Robert MacCulloch: Are MMP-Style Coalition Agreements Good or Bad for the Country?

In NZ's old first-past-the-post political system, we knew what the government would be on election night. The winning party assumed power based on a bunch of promises, most of which it was free to dump in the future with the defense that "circumstances had changed". And that may have well been true. Maintaining flexibility can be a virtue since it allows one to adjust policies as new information arrives.

However under MMP, once a coalition agreement that binds all parties has been drawn up, it becomes difficult to renege on the plans made in that document. Since if one party tried to dump a part of it, then the other coalition partners would be affected and may not agree.

The upshot is that the coalition agreement which National, ACT and NZ First are about to sign effectively binds them to a committed course of action over the next three years. Renegotiation would be hard. Let's say, for example, the fiscal situation is found to have weakened in a few weeks time and inflation is up again, making National's tax cuts less tenable and its original desire to raise revenues from foreign buyers more important. It could hardly renegotiate the agreement with ACT and NZ First that may have locked in the those cuts and dumped the foreign buyer tax.

Is commitment good or bad? Whether policymakers should commit to a certain course of action or have flexibility to change is a central question in economics, particularly regarding monetary policy. Reneging on a promised route can lose you credibility, but having one's hands tied so you can't change course depending on incoming information can also be dangerous.

Sources:
https://www.philadelphiafed.org/-/media/frbp/assets/economy/articles/business-review/2008/q4/brq408_commitment-vs-discretion.pdf 

Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.