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 September 2011.
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).
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. 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).
A
Parliamentary Budget Office was established in May 2011. This followed the
recommendations Joint Select Committee (see http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/051.htm&pageID=003&min=wms&Year=&DocType=).
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 Irish Fiscal Advisory Council
is now up and running and has produced its first assessment
report. It has five members (mostly academics) and a small secretariat. The
draft legislation putting the council on a statutory basis will be published in
early 2012 and should be in place by the summer.
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 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 director, Lars Calmfors,
has a paper describing the experience of the
council so far.
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.
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.
In addition
to these existing fiscal councils, proposals for new fiscal councils exist in
other countries. In particular advanced plans exist in Portugal. A
paper by Horvath and Odor also discusses a proposal
for Slovakia. The commission also has a survey of all independent institutions
involved is fiscal policy in the EU countries.
Ball, L (1997) A proposal for the
Next Macroeconomic Reform, Victoria Economic Commentaries, 1-7.
Calmfors, Lars (2003), Fiscal Policy to Stabilise the Domestic
Economy in the EMU: What Can We Learn from Monetary Policy?, CESifo Economic Studies, 49,319-353.
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.
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: Theory and Evidence’, Paper to Conference on
Independent Fiscal Institutions, March 18-19, Fiscal Council Republic of
Hungary, Budapest.
Wren-Lewis, S. (1996), Avoiding Fiscal Fudge, New Economy, 3, 128-132
Wren-Lewis, S. (2003), The
compatibility between monetary and fiscal policies in EMU: a perspective from
the Fiscal Theory of the Price Level, in Monetary And Fiscal Policies In EMU:
Interactions And Coordination, ed(s) Buti, Marco, Cambridge University Press.
Wren-Lewis, 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.
Calmfors,
L (2010) “The
Swedish Fiscal Policy Council – Experiences and Lessons”
Calmfors,
L (2011), The
Role of Independent Fiscal Policy Institutions, CESifo
Working Paper Series No. 3367.
Calmfors, L and Wren-Lewis, S (2011), What should fiscal councils do? Economic Policy Vol. 26, pp 649-695 and Oxford Economics Department Discussion Paper No. 537
Coene, L (2010), Lessons from Belgium, Paper to Conference on Independent Fiscal Institutions, March 18-19, Fiscal Council Republic of Hungary, Budapest.
Debrun, X., L. Moulin, A. Turrini, J. Ayuso-i-Casals and M. Kumar (2008), “Tied to the Mast? The Role
of National Fiscal Rules in the European Union”, Economic Policy 54, 298–362.
Debrun,
Xavier, David Hauner, and Manmohan
Kumar (2009), “Independent Fiscal Agencies”, Journal of Economic Surveys
23(1): 44-81, February.
Debrun,
Xavier and Takahashi, Keiko (2011), “Independent Fiscal Councils in Continental
Europe: Old Wine in New Bottles?”, CESifo DICE Report 3/2011.
Fabrizio, S. and A. Mody
(2006). ‘Can Budget Institutions Counteract Political Indiscipline?’, Economic Policy, 21, 689-739.
Hallerberg,
M. and J. von Hagen (1999). ‘Electoral
Institutions, Cabinet Negotiations and Budget Deficits in the European Union’
in J. Poterba and J. von Hagan (eds),
Fiscal Institutions and Fiscal Performance, University of Chicago Press.
Hallerberg, M., Strauch,
R. and J. von Hagen (2009). ‘The Design of Fiscal Rules and Forms of Governance
in European Union Countries’ in Ayusi-i-Casals, J., Deroose, S.,
Flores, E. and L. Moulin (eds), Policy Instruments
for Sound Fiscal Policies, Palgrave Macmillan, London.
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April
Page, K. (2010). ‘Lessons from
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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.