The world’s oldest fiscal watchdog…CPB Netherlands Bureau for Economic Policy Analysis

Here is an amazing paper on an institution which is really different. It is not just the first fiscal watchdog but does some amazing functions  as well.

The sovereign debt problems in European countries have increased the interest in fiscal watchdogs. This paper discusses the world‟s oldest fiscal watchdog, CPB Netherlands Bureau for Economic Policy Analysis (CPB). CPB was founded directly after World War II. It has built a reputation of independence and quality, while it has also achieved a solid position in Dutch policy making. CPB provides (i) the macroeconomic forecast underlying the annual budget, (ii) a midterm review of the state of public finance at the start of each election cycle, (iii) cost-benefit analyses of all kind of policy proposals (from education to physical infrastructure), and (iv) an assessment of the economic impact of the platforms of political parties before the election.

Four lessons can be drawn from 65 years of Dutch experience. Firstly, a reputation of quality and independence is crucial for the success of a watchdog. Building such a reputation takes time. Secondly, the scope of activities should not be limited to fiscal policy only. The broad scope of CPB‟s analyses has contributed to shared public understanding of relevant trade-offs and policy options. Thirdly, the effectiveness of CPB depends crucially on a clear demarcation of the distinctive roles of CPB and political parties. Welfare theory provides little guidance in drawing this demarcation line. Fourthly, being part of the government has the advantage of getting inside information and being effective in the daily policy making process, but the disadvantage that the actual or perceived independence is more difficult to maintain.

Apart from giving an outlook on the state of economy and budgets, what is really interesting is its assessment of economic impact of each political party before the election.

A unique feature of the Netherlands is that CPB publishes an analysis of the economic effects of election platforms of political parties. This evaluation serves a number of goals, some of them intended when the first evaluation was conducted in 1986, some of them evolved over time.

Firstly, discussions with CPB help political parties to improve their program. Many policies initially proposed by parties have unintended consequences. This applies in particular to all kind of tax proposals. CPB systematically investigates proposals and helps improving them on the technical side. In practice, many proposals are adjusted during the process, following CPB‟s advice. 

Secondly, an effect not foreseen in the first evaluation in 1986 was that the evaluation turned out to be a great help to facilitate negotiations between political parties on the program for a new government. By having a common denominator for the calculation of cost and revenues of all proposals, disputes about facts are avoided during the negotiations.

Finally, the evaluation plays a major role during the election campaign. The evaluation is published several weeks before the election. CPB tries to publish at least 12 weeks before, but this is not always feasible in practice, in particular when the elections are held unexpectedly due to the fall of government. By publishing well ahead of the election CPB tries to limit its direct impact on the election outcome. CPB conducts this evaluation at the request of each political party and a party that does not want its platform to be included in the evaluation is left out. In practice, all major political parties participate in the analysis. The revelation principle is at work here, because by not participating in the evaluation, a party signals to voters that its program is economically and financially unsound. 

It works as a fine nudge. All parties are nudged to participate in the program.

But this is just amazing to note. To have an institution which helps you assess economic impact of all political parties wishlists. It becomes like an exam for all political parties to pass. The debate also becomes more informed with electorates knowing what each one plans to offer.

Though there are objections to this exercise:

First, the exercise might constrain the political debate too much, by CPB disapproving proposals on what are presumably technical arguments. For some topics, this might be asking too much of what economic science is able to provide. CPB therefore deliberately restrains its judgement to avoid excessive interference in topics which economists might interpret as merely positive issues that can be settled by purely positive economic arguments, but which political parties -and society in general- consider to be political issues.

A second objection against the evaluation is that the exercise biases the debate in the direction of proposals of which CPB is able to evaluate the effects quantitatively

Third, the exercise might bias the debate in favour of the short run implications, since the longer run implications are much more uncertain and materialize beyond the next government period.

Despite this criticism, the evaluation  continues.

Barring this, paper has a good historical a/c of how CPB came up and added various functions over the period. In the end:

To some extent, the role of CPB in Dutch fiscal policy is unique in the world and reflects typical Dutch circumstances
(e.g. a prevalence of coalition governments and the independent position of CPB since World War II). Nevertheless, the Dutch fiscal institutions, procedures and specific rules could be relevant and transferable to other countries. The Dutch model with a mix of an independent expert institute and a high-level advisory group on fiscal policy can be interesting.

India too has been under coalition governments for sometime now and is expected to stay esp at the centre level. But we have nothing like this barring independent opinions on some party. Nothing like this where an institutional fix helps encourage debates on economic promises of each party.

Just amazing to note this. Also see the reference list of some very useful papers on Dutch econ policy and fiscal watchdogs…

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