Imagine that before the US election the Congressional Budget Office published a detailed analysis of the economic implications of each candidate’s policies for different categories of government spending and taxation, and their impact on GDP, unemployment and much more. These were based on detailed and comprehensive accounts provided by both parties, and not unspecified aggregate numbers with no policies attached such as in the Ryan plan. You would have to agree that this would give voters a more informed choice, but you might also say that it was politically impossible in any country. Well have a look at the Netherlands, which will hold elections on 12th September. That is exactly what happens there, with the analysis provided by their fiscal council, the Bureau for Economic Policy Analysis (CPB). (If you are at all interested, the detail provided in the CPB’s analysis is extraordinary (pdf) – for example, it predicts what impact each party programme will have on greenhouse emissions.)
That is the positive news. The not so good news is that unemployment is expected by the CPB to rise by 1% over the next two years, and almost none of the major parties are planning to do anything to try and stop this. How could they stop it? Being part of the Eurozone means that fiscal policy is the only aggregate policy tool available. As a result political parties should be planning to raise budget deficits – increasing government spending or cutting taxes – on a temporary basis to keep demand rising in line with supply. Yet only one major party is planning to do this: the far right ‘Party for Freedom’, whose refusal to vote for the deficit reduction plans of the previous coalition brought down the government and sparked this election.
Now increases of 1% in unemployment may seem small beer compared to what is happening in Spain, for example. But unlike Spain, there is no market pressure in the Netherlands to reduce budget deficits. Instead the pressure comes from the Eurozone’s fiscal rules. And it matters because if countries like the Netherlands and Germany are reducing output and increasing unemployment by trying to cut budget deficits, then this makes the task for countries like Spain much more difficult.
General developments in the Eurozone are proceeding as I thought they might when I recklessly forecast that the Euro would survive. Because the process involves a power struggle between different economic ideologies, and countries, it is slow and painful and full of potential hazards and uncertainties: will the conditionality imposed on Spain and Italy to obtain ECB help be light enough to be politically acceptable to these countries, for example. (Paul Collier has an interesting post on this here.) I still worry that Germany might demand Greek exit as a token victory, but I’m relying on wise heads, and the IMF, to make sure that does not happen. However survival will still come at the price of a prolonged Eurozone recession, and here the fiscal rules are the central problem, as the Netherlands illustrates all too clearly.
The voters of the Netherlands are being given some choice, as Matthew Dalton points out . The Liberals (right of centre) want to cut the deficit by reducing spending, while the socialists want to raise taxes on high earners, and would increase the deficit compared to baseline in 2013 (but not 2014). However according to the CPB: “For almost all parties, unemployment will increase, compared to the baseline.” The exception is the right wing Freedom Party: it has the only programme that raises growth (slightly), and it is the only party that plans to increase the deficit in both 2013 and 2014 (all relative to baseline). So voters can vote against what I have previously called budget madness, but only by voting for a party that wants to abolish the minimum wage and halt immigration from non-Western countries.
I started this post with the CPB, so let me finish with them as well. The CPB is in a delicate position, as it wants to retain the trust of all the political parties for being impartial. However, in the FT (£) in February (also available here), the Director of the CPB Coen Teulings wrote an article entitled “Eurozone countries must not be forced to meet deficit targets” (jointly written with Jean Pisani-Ferry). The Dutch central bank, on the other hand, has been calling for the urgent ‘rationalisation’ of the public finances. (Its head was appointed by the previous coalition that proposed deficit cuts.) Which goes to show that fiscal councils tend to be wise, but central bankers talking about fiscal policy can be – well - not so wise.