Centraal Planbureau

Charted choices:calculating fiscal and economic effects of election manifestos

Johannes HersHead of Public Finance CPB

Budapest31 January 2014

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Structure of talkBackground on role of CPBEvaluation of election manifestosBird’s eye view of resultsTake away

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Formal position of CPB• Department within Ministry of Economic Affairs • Staff of 100-120 large compared to other countries• CPB wants to be a widely trusted source of independent economic

analysis• Works for Cabinet and ministries, opposition parties, social partners:

– macro-economic forecasts next year and cabinet period– Sustainability analysis government finance– Impact of government agreements and budget packages– Costing of major reforms, cost-benefit analysis, think tank– Evaluation of election manifestos

• Strong position based on reputation, not on legal position• De facto independence, requires vigilance and reticence

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Election cycle • Mid-term economic forecast incl sustainability of public finance• Advisory Group on Fiscal Policy gives advice on budgetary goals • Publication of CPB analysis of election manifestos• Elections • Negotiations on new coalition agreement• Publication of CPB analysis of coalition agreement

• Start: about 5-6 months prior to elections

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Structure of talkBackground on role of CPEvaluation of election manifestosBird’s eye view of resultsTake away

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Evaluation election manifestos: merits

• On request of political parties• 3 parties participated in 1986 (first time)• 10 parties participated in last evaluation in 2012

• Merits: – Same underlying economic scenario – Evaluation by identical standards – Makes programs comparable – Improves concreteness in proposals – Check on practical and juridical feasibility– Facilitates subsequent coalition negotiations

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Evaluation election manifestos: drawbacks• Objections / critics:

– Constrains political debate (e.g. juridical feasibility) – Bias in debate to proposals that are easily evaluated

› e.g. institutional reform in health care not effective– Not all trade offs are visible

› e.g. long term purchasing power effects– Too detailed, lot of work for parties and CPB

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Rules of the game: transparent and accountable

• communicate publicly at start about "rules" (e.g limits on unspecified spending cuts, laffer curve limits on large increases of tax rates etc)

• be transparent about models used and key assumptions • communicate exclusively and bilaterally with parties: NEVER share

party X's plan with party Y• CPB does not check if measures that parties hand in are part of their

election manifesto: this is for the media • check during the process if you understand proposals by sending

back a neutral refrasing of it [eliminate propaganda texts] • reduce gaming: parties see the scores of other parties (ie their

relative score) for the first time at publication day

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Structure of talkBackground on role of CPBEvaluation of election manifestosBird’s eye view of resultsTake away

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Bird’s eye view of results 2012Effects of manifestos on 5 main topics:1. Policy measures: ex ante fiscal costs and benefits2. Medium term macro-economic outcomes (gdp, unemployment,

purchasing power, ex post fiscal balance).3. Structural labour market effects: long term employment4. Sustainability of government balance 5. Special topics (5 in 2012): energy/climate, education, innovation,

mobility, environment

• Start from scratch: fiscal effects are the first and crucial step

• If more: important to show the crucial trade offs

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Example of outcomes and key trade off'sVVD PvdA PVV CDA SP D66 GL

changes compared to baseline

(1) EMU balance (2017, ex ante, % GDP) 2.5 2.4 1.1 2.1 1.6 2.2 2.4

(2) EMU balance (2017, ex post, % GDP) 1.4 1.1 1.3 1.1 0.8 1.0 1.0(2) GDP volume (2017, %) -0.2 -2.3 0.7 -0.6 -1.8 -1.1 -2.0(2) Unemployment (2017, pp*) 0.8 1.3 -0.5 1.2 0.4 1.3 1.1(2) Purchasing power median (2017) -1¼ -¼ 2 -3¼ 3 -2½ 2½(2) Lowest and highest income ratio (2017) -2 3¾ ¼ -½ 6¼ -¾ 1

(3) Structural employment (2040, pp) 3¾ -1 -¼ 2¼ -3¾ 1½ 2¼

(4) Sustainability (% GDP) 3.2 2.4 0.4 3.4 1.6 3.3 3.2

(5) Greenhouse gases (2020, Mt CO2 eq) -14 -34 5 -7 -23 -31 -63(5) GDP effect education (structural, %) 2.9 2.7 -0.2 0.7 0.5 3.5 1(5) Housing market (welfare gains, % GDP) -0.2 0.4 -0.9 -0.1 -0.4 0.1 0.7(5) Transport and mobility (welfare gains, % GDP) -0.01 0.02 -0.02 -0.02 0.01 0.04 -0.04

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1. Ex ante fiscal effects policy measuresCalculation of direct fiscal costs and benefits based on:• Information in the budget and of ministries (CPB checks)• CPB models: model for income tax and social premiums, model for

other taxes, model for wage costs public sector etc• CPB expert opinion on various topics • No free lunches e.g.:

– Hard limit on size of unspecified budget cuts: practical and juridical feasibility

– Wage freeze public sector only temporary effect: one labour market

– Only policy measures starting in cabinet period: implementation must be credible

Crucial: no free lunches and consistency between parties

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Other instruments used:1. Policy measures: ex ante fiscal costs and benefits [CPB tax-benefit

calculator etc] 2. Medium term macro-economic outcomes with CPB macroeconomic

model [Saffier II]3. Structural labour market effects with CPB general equilibrium model

[Mimic]4. Sustainability of government balance with CPB dynamic GE model

with overlapping generations [Gamma]5. Special topics with various specific models

http://www.cpb.nl/en/models

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Looking back at exercise in 2012• General conclusion:

– unanimous on value of the exercise, especially on ex ante fiscal costing of manifestos

• However: – Size and amount of detail not manageable anymore

› E.g ca 3000 policy measures analyzed, 60 fte 3 months› Lot of coordination internally and with parties› More and more parties as result of political fragmentation

– Debate too focused on measures which “score”› Especially in special topics, new measures without evidence

base for effects are excluded

• Conclusion: back to basics, skip the special topics

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Structure of talkBackground on role of CPBEvaluation of election manifestosBird’s eye view of resultsTake away

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Take away for the evaluator: • A reputation of quality and neutrality is crucial for trust of

parties; building this reputation takes time and sound analysis• Be transparent and accountable about process and content• Starting from scratch first step is direct costing of policy measures

– Very difficult without information and knowledge of ministries– Where possible develop your own instruments to calculate costs

and benefits of policy measures (e.g. models for tax measures)– This is doable with relatively small staff of experts (5-6 persons)

• If more output (models!): show crucial trade offs– Supply side (incentives) vs demand side – Fiscal effects vs purchasing power– Short vs long run effects– In order to do this you'll need models and experts

• Takes a lot of effort and institutional knowledge to do it right

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Take away for parties• Trust: helps to demonstrate reliability / quality of your plans

– “approved by IFI so no empty promises”– And: if critical mass asks for analysis, lacking this approval is

disadvantageous in the political debate• Concreteness and accountability:

– demonstrate to the voter that your program can be developed into a viable government program

– facilitates quick (coalition) negotiations and implementation after elections

• Comparability: quantifies your choices in terms of fundamental trade offs

– E.g. fiscal consolidation versus purchasing power– E.g. incentives for efficiency vs income equality

• Takes a lot of effort and institutional knowledge to do it right

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More on: http://www.cpb.nl/en/publication/charted-choices-2013-2017

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Evaluation election manifestos: the process0. Regular contacts outside “election season”

1. Kick off document containing information for parties [week 1]2. Kick off meeting with briefing on rules of conduct [week 1]3. Parties hand in their concrete policy proposals [week 2]4. CPB sends parties ex ante fiscal effects of proposals [week 6]5. Parties hand in their amendments of policy proposals [week 8]6. CPB sends parties macroeconomic and other outcomes [week 11]7. Parties hand in last (small) adjustments [week 12]8. CPB sends parties draft reports [week 13]

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1. Ex ante budgetary outcomes: expenditureVVD PvdA PVV CDA SP D66 GL

effect by 2017 compared with baseline in billion euros Public administration -1¾ -1¾ -1¾ -1¾ -1¾ -1 -1¾Security ¼ -½ -½ -½ -¼ -½ -¼Defence 0 -1 -½ 0 -1½ -½ -1 Transport and mobility ¼ -1¾ -¾ -¾ -1 -½ -¼Environment -½ -¼ -¾ 0 ½ 1¼ ¾Education ¼ ¾ -2 0 -1 1¾ 2¼Health care -8½ -4½ -1¼ -5¼ -¾ -5 -1¾Social security -7 -6¾ -1½ -6 -6¾ -7½ -8 Transfer payments to companies

-½ -½ -1¼ -¼ -¼ 0 -½

Development aid -2¾ 0 -3½ -½ ¾ 0 ¾Other -¾ 0 -1¼ -¼ -¼ -½ 0

Total EMU-relevant expenses -22¼ -15¼ -14¾ -15¼ -11¼ -12¾ -9¾