Fostering Inclusive Growth: A Golden Opportunity to Put Future Growth on a Socially Sustainable Footing

NAECLamia Kamal-Chaoui, Senior Advisor to the OECD Secretary-General and Coordinator of the Inclusive Growth Initiative and Shaun Reidy, Policy Analyst, Inclusive Growth Unit

The crisis left many a nation teetering on the edge of financial and economic catastrophe. Thankfully, governments managed to pull us back from the brink. Yet, as we have stabilised our economies, the gaping chasm between our societies’ ‘’haves’’ and ‘’have-nots’’ has come into sharp relief.

In the last seven years, in a context of prolonged fiscal retrenchment, we have watched as OECD unemployment levels hit a peak unseen in a generation and as precarious work has boomed. We have also seen inequalities of income and wealth rise to their highest levels in some 30 years. In 2012 the average income of the top 10% of earners in the OECD grew to just under ten times that of the bottom 10%, up from around 7 times in the mid-1980s. In terms of assets, the top 10% controlled half of total household wealth in 2012, with the bottom 40% owning only 3%, in the 18 OECD countries with comparable data.

To be sure, these problems did not originate with the crisis. The economic seeds of the inequality we are reaping today were sown over many years. Structural changes in the labour market, the forward march of technology, integration into global value chains, and the decline of unionisation all contributed to growing wage dispersion between high and low-skilled workers.

But it was not just bad luck that this occurred at the very moment that the traditional redistributive mechanisms of the state began to weaken, in a climate of growing fiscal pressures and increased tax competition. Specific policy choices meant some people losing out. Prior to the crisis we relied on growth to paper over the cracks. We can no longer. Yet for want of a better alternative many individuals, companies, and countries have simply returned to business as usual.

With our economies going nowhere fast, we need to take this opportunity to fundamentally re-think how we grow and who benefits from that growth. Taking its lead from the New Approaches to Economic Challenges (NAEC) project, this is precisely what the OECD’s All on Board for Inclusive Growth initiative sets out to do.

The OECD’s work on Inclusive Growth understands that GDP growth is important to improving everyone’s living standards, but it also recognises that it is not the be all and end all. We cannot continue to blindly pursue growth at all costs without a thought to who benefits from it, or to how socially sustainable it is. That is why our approach to Inclusive Growth moves beyond money alone to look at how people are faring in other areas of life that matter to their well-being like their health, jobs and disposable household income. That is also why we look past the statistically constructed ‘average person’ to get a real and clear picture of how each part of the income distribution is doing.

Our work on Inclusive Growth has made it clear that over the long-run growth will neither reach its potential, nor be sustainable if it is not inclusive. In many ways this is self-evident. Growth built on an ever smaller base, like a building built on shrinking foundations, will be gradually undermined and ultimately collapse. Whilst from a political perspective, a public growing weary of the worst excesses of inequalities will likely not tolerate them indefinitely.

These dawning realisations have led to the issue of inequality gaining increasing political traction. Many citizens are concerned about the implications of increasingly unequal societies and many governments have started to talk about the issue. Much of that talk has been about promoting equality of opportunity. Such talk is to be welcomed, but talking about opportunity is not enough. We also need to focus on outcomes.

Inequalities of opportunity and of outcome are two sides of the same coin. The unequal outcomes of one generation tend to become the inequality of opportunity of the next. Simply giving a child from a poor background access to the same opportunities as a wealthy counterpart will not suffice. The balance of life chances is stacked against children from lower-income backgrounds. Children born into poorer families suffer from any number of disadvantages in relation to their richer peers: they are likely to have poorer diets, more likely to be bullied in school, have parents with shorter formal education and to live in workless households. Overcoming these obstacles can be nigh on impossible.

Dealing with this calls for a much more comprehensive approach to Inclusive Growth that does not only give people equal opportunities, but also bestows them with the ability to make the most of those opportunities. The OECD’s Framework for Inclusive Growth aims to help policy makers do just that, setting out to assess the effects of policies on income and non-income outcomes simultaneously. The Framework seeks to enhance policy makers’ understanding of the trade-offs and synergies that exist between pro-inclusiveness and growth-friendly policies.

In practice, pursuing Inclusive Growth calls for an approach that promotes the creation of high-quality jobs. An approach that understands the benefits of flexibility for employers and employees, but also grasps the importance of ensuring that a workforce is properly protected and supported by a strong social safety net, and activation policies to help people back into work. It calls for an approach that recognises the importance of increasing skills and improving education, but also sees that such efforts will be of little value if investment is not forthcoming to create skilled jobs in sufficient numbers. It also calls for an approach that underlines the value of progressive taxation to make sure no one is left behind.

Of course, each country has different goals and priorities, and distinct preferences as far as inequality is concerned. But we also need to have critical awareness about where country preferences come from. In many instances there is a clear danger of elites, who have an important role in setting national preferences, determining the political direction of travel for their own ends. Transparent and accountable government and well-structured institutions are key to avoiding that risk.

By pursuing Inclusive Growth we can empower individuals, ensuring that everyone benefits from growth, and that everyone has the chance to contribute to growth in the future. Businesses stand to gain just as much from this. Companies rely on healthy, well-educated, productive workforces to succeed, and they rely on effective labour market policies to help supply them. Inclusive Growth means more and better resources for businesses to draw on.

Now governments need to move this agenda forwards. With the Crisis fresh in the memory and inequality grabbing the world’s attention we have a golden-opportunity to put growth on a socially sustainable footing, and turn greater inclusiveness into a strong driver of economic growth. We cannot afford to let this chance go to waste.

 

Useful links

OECD Inclusive Growth Initiative

OECD Centre for Equality and Opportunity

OECD Inequality webpage

Turning the Tide towards Inclusiveness

NAECStefano Scarpetta, Director of the OECD Employment, Labour and Social Affairs Directorate

A rising tide lifts all boats, or so many used to think. But the evidence suggests that over the past three decades in a large number of advanced and emerging countries economic growth has disproportionally benefited people who are already relatively well-off, leaving the lower- middle-class lagging behind.

Today the average income of the richest 10% of the population across the OECD is almost ten times that of the poorest 10%. We observe also a worrying pattern: in each of the past three decades the gap has increased by one factor – it was 7:1 in the 1980s, 8:1 in the 1990s and 9:1 in the 2000s.

These averages hide large differences across countries, from a ratio to 6:1 in Nordic countries, to 19:1 in the US, almost 30:1 in Mexico and Chile and beyond 50:1 in South Africa and other emerging economies. But over the past decades we have observed a convergence towards higher levels of income inequality (although some emerging economies have managed to reduce income inequality, albeit from very high levels). The situation is even worse when we look at the distribution of household wealth. Comparable data collected for the first time by the OECD for 18 OECD countries show that the top 10% of households owned half of all total household wealth in 2012, while the bottom 40% owned a meagre 3%.

Not only do high levels of income inequality challenge social cohesion, they also tend to reproduce themselves from one generation to the next. This happens largely because they hinder the opportunities of the lower middle-class to access the same education and health opportunities as their better-off counterparts. The gap in educational outcomes between individuals from a low socio-economic background and those with median and high background increases dramatically as one moves from a more egalitarian to more unequal country. Similarly, a new set of OECD data shows that at age 25, men with university education can expect to live almost 10 years longer than men with primary education. Surely we can agree that people’s life chances should not essentially boil down to their wealth, age, gender, or place of residence.

The risks posed by such lopsided growth are evident. Our recent publication In it Together revealed that economies grow more slowly when lower earners get left behind – and we are talking about as much as 40% of the population. The rise in inequality observed between 1985 and 2005 in 19 OECD countries knocked 4.7 percentage points off their cumulative growth between 1990 and 2010.

The implication is that if we want to achieve our full growth potential, we need to promote equality of opportunities rather than just relying on redistribution of income and wealth. In all countries, and particularly in advanced ones, redistribution still greatly reduces income inequality – typically through taxes and transfers such as unemployment and other social benefits. Yet, in recent decades, the effectiveness of redistribution has weakened in many countries. It is important to put a renewed focus on it, through effective and well-targeted transfers as well as by making sure that the rich and the very rich in particular pay their fair share of taxes.

But policies also need to do more to address inequalities at their roots, ensuring that people can access high-quality education and health services while having a reasonable prospect of finding good-quality jobs, regardless of their social backgrounds.

Improving access to pre-school care and education – and its quality – for children and youth in lower-income households is a key first step in all countries. Too many young people are leaving education without basic skills, even in some of the richest countries. The proportion is put at 24% in the United States, 22% in Norway and 14% in Switzerland.

But promoting equality of opportunities is not just about education. It is also important to promote inclusion in the labour market for underrepresented groups, like women and youth. Concerning women, for example, we need to stop talking about equal pay for equal work and just make it happen. We also need to better support families in areas like parental leave and childcare to ensure that both parents can balance their work-life commitments.

The situation of young people in labour markets has become a growing cause of concern since the financial crisis struck. In 2014, 14% of youth were not working, studying or in training in the OECD, but this share reaches 25% in Italy and Greece and even higher in some emerging economies. To avoid scarring effects on their long-term employment prospects, and for the sake of intergenerational justice and social stability, our societies need to offer our young people a better deal, especially those with low skills and from migrant families. To tackle high youth unemployment, we need to be ambitious and use well-targeted activation strategies and measures to encourage firms to provide high-quality apprenticeships, internship programmes and training opportunities.

Moreover, only focusing on increasing the number of jobs is not enough. To make sure that growth is inclusive, countries need to ensure that good education is rewarded by access to productive and rewarding jobs; jobs that offer career and investment possibilities; jobs that are stepping stones rather than dead ends. There is a lot that labour market policies can and should do to address labour market segmentation, improve working conditions and foster skills recognition and a better match of wages with productivity.

Inevitably, policy mixes will vary between countries, responding to their individual economic and political circumstances. There are a number of win-win policies – good for growth and inclusiveness. But, equally inevitably, countries may also face trade-offs between policies to boost growth in the short-run and those to improve the distribution of growth dividends. However, given the scale of the inequality challenges we face and its impact on long-term growth, we need to exploit synergies and complementarities of policy in different areas, while addressing possible short-term trade-offs, for a better and more inclusive future.

Useful links

OECD Centre for Opportunity and Equality.

In It Together: Why Less Inequality Benefits All OECD (2015)

Time to think about the schools of tomorrow

Trends shaping educationToday’s schools are very different from those your grandparents went to. That’s not too surprising – education constantly evolves in response to social, economic and cultural shifts. So what about the schools of tomorrow – what will they teach, who will their students be and how will they learn? To start thinking about the answers to some of these questions, try taking this quiz drawn from the latest edition of the OECD’s Trends Shaping Education.

You may now begin.

The Romeo and Juliet of Economic Transformation

NAECDouglas Frantz, OECD Deputy Secretary-General

Let’s begin with a proposition: The United Nation’s Sustainable Development Goals (SDGs) and the OECD’s New Approaches to Economic Challenges (NAEC) initiative were made for each other. They are the Romeo and Juliet of economic transformation.

Consider first the SDGs. Last September at the UN, world leaders adopted an ambitious, 15-year blueprint for a better world. The goals are broad, universal and, indeed, potentially transformative. They envision nothing less than saving our planet for future generations, ending extreme poverty and hunger, and creating a healthier, safer, more inclusive world.

I say “potentially transformative” because achieving these sweeping objectives will require an unprecedented global effort. Decisions made by our governments in the next few years will determine the quality of life for generations to come around the globe.

But this is not a matter of the rich countries extending a hand to the poor ones – or dictating development approaches and policies. This time around, the leaders of the world’s rich countries and its poor countries must work together to find common solutions that recognize our interdependence as well as our independence.

Tackling the 17 goals in the UN’s 2030 Agenda for Sustainable Development will require new thinking in developed and developing countries alike, among leaders and civil society, in the corporate boardrooms and the village halls. The innovations will require fundamental changes in our patterns of consumption and production, and a recognition that we are all in this together.

Indeed, each individual goal — and the means of meeting it — will need to be viewed through the lens of policy coherence. This requires understanding that decisions made on one goal will have an impact on other goals. It’s a vision that is less straightforward and simple than conventional practices.

As Kitty van der Heijden of the World Resources Institute told the NAEC workshop at the OECD in January, actions by all will have to benefit all.

We can say with certainty that the SDGs require dynamic new approaches to economic challenges.

This brings us to the second prospective partner in this marriage: The OECD’s New Approaches to Economic Challenges, or the NAEC. The objective of the NAEC is to stimulate new thinking on integrated, multi-dimensional solutions to the world’s most intractable economic and social problems.

The approach is rooted in the principles that we must make tough decisions together and that we must understand the impact of one policy decision on other decisions, which is not always obvious or considered. The NAEC weighs the impact of uncertainty, spill overs, trade-offs and systemic risks in an effort to transform mind sets, policies and ultimately economies.

Will this marriage work? The NAEC provides an intellectual and practical framework for precisely the coherent, cooperative and universal approach required to achieve the targets set forth in the SDGs. And, like the SDGs themselves, this framework can be applied by all of us and to all of us – OECD members, emerging and developing countries and international organizations working to find solutions.

Words are cheap and the challenges are huge. But the opportunities to make the world a better place are very real — if we make the right decisions.

Progress is possible on a global scale. We have seen it. The agreement reached in Paris in December on combating climate change was a big step forward, though there remains a long way to go if we are to stop killing our planet.

The Millennium Development Goals showed what could be accomplished by focusing global attention on developing countries – child mortality rates were cut by more than half, so was the number of people living on less than $1.25 a day, to name just two results.

In the narrowest sense, the SDGs are an extension of that unfinished anti-poverty effort. Clearly, rich countries still need to help the poorest countries. The SDGs don’t absolve us of that responsibility.

But the SDGs represent a very different agenda. Yes, the SDGs ask developed countries to redouble their efforts on behalf of developing countries, especially the poorest of the poor. Equally important, however, they require us to take a hard look at ourselves. No country can say that we it has no work to do when it comes to improving our societies. In the eyes of the SDGs, we are all developing countries.

Indeed, the SDGs are the mirror in which we see our own policies and performance reflected. The picture isn’t pretty in some categories. For instance, we all need to do a better job of fostering inclusive growth and adopting sustainable consumption patterns. We all need to make sure that, at the very least, our policies do no harm to the rest of the world.

These dual objectives of the SDGs – helping others while helping ourselves — are where the OECD and the NAEC initiative are the right match. No organization is better equipped to work with both developed and developing countries than the OECD. We have been doing it for more than half a century.

At the same time, the fundamental and dynamic re-thinking of the path to solving global economic challenges embodied in the NAEC provides the right methodology for tackling the interrelated complexities of the 2030 Agenda.

In short, the integrated approach prescribed by the NAEC recognises our global responsibility to find universal solutions to the challenges of the SDGs. Our self-interest demands that we do so.

Returning to our star-crossed lovers, it seems self-evident that the SDGs and the NAEC, like Romeo and Juliet, were made for each other. Our job is to bring the Montagues and Capulets together and make sure there is a better outcome this time.

Useful links

New Approaches to Economic Challenges (NAEC)

NAEC Seminar Series

The Importance of a Policy Coherence Lens for Implementing the Sustainable Development Goals

NAECEbba Dohlman, Senior Advisor, Policy Coherence for Development, OECD

The 2030 Agenda for Sustainable Development and the Addis Ababa Action Agenda call upon all countries to “pursue policy coherence and an enabling environment for sustainable development at all levels”. Sustainable Development Goal 17 – on the means of implementation – includes a Target to “enhance policy coherence for sustainable development” (PCSD). The OECD defines PCSD as an approach and policy tool to integrate the economic, social, environmental, and governance dimensions of sustainable development at all stages of domestic and international policy making. PCSD aims to increase governments’ capacities to foster synergies across economic, social and environmental policy areas; identify trade-offs; reconcile domestic policy objectives with internationally agreed objectives; and address the spillovers of domestic policies.

Policy coherence for sustainable development is fundamental to ensure that progress achieved in one SDG contributes to progress in other SDGs, and to avoid the risk of progress in one goal at the expense of another. PCSD is critical to:

  • Consider the economic, social and environmental costs and unintended consequences of policy decisions. For example, the USD 55-90 billion annual support for fossil fuels in OECD countries incentivise further CO2 emitting fossil fuels rather than investment in renewables; contribute to climate change; aggravate pollution and health risks; and waste money that could be reallocated for more targeted spending on the poor while contributing to global climate objectives.
  • Identify effective uses of diverse sources of finance other than ODA. While ODA remains crucial for the least developed countries and most vulnerable populations, it now represents only 20% of the developed world’s financial engagement with developing countries. PCSD can help to make best use of existing resources, including more effective fiscal administrations, higher tax income; remittances; trade and investment; more direct access to capital markets; low interest debt; and addressing illicit flows.
  • Shed light on critical sectoral interactions to achieve SDGs and Targets. PCSD can help to inform how efforts to attain a goal in one sector would affect (or be affected by) efforts in another sector, for example between water (SDG6), food (SDG2), and energy (SDG7). Agriculture is the largest user of water at the global level; energy is needed to produce and distribute both water and food; and the food production and supply chain accounts for almost one third of total global energy consumption. Policy decisions made in these sectors can have significant impacts on each other and tensions may arise from real or perceived trade-offs between various objectives. Improved water and energy services reduce the burden on women and young girls who often spend several hours each day collecting water and gathering biomass for cooking, thus freeing up time for their participation in education and income generation activities. The provision of cleaner water and energy services is also linked to improvements in the health, micro-enterprise activity, and agricultural productivity of women, thereby spurring overall national economic development.
  • Deal with systemic conditions and disablers that hamper sustainable development. Illicit financial flows for example are a major disabler for sustainable development. In many countries of origin, they are a symptom of governance failures, weak institutions, and corruption, but also of other systemic conditions in recipient countries that allow IFFs to thrive, such as tax havens and secrecy jurisdictions. A PCSD lens can inform actions at international level to support a fairer and more transparent global tax system; and curb tax avoidance strategies which in most cases are legal but unfairly take advantage of the interaction between tax rules of different countries. At the national level, success will depend on the quality of domestic regulations, institutions and capabilities to identify, track, and fight tax evasion, money laundering and corruption.

The multi-sectoral and transformative nature of the 2030 Agenda for Sustainable Development will require institutions to be able to work across policy domains (horizontal coherence) and governance levels from local to global (vertical coherence). It requires policies that systematically consider sectoral inter-linkages (synergies and trade-offs) and effects (here and now, elsewhere, and tomorrow). The OECD’s analytical framework can help inform decision-making and support policy-makers and stakeholders to design policies that systematically consider:

  • The roles and responsibilities of different actors as well as the diverse sources of finance – public and private, domestic and international – for achieving sustainable development outcomes.
  • The policy inter-linkages across economic, social and environmental areas, including the identification of synergies, contradictions and trade-offs, as well as the interactions between domestic and international policies.
  • The non-policy drivers, i.e. the enablers (that contribute to) and disablers (that hamper) sustainable development outcomes at the global, national, local and regional levels.
  • The policy effects “here and now”, “elsewhere”, and “later”. This captures ways in which the pursuit of well-being today in one particular country may affect the well-being in other countries or of future generations (the long-term impact of policies at national and global levels).

Analytical Framework for Policy Coherence for Sustainable Development

PCSD

Against this background, the OECD is developing PCSD Framework, a self-assessment policy toolkit, aimed at providing policy-makers with practical guidance on: (i) setting up institutional mechanisms for coherence, including political commitment and leadership, coordination capacity and monitoring systems; (ii) managing policy interactions at different levels to detect and resolve policy conflicts; (iii) addressing contextual factors that enable or impede coherence for sustainable development; and (iv) anticipating the unintended consequences of policy decisions. It includes thematic modules on Food Security, Illicit Financial Flows and Green Growth.

Useful links

OECD work on policy coherence for development

Measuring Multidimensional Well-being and Sustainable Development

NAECMartine Durand, OECD Chief Statistician and Director of Statistics Directorate, and Simon Scott, Counsellor in the OECD Statistics Directorate

The notion of sustainable development is profoundly multidimensional so assessing progress on sustainable development requires measures of multidimensional well-being. The number and diversity of the new Sustainable Development Goals and targets reflect the many dimensions of development (health, decent work, climate, etc.), and policy thinking must integrate these dimensions if progress is to be achieved across the board.

The OECD has long recognised the multidimensionality of people’s well-being and of the resources needed to sustain it over time. Realising that measures of total output are not adequate to assess progress in all its complexity, we have been actively researching relevant new measures of well-being and prosperity, and developing policies designed to improve people’s lives on a sustainable basis.

This effort has intensified and gained new traction in recent years as well-being has failed to improve in tandem with economic growth, leaving some people behind and exacerbating inequalities. The growing disconnect between the health of economies, as measured by GDP growth rates, and people’s experiences and perceptions of their lives has given rise to a new measurement and policy agenda to identify well-being indicators that can signal whether societies are evolving in desirable directions and at a sustainable pace.

The OECD has played a major role in this effort, in particular by developing a multidimensional well-being framework that can both gauge whether people’s lives are improving, and inform policy efforts toward this end. The framework also aims to indicate whether improvements are sustainable, and where governments and others need to invest to improve well-being now and tomorrow.

In 2011 the OECD launched its Better Life Initiative to measure progress on 11 dimensions of current well-being: health status; work and life balance; education and skills; social connections; civic engagement and governance; environmental quality; personal security; income and wealth; jobs and earnings; housing; and subjective well-being. The eleven dimensions are recognised as universal, i.e. relevant to societies across the world, irrespective of their level of socio-economic and human development. The framework focuses on people, takes distribution into account, includes both objective and subjective elements, and concentrates on outcomes as opposed to inputs and outputs.

The framework also considers resources for future well-being, thus bringing in a sustainability perspective. In particular, the OECD approach focuses on the broader natural, economic, human and social systems that embed and sustain individual well-being over time. The focus on stocks of “capital” or resources is in line with the recommendations of the Stiglitz, Sen and Fitoussi Report (2009) and other recent measurement initiatives that distinguish between well-being “here and now” and the stocks of resources that can affect the well-being of future generations “later”. Several approaches go beyond simply measuring levels of stocks to consider how these are managed, maintained or threatened. Recognising the global challenges and shared responsibilities to maintain well-being over time, they also highlight how actions taken in one country can affect the well-being of people in other countries (“elsewhere”).

The OECD well-being framework and the SDGs are highly consistent, not only in their general features – focusing on people, multidimensionality, today and tomorrow, here and elsewhere – but even in their specific dimensions.

Because of these close linkages, the OECD work on well-being can be particularly useful in helping countries deliver on the SDGs agenda:

  • From a measurement perspective, the OECD framework and indicators can pinpoint specific data sets to monitor national and regional progress towards targets in OECD countries, especially where the official SDGs indicator set may be more relevant for emerging and developing economies and/or for global monitoring.
  • From a policy perspective, the framework covers several areas relevant for the SDGs where the OECD has specific long-standing expertise and instruments to offer (health, education, environment, jobs, etc.).
  • From a coherence perspective, the framework embodies a recognition that many dimensions are related and therefore must be studied together and not in isolation. This has already been central to establishing the OECD Inclusive Growth policy framework which aims to nail down the interdependencies at the policy level.

BLI and SDG

In order to make the concept of well-being more policy-actionable, work is under way to study the drivers of well-being, i.e. the policies and the individual and societal characteristics shaping each of the outcomes of interest. In addition, to help policy makers to better grasp policy trade-offs and find ways to improve both the level and distribution of well-being outcomes, the OECD has built new measures of “multidimensional living standards” that integrate the multidimensionality of the Better Life framework with a focus on the distribution of income and non-income dimensions of well-being.

The interest of such an approach lies in providing an explicit link to key structural policies and their effects on various income groups, making it possible to estimate the impact of policy packages with ambiguous net effects on the well-being of the various segments of the population. For example, both stricter climate mitigation policies and extending health insurance through higher tax may improve health outcomes but reduce household income, with the net well-being effects depending on the relative elasticities of income and health to these policy changes. Work has started in the OECD to quantify these impacts, so that net results can be seen through the multidimensional living standards metric. This approach is flexible and can be easily adapted to the SDGs framework. It provides opportunities to identify the best policy measures to reach several goals at the same time – a key challenge posed by the multidimensional character of the SDGs.

Useful links

OECD Better Life Initiative

OECD work on statistics

Can Fiscal Watchdogs Be Fiscal Rescue Dogs?

Gotcha!

Bill Below, OECD Directorate for Public Governance and Territorial Development (GOV)

In The Magic Mountain, Thomas Mann wrote famously that “everything is politics”. There are some who believe that fiscal policy should be a notable exception. Those who share this viewpoint would like to see fiscal policy removed from the political arena and encapsulated in a non-partisan process, along the lines of monetary policy. But, this isn’t likely to happen anytime soon, and for reasons deeply rooted in modern democratic principles. From the First Baron’s War (1215-1217), resulting in the Magna Carta, to the French and American revolutions, the notion of taxation without representation has been roundly repudiated. What works for monetary policy and institutions such as the Fed or the ECB, cannot, it seems, work for fiscal policy.

Why is this even an issue? Because democracies have a hard time not spending more than they take in. The composite fiscal balance of all OECD countries, as well as most of its individual member countries, was in deficit throughout virtually the entire three decades prior to the crisis of 2007/2008 (OECD Economic Outlook 2009). The term for the phenomenon is ‘deficit bias,’- the tendency of democratically elected governments to veer into the fiscal red and stay there. Deficits can be manageable. But when they reach levels that are considered unsustainable, mere bias becomes ‘fiscal irresponsibility’, ‘fiscal profligacy’ or more colorfully, ‘fiscal alcoholism.’

One strategy for curbing deficits consists of fiscal rules. Fiscal rules codify deficit and debt ceilings, providing policy makers with a legal framework to guide better fiscal choices. To work, fiscal rules must navigate a tricky line between being sufficiently comprehensive to accomplish their objectives and anticipate loopholes while avoiding soul-crushing complexity and rigidity. Not an easy task, as critics of the European Union’s Stability and Growth Pact are quick to point out. Fiscal rules must also have the flexibility required to support a country’s broader macroeconomic objectives. To jumpstart growth during a downturn, governments follow countercyclical policies, increasing public spending and providing tax relief when government coffers are at their lowest (apostasy to anti-deficit hardliners). Then, when better times return, the previously avoided tax hikes and spending cuts must be instigated.

Governments consistently get the first part right.

The financial crisis was a “gotcha” moment, catching many countries off-guard and in vulnerable positions. Eight years on, countries that had the highest deficits going into the crisis still have the lion’s share of fiscal consolidation ahead of them (OECD, The State of Public Finances 2015). The public debt position of OECD countries continues to worsen.

Can watchdogs be rescue dogs? The OECD thinks so. The period since the crisis has seen the rise of a relatively new breed of fiscal watchdog-the Independent Fiscal Institution (IFI), also known as Fiscal Councils. Prior to the crisis, only six countries had IFIs in place. Today, they number twenty-five and growing. It could be that IFIs are the missing link in a form of fiscal tri-therapy already consisting of fiscal rules and budget reform. That’s the hope of the OECD and many of its members. The OECD Network of Parliamentary Budget Officers and Independent Fiscal Institutions (PBO network, for short) was created as a support organization for IFIs ranging from fledgling operations to well-established entities.

In many cases, the support is badly needed.

This has a lot to do with the precarious role IFIs play, particularly when starting out. Their job: to depoliticize fiscal policy information, intervening prior to policy but without decision-making authority. If it sounds like a challenge, it is. What IFIs can do is issue objective, non-partisan assessments of proposed fiscal policies, promises and programs. In lieu of legally binding enforcement power, the IFI plays the role of fiscal gadfly, whose job—not unlike that of Socrates—is to point out inconvenient truths that often contradict the powerful and ambitious and the institutions that they represent. We know what happened to Socrates. Needless to say, it can be a lonely job. Effectiveness depends on having good friends elsewhere, notably in the financial community, the media and of course the greater public. It also requires a solid reputation for independence, transparency, expertise and fearlessness. IFIs must be constituted to resist partisan pressure and intimidation in all forms, from the risk of defunding to being shut out from vital government data.

Consequently, every IFI that has made it has a harrowing, near-death experience to recount. For the UK’s Office of Budgetary Responsibility (OBR), it occurred in November, 2011, the day it told the government it could not afford its budget plans (the Chancellor duly revised them). For Canada’s Parliamentary Budget Office it was the publication of its first report—during an election campaign–revealing that the cost of participating in the war in Afghanistan was significantly higher than claimed. One European IFI went from a well-staffed organization with a broad remit, to a vastly reduced operation consisting of just a few people. Venezuela’s Congressional Budget Office was shuttered without further ado by President Hugo Chavez in 2000, two years after its creation.

The OECD’s PBO network offers a place where IFIs can exchange best practices and build up their staying power in a dangerous but badly needed line of work. Following the OECD Recommendation on Principles for Independent Fiscal Institutions, the PBO network offers guidance on setting up and managing effective IFIs.

So, why is deficit bias so entrenched? At least some of it boils down to politics. In campaign mode, the urge to give (funding programs, cutting taxes) is consistently stronger than the urge to take away. When it comes to cold, fiscal reality, there seems to be a strong belief that ineluctable truths make unelectable candidates. Ironically, some research suggests that if voters are made fully aware of fiscal arithmetic, they will support short-term costs for longer-term gains (Alesina et al. 1998, cited in Calmfors and Wren-Lewis, 2011). Also, fiscal processes are complex and chaotic—not a monolithic, well-coordinated activity like the Berlin Philharmonic playing Beethoven, but more like a stadium filled with oom-pah-pah bands, each seeking to be heard above the rest. With well-conceived fiscal rules and objectives, aided by strong and sufficiently supported independent fiscal institutions, policy makers may at last begin to play in the same key when it comes to fiscal responsibility. That, at least, is the outcome that the OECD’s PBO network is passionately working towards.

Useful links

OECD, The State of Public Finances 2015

OECD Recommendation on Budgetary Governance 2015

OECD Recommendation on Principles for Independent Fiscal Institutions 2014

OECD work on Budgeting and Public Expenditures

Directorate for Public Governance and Territorial Development