This page is
maintained by Simon
Wren-Lewis at Oxford University. I created this site because there was no
single link to the web pages of the existing fiscal councils, or easily
accessible account of what fiscal councils in general were trying to achieve. I
have tried to be objective in its contents: for my own papers and other
contributions on this subject see my webpage.
Please let me know of any errors that you find, or comments that you have. Last
updated March 2012.
The term Fiscal Council is generally used to describe an institution, funded by but independent of government, which provides public advice on fiscal issues. Here we will restrict the term to include only institutions that provide macroeconomic advice on the likely course of national budget deficits, but these same institutions may or may not also provide detailed microeconomic costing of the budgetary impact of particular projects or proposals (as is the case of the CBO in the US, for example). Some prefer the term Independent Fiscal Institutions to Fiscal Council, because many are not councils of the ‘wise men’ type, but have a more traditional hierarchy with a single head. They are also sometimes referred to ask ‘fiscal watchdogs’, but those set up to serve parliament (CBO, PBO) can be a little uncomfortable with this description.
These institutions are often described as ‘independent’. The degree and type of independence from, in particular, the Finance Ministry of a country varies across countries. They have begun to interest macroeconomists as a possible antidote to deficit bias: the tendency for government debt as a proportion of GDP to rise over time that has been observed in the OECD area as a whole. A few countries have had institutions for many decades that can be classed as Fiscal Councils, and while in some cases those countries do appear to suffer less from deficit bias (e.g. the Netherlands), in other cases problems remain (e.g. the US).
As yet there is no international network of Fiscal Councils, although the first conference bringing representatives from most of these councils together was held in Budapest in March 2010. The OECD has also been active in analysing and bringing together these institutions (see this draft code of practice for example). Two comprehensive surveys of Fiscal Councils are provided by Debrun et al (2009) and Calmfors and Wren-Lewis (2011). (A short summary of the latter reference is here.) For a short survey focusing on Europe, see Debrun and Takahashi (2011). This page contains links to the web pages of these Fiscal Councils, and also lists some of the academic work which has proposed and analysed such bodies. There is also a brief ‘question and answer’ section for those who do not have the time to read any of this literature.
For long runs of data on debt to GDP, see the excellent IMF data mapper.
The Public Debt Committee was established in 2002, comprises 14 members, and receives financial support from the Austrian Central bank. It provides recommendations on the direction of fiscal policy, and the overall fiscal stance (see the 2009 report summary for example).
Following the recommendations Joint Select Committee (see here), a Parliamentary Budget Office is to be established in 2012. The focus is on project costing, but the office may also decide to comment on macroeconomic budgetary issues. The advert for the head of this Office is here.
The Federal Planning Bureau, established in 1994, provides a range of services along similar lines to the CPB in the Netherlands. In addition, the High Council of Finance, which was reformed in 1989, overseas the coordination of regional and national fiscal policy. It sets medium term objectives for regional and national budget deficits, and proposes annual targets, which form the basis for government negotiations. The High Council is chaired by the Minister of Finance, but has representatives from inside and outside government. Although it has no formal decision making power, it does exert considerable influence. The influence of the High Council is analysed in Coene (2010).
The Parliamentary Budget Office provides independent analysis to Parliament on the state of the nation's finances, the government's estimates and trends in the Canadian economy, and upon request estimates of the financial cost of any specific proposals. It has a staff of 14.
The Economic Council, established in 1962, prepares economic reports and forecasts on a range of issues including fiscal policy. It has four members and a staff of around 35.
The German Council
of Economic Experts comprises five members and a staff of around
30. The Council was established in 1963 to advise on a wide variety of economic
policy issues, including macroeconomic fiscal policy. The federal government
has to publish its comments on the Council’s annual report.
The Fiscal Council of the Republic of Hungary was set up in
2009 as ‘an independent state institution that endeavours to ensure the
responsible management of public resources.’ It prepared macroeconomic
forecasts which represented the baseline for budgetary decisions. It also
provided comment and advice on fiscal planning more generally, within the
context of existing fiscal rules, with a total staff of around 35. Some of its
reports were critical of government proposals or forecasts. In early 2011 the
Hungarian government replaced the Council with a three person body that was
widely perceived as a less effective fiscal policy watchdog (see, for example,
a letter
to the Financial Times from three directors of other fiscal councils).
After plans outlined here, the members of the Irish Fiscal Advisory Council were announced in June 2011. The Council reports formally at least 3 times per year. It has five members, and a secretariat of three.
The Netherlands Bureau for Economic Policy Analysis (CPB) was founded in 1945. It is an independent research institute and has its own independent external advisory body. It provides economic and fiscal forecasts as inputs into the budgetary planning process. It also evaluates (at the party’s request) the election programme of government and opposition parties. The Bureau also provides economic expertise over a wide range of specific issues, such as labour market reform, and has a staff of over 170.
The Fiscal Policy Council was set up in 2012. Web link needed.
An early discussion is contained in a paper by Horvath and Odor. Web link needed on
current position.
The Public Finance Act of 2009 requires the creation of an independent advisory body to provide assessments of the public finances.
The National Assembly Budget office (NABO) was established to support the legislative activity of the National Assembly of Korea in 2003. Its aim is to be a ‘fiscal institution that assists in the examination of the national budget and accounts in the legislative body via impartial and non-partisan research and analysis’. It currently employs around 120 staff. It has a wide ranging remit, and provides analysis of particular micro and macro issues as well as macroeconomic trends.
In 2007 the Swedish Fiscal Council was established. The Council consists of eight members and is assisted by a secretariat with four employees. The mission of the Council is to provide an independent evaluation of the Swedish Government´s fiscal policy. Its first director, Lars Calmfors, has a paper describing the initial experience of the council. The current director is Lars Jonung.
In 2008 the Conservative Party outlined its proposal
for an Office
of Budget Responsibility. Some comments on the original UK proposal are here,
and in Chapter 11 of the Institute of Fiscal Studies’ Green Budget. The case for a
UK Fiscal Council is presented in written form in Kirsanova et al (2007), in Power Point or, to my
embarrassment, video form here,
and as a dialog between Tim Besley and Romesh Vaitilingam here (see also Besley and Scott (2010)). The new (May 2010)
Conservative/Liberal government, as one of its first acts, set up an interim
Office for Budget Responsibility (OBR), chaired on an interim basis by Sir Alan
Budd. Within weeks it produced its first pre-budget
report. Shortly afterwards it produced the forecasts that were part of an
‘emergency’ Budget.
In
July 2010 a debate began on the structure of the permanent OBR. Sir Alan Budd’s
own suggestions are here. The Treasury Select Committee have taken
evidence on this issue (see for example here), and Lars Calmfors, director of the Swedish Fiscal Council, has also
made an interesting contribution. Legislation
establishing the permanent OBR has recently been approved by parliament. Sir
Alan Budd was replaced by Robert Chote, and the OBR
has already produced a number of reports. An account of its
formation and structure is given in Wren-Lewis, 2011b. When the OBR
revised down its estimate of potential output in November 2011, the Chancellor
revised his medium term fiscal plans as a result (see here)
The Congressional
Budget Office (CBO) has a mandate to provide the United States Congress
with ‘objective, nonpartisan, and timely analyses to aid in economic and
budgetary decisions on the wide array of programs covered by the federal budget
and information and estimates required for the Congressional budget process.’
Established in 1974, it provides objective and impartial assessments
(‘scoring’) of policy proposals that have a significant influence on decision
making. It also provides an overall assessment of the likely path of deficits
and debt into the medium term. It has a staff of around 250. It produces an annual assessment of the outlook for the government budget,
including projections that go to 2080.
The European commission
also has a survey of all independent and
quasi-independent institutions involved is fiscal policy in the EU
countries.
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Calmfors, Lars (2003), Fiscal Policy to Stabilise
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Calmfors, Lars (2005), What Remains of
the Stability Pact and What Next, Swedish Institute for European Policy Studies Report 2005:8
Castellani, F. and X. Debrun (2005). ‘Designing Macroeconomic Frameworks: A Positive Analysis of Monetary and Fiscal Delegation’ International Finance, 8, 87-117.
Debrun, Xavier (2011). "Democratic Accountability, Deficit
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Eichengreen, B., Hausmann, R. and von Hagen, J. (1999) Reforming budgetary institutions in Latin America: the case for a national fiscal council. Open Economies Review 10: 415–442.
Von Hagan, J and I.H.Harden (1994) ‘National Budget Processes and Commitment to Fiscal Discipline’ European Economy Reports and Studies, 3, 311-408.
Von Hagen, Jürgen, and Ian Harden (1995) "Budget Processes and Commitment to Fiscal Discipline", European Economic Review 39(3): 771-779.
Von Hagen, J. (2010). ‘The Scope and Limits of Fiscal Councils’, Paper to Conference on Independent Fiscal Institutions, March 18-19, Fiscal Council Republic of Hungary, Budapest.
Jonung, L. and Larch, M. (2006) Improving fiscal policy in the EU: the case for independent forecasts. Economic Policy 21: 491–534.
Kirsanova, Tatiana , Campbell Leith and Simon Wren-Lewis (2007), "Optimal Debt Policy, and an Institutional Proposal to help in its Implementation", in J. Ayuso-i-Casals, S. Deroose, E. Flores, and L. Moulin (eds) "The role of fiscal rules and institutions in shaping budgetary outcomes", European Economy Economic Papers 275, April. (pdf)
Krogstrup, S and C. Wyplosz (2010). ‘A Common Pool Theory of Supranational Deficit Ceilings’ European Economic Review, 54, 269-278.
Leeper, E.M. (2009), Anchoring Fiscal Expectations, Reserve Bank of New Zealand Bulletin, 72:3, 17-.
Leith,
C and Wren-Lewis, S (2006), Fiscal Stabilisation Policy and Fiscal
Institutions, Oxford Review of Economic Policy, 21, pp 584-597
Rogoff,
K.S. and. J.I. Bertelsmann (2010). ‘The Rationale for Fiscal Policy Councils:
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S (2011), Comparing the delegation of monetary and fiscal
policy, Oxford Economics Department Discussion Paper No. 540
Wyplosz, C. (2001), Fiscal Policy:
Institutions vs. Rules, Report prepared for Swedish Government’s Committee on
Stabilisation Policy
in the EMU.
Wyplosz, C (2005) “Fiscal Policy: Institutions versus Rules” National Institute Economic Review, 191, 70-85
Bos, F. and C. Teulings (2010). ‘Lessons from the Netherlands’, Paper to Conference on Independent Fiscal Institutions, 18-19 March, Fiscal Council Republic of Hungary, Budapest.
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(2010), Lessons from Belgium, Paper to Conference on Independent Fiscal
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Debrun, Xavier and Takahashi, Keiko (2011), “Independent Fiscal Councils in Continental Europe: Old Wine in New Bottles?”, CESifo DICE Report 3/2011.
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Although some Fiscal Councils have been in existence for many years (for example, the CPB in the Netherlands), in the last few years new Fiscal Councils have been created (e.g. Sweden, Hungary and the UK). There are proposals for new Councils in Ireland, Portugal and Slovakia. There has also been an increase in the number of academics putting forward the case for some form of Fiscal Council (see Proposals for Fiscal Councils above). In part this reflects the failure of fiscal rules to bring an end to deficit bias.
The initial reaction to the problem of deficit bias, both in government and academia, was to explore the use of fiscal rules that might provide a constraint on governments. Probably the most notable example is the Stability and Growth Pact of the Eurozone. However these rules have not been very successful, in the sense that they have not been adhered to. One of the problems with fiscal rules is that simple rules are clearly suboptimal, but more complex rules are difficult to monitor. (The most straightforward example is the need to let the automatic stabilisers operate, but the difficulty in calculating cyclically adjusted deficits.)
A Fiscal Council could be seen as an alternative to a fiscal rule, reflecting the difficulty in formulating a simple optimal rule. (See Kirsanova, Leith and Wren-Lewis (2007), for example. Monetary policy is increasingly operated by independent institutions that do not follow an explicit rule.) However in practice Fiscal Councils often operate within the context of existing fiscal rules, and are seen in part as watchdogs that ensure that these rules are adhered to. (Occasionally they may sanction deviations from them – see below). The relationship between fiscal rules and Fiscal Councils is discussed in Calmfors and Wren-Lewis (2011).
· If government debt gets very large, a risk premium reflecting the possibility of default may emerge.
· A large negative shock may weaken the power of monetary policy when a zero lower bound for interest rates is hit. In this situation governments should want the ability to expand fiscal policy to support demand, without fear that higher debt will create concerns over default.
· If the current generation does not act in a way that looks after future generations, then there is a danger that capital accumulation will be sub-optimal. In these circumstances, higher debt crowds out private capital. (In contrast, if the conditions for Ricardian Equivalence hold, then government debt just represents deferred taxes, and has no effect.) Now if the existing stock of capital is not sub-optimally high (which is possible but unlikely), then higher debt reduces capital further away from its optimal level, which in turn reduces long term output and welfare. In addition, the current generation may simply exploit future generations, leading to an unfair distribution between generations.
· By making fiscal positions more transparent, they may prevent governments deliberately concealing the extent of future deficits implied by current policies, or prevent governments being overoptimistic about their finances. The public may have insufficient information to differentiate between governments that are more efficient at managing spending, and those that pretend to be in order to win votes through spending increases or tax breaks. A Fiscal council could help provide that information.
· Because governments in a democracy may not be re-elected, there may be an incentive for them to discount the future heavily. In particular, by raising debt, they may stifle the spending plans of the opposition. If political parties differed over the size of the state, and if raising spending or cutting taxes was easier than the opposite, then raising debt might be the most effective way of achieving political aims.
· In the previous cases, if the public had full information and could discipline governments, deficit bias would not arise. An alternative reason for deficit bias is that the public may be selfish, in the sense that they attempt to exploit future generations, or they may be unable to resist immediate temptations. A Fiscal Council could attempt to apply political pressure on behalf of future generations, or provide moral pressure to discount the future less heavily. They may also prevent politicians pandering to these tendencies.
· Fiscal Councils may reduce the ‘common pool problem’ (see below). They can provide a coordination device that forces individual spending ministers to recognise the overall budget constraint: to ‘internalise the common pool externality’.
One of the motives for setting up a Fiscal Council may be a concern that governments are inclined to make overoptimistic projections of the public accounts (see Jonung and Larch (2006) for example). However not all Fiscal Councils prepare their own forecasts (e.g. Sweden). Equally, presentation of an independent projection for public deficits and debt is not a guarantee that governments will observe fiscal discipline. (The example of the United States under George W. Bush perhaps.) Variation here may reflect different institutional contexts in which fiscal projections are made: for example, are the macroeconomic forecasts used by a government produced by institutions with a reputation to protect, or are they the property of the government itself.
There is a potential tension between using fiscal policy as a tool of demand management, and avoiding deficit bias. It may be politically convenient to expand fiscal policy in a downturn, but ignore the possibility of contraction in a boom. In an economy operating within a floating exchange rate regime, the question arises whether monetary policy should be entirely responsible for demand management (see Kirsanova, Leith and Wren-Lewis, 2009). Even in this case, however, if interest rates hit a zero lower bound, there is general agreement that fiscal expansion can and should play a role in supporting output. For countries operating under fixed exchange rates, or in a monetary union, there may be a more general case for using discretionary countercyclical fiscal policy.
In this context, a Fiscal Council may have an important role in ensuring that any demand stabilisation role for fiscal policy does not take place at the expense of a longer term prudent debt policy. The existence of a Fiscal Council could in this context make discretionary countercyclical policy easier for governments to undertake. In 2009 the Swedish Fiscal Council suggested additional fiscal expansion beyond that proposed by the government. A Fiscal Council could help overcome time inconsistency issues involved in countercyclical policy that are familiar from the monetary policy literature.
Because spending measures tend to targeted at specific groups, but financed (sooner or later) through general taxation, then the voice of the beneficiaries favouring spending increases may be more effective than the more muted voice of the much larger group who lose (a little). (Much the same would be true of specific tax breaks, financed through general increases in taxation.) If general tax increases to finance spending increases or specific tax breaks are postponed, then deficit bias results. This problem may be particularly acute where there is a lack of coordination between spending ministries in government, or where the finance minister does not have much power. In this context, a Fiscal Council can play a coordinating role, and enhance the position of the finance minister.