Associate Lecturer in the Politics of Economic Policy here in the UCL Department of Political Science. Stefano is also currently finishing off a PhD in Political Economy and Political Theory at John Stuart Mill College in the Free University of Amsterdam.
Mentioned in this episode:
Should Experts Set The Fiscal Rules?
[00:00:00] Alan Renwick: Hello. This is UCL Uncovering Politics. And this week, we're looking at who should decide on fiscal policy. In particular, what should we make of arguments that experts, rather than politicians, should set the size of the budget deficit.
Hello. My name is Alan Renwick. And welcome to UCL Uncovering Politics – the podcast of the School of Public Policy and Department of Political Science at University College London.
We're back from our little Easter break, and since we were last on the airwaves, a book has been published by a certain former UK Prime Minister, arguing –among other things – that elected politicians are unduly constrained by unelected technocrats, and that ministers should be freed from such fetters in order to enable them better to represent the will of the people. Not least, the book argues for scrapping the UK's Office for Budget Responsibility, which currently offers advice on the likely implications of different fiscal policy decisions.
Well, Liz Truss is – for better or worse – not my guest on today's podcast. But the person who is has thought a great deal about how – and by whom – fiscal rules should be set. Responding to a literature that advocates the opposite approach to Truss – a move towards greater expert control – he argues for a middle way, in which a fiscal council informs debate but does not decide.
That guest is Stefano Merlo, who is Associate Lecturer in the Politics of Economic Policy here in the UCL Department of Political Science, and who is also currently finishing off a PhD in Political Economy and Political Theory at John Stuart Mill College in the Free University of Amsterdam. And I'm delighted that Stefano joins me in the studio.
Stefano, welcome to UCL Uncovering Politics. It's great to have you on.
And so let's go straight into the paper that we're exploring here. In it, you're responding to a view that says that the size of a government's budget deficit should be decided not by elected politicians, but by a body of experts.
Could you maybe start just by setting out that view? So what exactly are the proponents of this position claiming? And what's their argument for that viewpoint?
[00:02:16] Stefano Merlo: Yeah, thank you. Thank you so much for having me first of all.
It is definitely a very key discussion that has been taking place over quite some time. And I think it can be summarised roughly in kind of three points.
There's an observational point. And namely, there is public debt. It's definitely been on an increasing trend, at least in the past 20 years, definitely in the Eurozone. The UK has seen an increase, especially during the pandemic. But up until the 1990s and 2000, it was a relatively modest kind of exposure to sovereign debt markets. So there's an observational point that debt has been on an increasing trend.
But then there's a bit of a normative point, if you wish, among our macroeconomic points, that this overspending can be problematic. And we'll say why this is an overspending and not just a simple and normal and the kind of peaceful level of spending.
And it's problematic, and generally macroeconomists give different reasons why it can be problematic. One can think of having to then devote much more resources every year to pay off the interest on this debt. It may also happen that in phases of market turbulence, public debt becomes a bit of the problem that leads to instability in financial markets, especially when fiscal plans seem to not be completely covered. And so in the sense having a bigger public debt can expose you more to these market sentiments.
But then the third one is more of a descriptive point is that macroeconomic and political economy literature has tied this level of spending to specific incentives that politicians may have.
And so this kind of three-point description is just a way of kind of panning out the general argument that there is high public debt, that this can be problematic, and that the reason why there's been this level of spending is that politicians’ incentives during elections and during their time in office may lead to increase in borrowing.
[00:04:23] Alan Renwick: And you want to set up those politicians’ incentives a little bit more. So presumably it's to do with public attitudes and public opinion wanting lower taxes, higher spending, and not necessarily recognising that in the middle there there's borrowing that goes up as a result.
[00:04:37] Stefano Merlo: Yeah, that's, yeah, that's super interesting.
So definitely, from the perspective of attitudes, I think our colleague Lucy Barnes would have a much longer explanation from this point. I limited myself to kind of looking at how macroeconomists and political scientists have looked at this from a bit of a theoretical perspective, I guess.
So they would highlight, roughly – there are many more details – but roughly four channels through which politicians may, in the end, borrow more than what is macroeconomically optimal. So first-
[00:05:11] Alan Renwick: Sorry, sorry, before you go on, I should mention Lucy Barnes hopefully will be on the podcast in a couple of weeks’ time.
Absolutely. So we'll be able to hear her perspective from, as you say, analysing public attitudes on these matters. But yeah, so you're coming more from a kind of theoretical perspective in terms of how we would expect the political system to function.
[00:05:26] Stefano Merlo: Yeah, and I think what the reason I was pointing out on the attitudes is that it's not always the case that just citizens want more public goods, and that therefore they must always demand cutting taxes. So I think Lucy will have something really interesting to say along these themes.
Although, of course, one of the, you know, clear incentives is definitely elections. So when politicians are arguing in their next manifesto in general, they might, for instance, promise higher spending in order to attract future votes.
And the key thing here is that, fundamentally, the cost of these spending promises will be ultimately felt by future governments and also future citizens. So because the benefits materialise very quickly. So if you can spend a little bit more on, for instance, unemployment insurance, then this generation will definitely benefit from it. But the cost might be higher interest rates further down the line.
But there's also other mechanisms at play. So, for instance, governments might use their spending powers to limit some of the discretion that future governments might have.
So, for instance, imagine that I am perhaps a conservative politician that might prefer cutting taxes – or conversely, a Labour politician that might want to do the opposite of increasing government spending – well, the fact that I'm doing this might create a constraint for future governments at the time at which they might have to then reduce what they can do at their next election.
But there could also be cases in which ministers in deciding how much to spend on each one of their briefs will compete in a sense for the public's attention by saying, Hey, I am the one that has really championed and solved these problems. But in so doing, they will not coordinate very well. And the overall level of spending might therefore become out control, or at least higher than macroeconomists would see appropriate.
So these are kind of roughly kind of four mechanisms and incentives through which this deficit bias – this is how they call it – might come into play.
[00:07:38] Alan Renwick: So, yeah, so that's really interesting. And I guess it makes sense that economists would be concerned about these kinds of biases and would respond by saying well it's these pesky politicians who are getting in the way and if only we had policymaking by experts – by people like us, by economists – then the world would be a much better place.
But one of the interesting things about your paper is that you show that it's not just economists who have this view. There's also a view within political theory that says that actually it would be desirable to move this kind of decision making away from elected politicians.
[00:08:12] Stefano Merlo: Yeah, I think that is super interesting. And although I have to say that this view, it's probably…
So it's been proposed by Philip Pettit in the early 2000s. So there is definitely a very well-known political philosopher.
But I wouldn't say that it's widely shared in the democratic theory, precisely because we can already imagine that there are some anti-democratic tendencies in this way of thinking.
But the main argument, which I think is a very interesting one – and it's really good that it's out there, because then we can discuss it a little bit more in detail –is that basically when these electoral incentives come into play, then a view of democracy that is meant to be based on some common recognisable reasons gets somehow diluted.
So the idea of Pettit was that democracy is a system by which we can all select some reasons that we should all find appealing and compelling, and that once decision makers have this discretion at hand, like in fiscal policies, and they have an electoral incentive to use it to their advantage, well, then this fiscal policy cannot possibly be based on considerations that will be shared by all.
And so in this sense, the democratic element… So the argument that Philip Pettit puts forth is a democratic one. So he's not saying we should limit democracy. On the contrary, he's saying, these expert bodies are helpful to make it more democratic – to make the policymaking more democratic.
So in my reasoning, I was kind of torn – like what should I believe? Like, well, who do I listen to?
[00:09:53] Alan Renwick: Yeah, and can you just spell out for me again? I think you've basically said it. But can you just spell it again: in what way is it making it more democratic?
[00:10:01] Stefano Merlo: Well, the idea is that the politicians that we're electing are not actually using their powers as democracies would want them.
So the idea is that these electoral incentives, so the idea that politicians are there to react, and they can use their spending powers as an attractive tool to get more votes. That very feature leads them to choose in ways that are undemocratic. Because democracy means choosing based on reasons that everybody should find reasonable and to some extent understandable. Maybe they will not be the reasons that everybody wants to select and because we might all have a different view of what is in our interest and in a public interest, but they will still be able to see them as generally within the common consciousness and the common good.
And if these politicians have such leeway, then it cannot be possibly so that they are based on these reasons.
[00:11:07] Alan Renwick: So, so let's go down a little ‘What is democracy?’ rabbit hole here. Because I'm quite intrigued by this. So part of the argument there, I guess, is that democracy is not just about appealing to the majority, but requires to be able to appeal to everyone. Whereas politicians thinking about how to gain election are often seeking to appeal only to a particular part of the electorate.
But then there's also an argument that in appealing to everyone, or in responding to everyone, you need to be using arguments that could in principle at least be accepted by everyone.
[00:11:39] Stefano Merlo: Yeah.
[00:11:40] Alan Renwick: I mean, I guess many people will find that an intriguing argument because they'll think, well, surely there are no such arguments. This is a kind of empty set of conditions that we're trying to satisfy.
[00:11:51] Stefano Merlo: Yeah. I, agree. And that's, I think, that's the main kind of line of attack, if you want, on these kinds of arguments, because it's hard to know exactly. What, how do, what kind of reasons are these?
So, if we think about fiscal policy, so the prime kind of redistributive tool, it is hard to really find something that will break us and make us all happy or at least all share some intuition that this is a good way of distributing and then using public powers.
However, I do want to kind of perhaps defend the intuition behind this reasoning. And that I think was that fiscal policy shouldn't be seen as a way of simply favouring a certain set of interests that might be, for instance, financing your campaign or be particularly influential in an economy.
I think we're also from, I guess, the perspective of democracy that has been around for so many years. We sort of take for granted that politicians have to justify these decisions. But I don't think it's necessarily the practice all around the world. And, however, fiscal policy is definitely a policy area that every state generally controls.
So I also want to kind of recognise that there is something in this argument to try and keep at bay those that want, for instance, just you know, pave my road a little bit better at the expense of others, regardless of the cost.
[00:13:18] Alan Renwick: And how wide is Philip Pettit's argument? I mean, in principle, I'm thinking that, you know, across all sorts of different areas of policymaking, we can imagine that it's quite likely that politicians pursuing their own electoral interests are going to diverge from anything that could reasonably be justified in the way that he wants to be justified.
So could we end up undermining any kind of democratic process that actually involves voters in making decisions about who will be making the decisions?
[00:13:47] Stefano Merlo: Yeah, that is a very, very good question. I don't have an obvious answer to that, but I think I can see the areas of policymaking in which this argument becomes the most convincing and could be, for instance, on choosing electoral laws or on choosing the shape of the districts for voting.
So that seems to be a clear case in which those who play the game are deciding also the rules of the game. And that is one of those tough cases in which our intuition draws directly to some level of independence from these cases.
But, but then again, these are some kind of paradigmatic cases. But when you kind of go down more into the more normal policymaking that we generally discuss, then it's hard to know, you know, where to stand – like when the labour parties, for instance, might want to represent more the interest of workers, could that be considered a sectional interest that we shouldn't really consider? Or is that not based on a vision of the common good?
Or conversely, the Conservatives might defend the business interest. And business doesn't need necessarily to be against others. What could construct a vision of the good is around an idea of free enterprise, perhaps.
So I find it that, as a conceptual tool, it's hard to use practically when we then come to the question of, right, so what do we do with this definition of democracy – like what is left for majorities and what is left for, I guess, independent agencies. And that is kind of where I start my, well, kind of counter argument, if you wish.
[00:15:31] Alan Renwick: Yes. So let's get into your argument. So why do you think Pettit is wrong?
[00:15:37] Stefano Merlo: I think I think Pettit is wrong in putting so much weight on this definition of common allowable reasons.
But perhaps I should say first that his view of democracy is based on this idea of status equality, which I share. And it tries to describe the status equality between people using the notion of freedom as non-domination.
And the basic idea, without getting too much into the philosophical discussion, I guess, is that freedom as non-domination means to not have some arbitrary power over us that decides uncontrollably what's going to happen in our lives. So you can think of a despot or a dictatorial state in which citizens do not have any powers to actually control what's going on in their lives and control their laws.
And the key word here that will be problematised is the word ‘arbitrariness’. So what is an arbitrary decision? Is it an arbitrary decision if this sectional interest come into play and start deciding that we should build so many roads because it's the business lobby of road builders that is arguing for it? Or how should we operationalise this word ‘arbitrariness’? That is very much of a key problem here in this literature.
[00:17:00] Alan Renwick: And the kind of counterintuitive bit particularly, I guess, if you're Liz Truss – but I think for more generally as well – is that for Pettit, decisions being made by elected politicians in this area of policy are more likely to suffer from this arbitrariness problem – this problem of seeming arbitrary from the viewpoint of the average voter – than are decisions being made by a body of experts who are not chosen by voters.
[00:17:30] Stefano Merlo: Yeah, yes, absolutely. So, that is the key kind of philosophically complicated bit I find. I had to wrestle with that for quite some time. Because arbitrariness in a sense has this idea of seeing someone else's will in this action against you. And if you think about fiscal policy, that's the prime example of seeing a party manifesto coming to force and being actually seen, I guess, on the streets, you know, with, for instance, more or less public works that happen.
So, this is a prime example of discretion. Politicians have this level of discretion that ties very nicely, I think, but problematically, sometimes, with this idea of arbitrariness.
And Pettit has tied this idea of arbitrariness to these allowable reasons. Like, which reasons are we using to justify our actions. And I don't think there's a really good way to… There's no good route to follow. I would much rather see this level of arbitrariness and this definition of arbitrariness based on popular control.
I don't want to call it my own argument because actually Pettit himself ten years later revised this initial argument. And I think right now actually it leans much more into the less expert rule and a bit more of the usual format that we generally see in democratic discussion.
But the change is moving therefore from a level of public control away from this definition of common allowable reasons, which I think leads the argument in a strange direction.
[00:19:06] Alan Renwick: Yeah, and you want to just spell out exactly what your thesis is there. So how does that notion of popular control kind of-?
[00:19:12] Stefano Merlo: Yeah, so I take seriously the arguments of macroeconomists on deficit bias, namely that there can be something in the institutional matrix that leads politicians to choose and make choices that citizens would not want.
But I try to take it as a procedural argument. Namely, I think that all these results point to the idea that citizens cannot really see what politicians are doing with the initial mandate that they give them. Yes. Here's your vote. Go and try and implement it as much as possible. But actually, when you look at fiscal policy, it's really hard to really see who did what. What kind of policies were passed.
And fiscal policy is a particularly complicated matter. The budget is a really long document. It is made of with many inputs, with a lot of assumptions. And so it can be particularly hard for citizens to constrain government in this sense.
So, I would have much preferred to take these results from the deficit bias literature and see them actually as, you know, remind us that democracy needs some level of accountability and to reduce this information asymmetry between citizens and policy makers.
So in a sense, I'm trying to get the economists to help the citizens control the politicians rather than take the experts and take away more of the work from the politicians if one sees it in this sense.
[00:20:44] Alan Renwick: Yes, so you're accepting the kind of foundational argument from the economists that politicians, in the way in which our politics is often currently constructed, have incentive structures that may lead them to excessively large budget deficits.
But the solution to that is not to just remove the politicians from the equation. The solution is to change the incentive structures. And particularly to improve the information and transparency available for voters so that they can hold politicians to account better, in a sense, in a way that fits with their long-term interests more effectively.
[00:21:20] Stefano Merlo: Yeah, absolutely.
And I think there's a key shift here, in a sense, because I also conclude the paper by saying that I don't outright object to the outcome that happened from increasing public debt, namely higher public debt. I object to these informational asymmetries.
And so I think sometimes the discussion has also been framed very much in too much public debt, but I think very little time has been spent discussing how too little public debt could actually be a problem for the future.
So you might think that spending too little for future investment might be a problem in and of itself. And you might have politicians that maybe these days might want to be seen as promising huge investment and they're not wanting to deliver them for reasons and for influences that we cannot see.
And so, actually my argument takes the outcomes, to some extent, as within the politics realm. And I don't want to take a stance so much on those, but I really care about the process that leads us to these outcomes. And I think fiscal councils and these independent agencies can be helpful in really constraining these politicians and the general political system to our own advantage.
[00:22:40] Alan Renwick: And so just what exactly is the role of the fiscal council of experts? What are they doing?
[00:22:46] Stefano Merlo: Yeah. So, fiscal councils can help us as citizens, but mostly I would say the parliament itself, to constrain majorities by helping them understand what executives are choosing. So, for instance, think about spending promises or justification for spending cuts.
Perhaps it often happens that politicians and executives might say, well, there was going to be a recession in the coming years. We definitely have to cut the budget here and there. Well, that is obviously based on some kind of forecast of future GDP. And that forecast and the power to use that forecast could be completely in the hands of executives that might use it to their own advantage, for instance, to justify spending cuts.
And in this case, the fiscal council could come in and say, Well, look, actually, our forecasts say something slightly different. We don't have any party related interest in pushing either one way or another. Or at least that's my ideal case. So the parliament could then use the analysis of this fiscal council to say, Well, it sounds like this is not the way to go. You're going to have to explain that a lot better.
And the influence of these two teams together – the experts with opposition parties, but I guess civil society more broadly – should ideally help us eradicate any influence that comes from, again, these sectional interests that Pettit was referring to at the beginning, but without taking that policy away from politicians by giving us more tools to contest what executives do with this.
[00:24:29] Alan Renwick: I have to say you're very much with me pushing at an open door with this argument. Because I mean, I work on deliberative democracy and citizens assemblies. And so thinking about, you know, how can we enable more thoughtful, reasoned discussion about policy issues in the political domain? And how can we ensure that these are inclusive processes?
So the idea that we should be thinking about a fiscal council as a way of encouraging better quality discussion of these issues is one that I find very, very attractive.
I guess if I were trying to be sceptical, I would think, well, yeah, but is a fiscal council like this, that has a purely advisory role, is it really going to make a difference?
I mean, politicians in parliament face all sorts of pressures in terms of their time, in terms of their own desire for re-election. Are they really going to focus in and use this kind of information thoughtfully in order to ensure that fiscal policy is going in a good direction?
And similarly with voters, you know, we all have busy, busy lives. And as you've said, fiscal policy is really complicated. Can we really expect that a body such as this is going to make a positive difference?
[00:25:41] Stefano Merlo: Yeah, no, absolutely, I think these are very valid concerns. I think they should be seen, these kinds of bodies, they should be seen more broadly in a set of attitudes that we should have towards politics. So they can't be seen as some kind of silver bullet that just solves all our issues and actually leads us to some magical path of public debt increase or decrease.
I think, however, that having some better clarity around issues of, for instance, GDP forecast or analysis of fiscal projections – so matters in which, you know, in theory, we should have a different kind of disagreement than in the issues of politics and moral reasoning – could actually really help us take away some reason for doubting the other side and for confusing the discussion overall.
And I'm also aware that there's big arguments against leaving too much to economists because economics is still a social science. So I guess we shouldn't just trust them as our doctors in telling us, you know, just how much of this drug should you take.
But I think that fiscal councils still could be part of some form of bipartisan consensus. That there should be someone that tells us some basic parameters of macroeconomic policy around which we can shape our common discussion.
[00:27:15] Alan Renwick: And I guess, you know, if you look in the UK., the Office for Budget Responsibility is essentially a fiscal council of the kind that you're advocating. I mean, I think you would want it to be constituted a little bit differently, more independent from government and so on. But it is essentially this kind of body.
And it does affect the debate. And governments are held to account and asked questions about the claims that they're making, about the effects of their tax and spending decisions that they probably wouldn't have been asked if the Office for Budget Responsibility wasn't there making its forecasts and analyses of what's happening. So yeah, I think we have direct evidence that this does work.
But I guess that then leads on perhaps finally to the Liz Truss point. And you've kind of hinted at it there in your remarks: that there is a perfectly legitimate concern that a body such as this can become kind of captured by one particular viewpoint, one particular orthodoxy; that it doesn't actually serve effectively the wider public good; that there may be matters of ideology at stake in our understanding of the impact of fiscal policy decisions that a body such as this is going to take one view on, but the elected politicians might take a different view on.
How do you respond to that critique?
[00:28:38] Stefano Merlo: Yeah, I think this is a definitely a very tricky issue also from my own argument in a sense that it's basically the question of who really are these experts? You know, who are these people?
And I don't think there's an easy fix to this to the extent that we have to rely on some form of professional incentives around, for instance, academia, to help us point to those that seem to have this reputation. It ultimately is about reputation in these cases.
And again, it goes back to the problem of informational asymmetry. How do you identify the expert if you're not an expert yourself?
I think the best that can be done – and I think it goes against current practice, at least in Europe, and I suppose also in the case of the OBR – will be to expand the selection of these committee members from these fiscal councils, perhaps actually giving a say also to academia in helping select some of these voices.
At the moment, most fiscal councils also in Europe tend to be appointed by the government. There generally is a vote in parliament. But in my preferred version there would be a much more collegial body that requires some form of, you know, broader unanimity within parliament. And as I said, perhaps including some voices from university, which should generally be outside of, to some extent, the tussle of politics, at least on that decision.
But again, yeah, it's a really tricky issue on how to actually choose these experts. And I really don't want to sound like they are there and they're easy to pick at all.
[00:30:26] Alan Renwick: Sounds like you've got some more work in this area that will keep you going for some time to come.
[00:30:30] Stefano Merlo: Yeah, no, absolutely. I think in my own case I started studying economics and moved on to political philosophy and I thought that things would get a little bit easier in the sense that the questions could seem to be more linear in a sense.
And now I'm actually seeing just how complicated putting the two things together is. Because finding institutional solutions to the problem of expertise seems to be an endless kind of pursuit. But yeah, hopefully this argument has push that a little bit closer to knowing what we should be doing with fiscal policy.
[00:31:05] Alan Renwick: Well, I look forward to further conversations as you take this work further. But this has been a really great exploration of some of the underpinning ideas in this area. So thank you, Stefano, so, so much.
[00:31:16] Stefano Merlo: Thank you for having me.
[00:31:17] Alan Renwick: We have been discussing the article ‘A Republican Assessment of Independent Fiscal Institutions’ by Stefano Merlo, published last year in the Journal of Politics. Full details, as ever, are in the show notes for the episode.
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