Role of independent fiscal policy institutions
Rapport till Finanspolitiska rådet
The role of independent fiscal
Stockholm University and
Swedish Fiscal Policy Council
This paper was originally published as a report to the Finnish Prime Minister’s Office.
The views expressed in this report are those of the authors and do not necessarily represent those of the Swedish
Fiscal Policy Council.
I am grateful for comments from Laura Hartman, Lars Jonung, George Kopits, Pekka Sinko, Simon Wren-Lewis
and participants in a seminar organised by the Prime Minister’s Office in Vantaa on 12 August 2010.
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ISSN 1654-8000 Studier i Finanspolitik 2010/9 3
The paper analyses how independent fiscal watchdogs (fiscal policy councils)
can strengthen the incentives for fiscal discipline. Several countries have
recently established such institutions. By increasing fiscal transparency they can
raise the awareness of the long-run costs of current deficits and increase the
reputational costs for governments of violating their fiscal rules. Councils that
make also normative judgements, where fiscal policy is evaluated against the
government’s own pre-set objectives, are likely to be more influential than
councils that do only positive analysis. To fulfil their role adequately, fiscal
watchdogs should be granted independence in much the same way as central
banks. There are arguments both in favour and against extending the remit of a
fiscal policy council to include also tax, employment and structural policies.
Whether or not this should be done depends on the existence of other
institutions making macroeconomic forecasts and analysing fiscal policy, the
existence of institutions providing independent analysis in other economic
policy areas, and the severity of fiscal problems. Studier i Finanspolitik 2010/9 5
A number of OECD countries now find themselves in a situation with soaring
government debt. The immediate cause is the deterioration of public finances
in the economic crisis, which has resulted from both the working of automatic
stabilisers and discretionary stimulus actions, including support to the financial
sector in many countries. But the public finance problems also reflect weak
budgetary positions at the onset of the crisis as well as insufficient adjustment
to future demographic pressures.
Earlier fiscal rules at both national and EU levels are now being violated in
most European countries. It is therefore natural that much interest focuses on
appropriate reforms of fiscal frameworks. There are clear parallels between
current discussions of fiscal policy frameworks and earlier ones of monetary
policy frameworks. In the sphere of monetary policy, an academic debate on
rules versus discretion started in the late 1970s. Initially, reform proposals
emphasised the importance of commitment to inflexible rules (for money
supply growth or exchange rates). The last decades’ approach to central
banking in most countries has, however, blurred the distinction between rules
and discretion. Flexible inflation targeting means following a rule for interest
rate setting, but with considerable discretion on how the rule is applied. The
most important break with the past is the delegation of monetary policy
decision-making to central banks with a high degree of independence from the
Although there have been many academic proposals on delegating some fiscal
policy decisions to independent institutions, this idea has not been applied in
practice. The reason is that fiscal policy-making is regarded as inherently much
more “political” than monetary policy-making. There has, however, been a
recent international trend towards setting up independent fiscal policy
institutions, fiscal watchdogs, with the task of monitoring public finances.
This paper first reviews possible causes of excessive accumulation of
government debt. It goes on to analyse briefly what role fiscal rules can play
for mitigating such tendencies. The main topic is, however, how independent
fiscal policy institutions can contribute to fiscal discipline. This discussion
draws on experiences of such institutions in various countries in general and
on the experiences of the Swedish Fiscal Policy Council in particular. Fiscal
indiscipline seems often too be associated with a lack of understanding of its
long-run consequences. It can therefore be seen as a manifestation of the more
general problem of too little analytical (research) input into the economic
policy process. For this reason it is natural also to include a discussion of how
to secure a sufficiently large analytical input into economic policy-making in
general and how independent institutions can contribute to that.
It remains to be seen though whether the recent financial crisis will result in less transparent monetary policy
frameworks with a larger amount of discretion as to how financial developments are taken into account. See, for
example, Calmfors (2009a).
6 Studier i Finanspolitik 2010/9
2 Fiscal objectives and rules
There has been a trend towards increased government debt in most OECD
countries since the early 1970s. This has led many observers to conclude that
modern democracies suffer from an inherent deficit bias and a tendency to
excessive accumulation of government debt. The concept of excessive debt
accumulation is, however, vague. It should be taken to mean debt
accumulation in excess of what is in the long-run interest of the majority of
voters, but the meaning of this depends on the theoretical model at hand.
2.1 Explanations of excessive government debt
Since the choice of appropriate fiscal institutions is likely to depend on the
underlying causes of debt accumulation, a short review of the research
literature is a good starting point. A number of (partly overlapping) reasons for
why unconstrained discretionary decision-making can lead to deficit bias have
1. Insufficient understanding among both the electorate and politicians of the
long-run constraints on fiscal policy. This could include a lack of
understanding of both the intertemporal government budget constraint, according
to which government solvency requires that future primary surpluses are at
least as large as the outstanding net government debt, and of the
requirements on future policy if it is to compensate for current deficits. 2
Lack of understanding of future policy demands seems often to be
associated with overoptimism (“this time is different”, allowing more leeway
than earlier) or overconfidence (underestimation of the variability of future
2. Politicians acting in their own interest rather than in the interest of the electorate. 4
This can occur through rent-seeking behaviour in a wide sense (including,
for example, prestigious projects with little value for society or benefits to
the own constituency and various interest groups). It is made possible to
the extent that lack of fiscal transparency or insufficient knowledge on the
functioning of the economy on the part of voters makes it difficult for
them to efficiently monitor the behaviour of politicians. According to one
version of the argument, rent-seeking behaviour can together with fiscal
opacity lead to procyclical policy, because voters demand more government
consumption and lower taxes in good times to prevent higher tax revenues
A related argument focuses instead
from being wasted on political rents.
on political business cycles: the voters’ difficulties of evaluating macroeconomic
outcomes give incumbent governments an incentive before elections to
signal their competence through deficit-increasing measures that boost the
economy in the short run. 6
See, for example, Swedish Fiscal Policy (2009), Appendix 1, regarding the intertemporal budget constraint.
2 See Reinhart and Rogoff (2010) and Rogoff and Bertelsmann (2010).
3 See von Hagen (2010).
4 Alesina et al. (2008) and Andersen and Westh Nielsen (2010).
5 Rogoff and Sibert (1988).
6 Studier i Finanspolitik 2010/9 7
3. Short-sightedness in the sense that too little weight is attached to the future.
An obvious explanation is that the political parties in power may have a
higher discount rate than the electorate because some of the future costs of
current deficits will be borne by other parties if the current government is
not re-elected. This presupposes that the preferences of politicians are not
perfectly aligned with those of the electorate (as discussed in the preceding
paragraph). A possible explanation is that political parties represent
different constituencies with differing preferences regarding the
composition of government spending or the trade-off between taxes and
government spending. This may create an incentive for the party in power
to accumulate debt for the strategic reason to constrain the policies of
future governments with different preferences.
4. Time inconsistency, which means that policies that are optimal ex ante are no
longer so ex post. The implication is that governments may initially decide
plans on fiscal restraint but later renege on them. One explanation is that
optimal fiscal policy depends on the private sector’s expectations of policy
which influence its behaviour. For example, it makes sense for a
government ex ante to induce expectations of low inflation, resulting in low
wage increases, but ex post, once this has been done, to pursue more
expansionary fiscal policy to reduce unemployment, which can then be
achieved at a lower cost of inflation than would otherwise be the case. But
if the private sector realises this, expectations never adjust to the
government’s announced plans and the economy ends up in a bad
equilibrium with high deficits. Similarly, even if governments in advance
rule out support to financial markets to reduce moral hazard problems,
support is likely to be deemed optimal once irresponsible behaviour has
caused losses involving systemic risks, which undermines the credibility of
an announced non-accommodation policy. Time-inconsistent policy could
also be the result of time-inconsistent preferences implying that people (and
thus governments) are more impatient when they make short-run trade-
offs than when they make long-run ones. Ex ante rates of time preferences
may then motivate a certain pace of deficit reduction in the future, but
once the future arrives decision makers could find themselves more
impatient (with a higher rate of time preference) than initially and therefore
choose to postpone the deficit reduction. 9
5. Common-pool problems, which arise because government spending is usually
targeted on individual groups, but financed out of general taxes. Individual
groups therefore lobby for spending on their preferred programmes
without considering the full budgetary costs now as well as in the future.
This can lead to both overspending and excessive debt accumulation for
the same reasons as the absence of clearly defined property rights over
natural resources can lead to overexploitation of them. A special case of
Persson and Svensson (1989) and Alesina and Tabellini (1990).
7 This form of time inconsistency was first discussed by Kydland and Prescott (1977) in the context of monetary
policy. Agell et al. (1996) is an early application to fiscal policy.
Modern analysis of intra-personal preference reversals was pioneered by Laibson (1997) using so-called hyperbolic
discount functions (as opposed to conventional exponential discount functions). Bertelsmann (2009) has applied this
analysis to public debt. See also Rogoff and Bertelsmann (2010).
See von Hagen and Harden (1994) and Velasco (2000).
8 Studier i Finanspolitik 2010/9
the common-pool problem is wars of attrition over budgetary consolidations.
They imply that, in a situation of unsustainable deficits, each group in
society – and the political party representing it – tries to postpone the
necessary fiscal adjustment in the hope that the burden of adjustment can
be shifted on to other groups.
2.2 Fiscal rules
Fiscal rules are widely seen as an appropriate method to offset tendencies to
excessive debt accumulation. By a fiscal rule I mean a well-defined target or
constraint for fiscal policy (or a set of targets or constraints) as well as principles
(guidelines) for how deviations from these targets or constraints are to be
A specific budget outcome or a specific path for government debt
over a certain period are examples of targets. Deficit and debt ceilings as well
as expenditure ceilings are examples of constraints. Such targets and
constraints do not have a value of their own, but should instead be seen as
intermediate objectives formulated with the aim of making it easier to attain
more fundamental, higher-level objectives.
Higher-level fiscal objectives
One can conceive of a number of higher-level objectives for budget and debt
• Long-run fiscal sustainability, implying that the government needs to meet its
intertemporal budget constraint, that is be able to service its debt. This is,
however, only a restriction, not an objective: since many paths for
government debt are consistent with this requirement, it does not pin
down a specific path (nor an end point).
• Social efficiency, which gives a motive for tax smoothing, that is to even out
(marginal) tax rates over time. This minimises the distortionary costs of
taxation and thus contributes to the smoothing of consumption over time
for households, which is welfare-improving.
• Intergenerational equity. What should be regarded an equitable distribution of
welfare across generations depends on value judgements. But a common
value judgement is that each generation should pay for its own costs.
• Precautionary savings to prepare for unanticipated contingencies. These could
refer to both the short and the long term. In the short term, an important
objective is to provide room of manoeuvre for stabilisation policy by
staying clear of the critical debt level at which default premia on
In the long term, the objective is to
government bonds start rising rapidly.
Alesina and Drazen (1991).
11 The seminal work on the principles to be observed when formulating fiscal rules is Kopits and Symansky (1998).
12 Auerbach (2008) and Finanspolitiska rådet (2008) discuss these higher-level objectives in more detail.
13 This value judgement has been clearly formulated by, for example, the Swedish government. See
Finansdepartementet (2010) and Budget Bill (2010). Implicit in such considerations is a rejection of the so-called
Ricardian view that the current generation adequately represents future generations.
See, for example, Bi and Leeper (2010) for an analysis of this.
15 Studier i Finanspolitik 2010/9 9
provide buffers against, for example, future increases in equilibrium
employment that put strains on public finances.
These higher-level objectives could motivate different types of fiscal rules as
well as different numerical values for the targets/constraints chosen.
According to most models, the tax-smoothing motive does not imply a target
for government debt: instead debt should act as a buffer against public finance
shocks and follow a random walk. This is consistent with a deficit target
“without memory” where past deviations from the target should not be
compensated. In contrast, a debt target or a deficit target “with memory” is
more in line with an objective for distribution across generations. Such
formulations would also square with the precautionary motive to the extent
that interest rates on sovereign debt are related to the debt level.
In principle, it is not possible to decide an adequate intermediate fiscal target
without first taking a stand on the relative importance of the various higher-
level objectives. Unfortunately, this is rarely done. For example, the Fiscal
Policy Council in Sweden has repeatedly criticised the government for its
failure to explain how its so-called surplus target, according to which government
net lending should amount to one per cent of GDP over a business cycle, has
been derived from the various higher-level fiscal objectives. In the long term,
such lack of motivations could threaten the legitimacy of a fiscal target.
The determination of an intermediate fiscal deficit or debt target should take
into account the interaction with other policies. There is an obvious such
interaction with future employment developments, in particular with the
development of the retirement age. Prefunding through fiscal surpluses now and
later retirement can be seen as substitutes for each other when it comes to
meeting the future fiscal changes arising from an ageing population. This
provides a strong argument for simultaneous determination of fiscal targets
and future employment targets (including policies to raise the retirement age),
so that appropriate trade-offs can be made. 19
The role of intermediate objectives
The rationale for fiscal rules regarding intermediary targets/constraints is that
it is likely easier to agree on policies that reflect “true” social preferences when
the choice is framed as an ex ante matter of principle rather than as a concrete
policy choice in a specific situation. One should expect the risks of policy
“slippage” to be smaller if policy in the short and medium term can be
evaluated against a simple, well-defined benchmark rather than against more
complex, higher-level objectives.
The exact logic depends, however, on the perceived causes of deficit bias
under discretionary decision-making. A decision on rules can be seen as being
See Wren-Lewis (2010a).
16 A debt target and a deficit target over a longer period are similar since a fixed annual deficit as a percentage of GDP
implies that the debt ratio converges to a specific value. See, for example, Finanspolitiska rådet (2008).
Finanspolitiska rådet (2008) and Swedish Fiscal Policy Council (2009, 2010).
18 This point was elaborated in Swedish Fiscal Policy Council (2009). As a response to the council’s discussion, the
Swedish government made it clear for the first time in the Spring Fiscal Policy Bill (2010) that prefunding should not
finance future costs arising from increased longevity and higher quality of publicly financed welfare.
10 Studier i Finanspolitik 2010/9
taken under “a veil of ignorance” regarding who will be in government in the
future. It should therefore help offset deficit bias arising from political rent-
seeking and short-sightedness deriving from limited periods of office.
Decisions on rules would also address the time-inconsistency problems (arising
from either the temptation to choose other policies once private-sector
behaviour has adjusted to particular policy expectations or from preference
reversals over time) because they are taken ex ante and not ex post. Finally, rules
might also help counteract the lack of internalisation of externalities inherent in
the common-pool problem, as it offers an opportunity for agents to rise above
the day-to-day struggle for resources. In contrast, one should not expect rules
to help if the root cause of excessive debt accumulation is insufficient
understanding of the long-run consequences of fiscal policy, unless the rules
are imposed by external agents with better understanding than domestic
legislators (as might be the case for some countries with EU fiscal rules).
Pragmatic considerations should play a role for the choice of intermediate
objectives. One aspect concerns the possibility to verify fiscal outcomes. The
problem of distinguishing between current expenditures and capital
expenditures has been used as an argument against a golden-rule formulation
according to which budget targets would encompass total government net
savings (including net government investment) rather than just financial
government net savings (net lending).
Pragmatic considerations also speak in favour of targets rather than constraints
for fiscal policy. Experience suggests that constraints in the form of deficit or
debt ceilings act as quite weak incentives for fiscal restraint, as governments
often choose to stay close to these ceilings in ordinary times, which implies
little leeway in the event of adverse shocks. One example is the EU stability
pact, where many countries were so close to the deficit ceiling of three per cent
of GDP that the violations in the economic crisis became very large. Another
example is the earlier fiscal rule in the UK according to which government net
debt should be below 40 per cent of GDP. Since debt stayed close to this limit,
the crisis implied a huge violation of it with the consequence that the rule was
2.3 Credibility versus flexibility
An important trade-off in the formulation of fiscal rules concerns credibility
versus flexibility. Here, it is interesting to contrast the examples of Germany and
Germany has recently reformed its fiscal framework by enshrining a new fiscal
rule in its constitution. The rule is a balanced-budget one: cyclically adjusted
net borrowing should be zero. The rule is binding in the sense that it is
followed up by a backward-looking indicator with memory. Deficits exceeding
0.35 per cent of GDP are accumulated in an account. When the accumulated
Finanspolitiska rådet (2008).
20 Office for Budget Responsibility (2010a,b).
21 See Federal Ministry of Finance (2009).
22 Studier i Finanspolitik 2010/9 11
deficits exceed 1.5 per cent of GDP, the government is obliged to reduce
them. Although this needs to be done only in cyclical upswings, the rule
implies a strong commitment with limited possibilities of discretionary
adjustment to unforeseen contingencies.
As discussed above, Sweden has the rule that government net lending should
be one per cent of GDP over a business cycle. Given the difficulties of dating the
cycle, this gives the government much discretionary leeway. The government
uses five different indicators to evaluate whether the target is met: (i) a
backward-looking ten-year average of actual net lending; (ii) a corresponding
backward-looking average of cyclically adjusted net lending; (iii) a partly
forward-looking seven-year average of net lending (encompassing actual
outcomes three years back and forecasts for the current and the three coming
years); (iv) a corresponding partly forward-looking average of cyclically
adjusted net lending; and (v) current (this year’s) structural net lending. There
is an apparent lack of transparency because the indicators represent
conceptually very different targets (both with and without memory) and can
show very different outcomes. This approach appears to have been chosen
because the government wants to retain a large amount of flexibility regarding
how fiscal policy can be used as a stabilisation tool.
The German and Swedish approaches represent polar cases. The different
choices may reflect that the “production possibility frontiers” with regard to
credibility versus flexibility are different. The recent Swedish fiscal track record
is better than the German one and a more flexible approach therefore probably
entails a smaller credibility loss.
Still, it would appear possible to find a better trade-off between credibility and
flexibility than in both Germany and Sweden. One in-between possibility
would be to define a clear threshold just as in the German case (for example, a
deviation of a certain magnitude from a well-defined past average of actual
deficits), but not let this threshold automatically trigger a fiscal response.
Instead, when passing the threshold the government could be obliged to
explain to the parliament why the situation has arisen and whether a, and if so
what, response is required. This would serve to highlight the situation for the
general public, but also give the government an opportunity to explicitly take
the cyclical situation into account and possibly to reformulate future budget
targets in response to the earlier deviation. The outlined procedure has some
resemblance with the stipulation for the Governor of the Bank of England to
write an open letter to the Chancellor of the Exchequer when there has been a
deviation of more than one percentage point from the inflation target.
Structural net lending incorporates adjustment for both the cycle and one-off fiscal measures. See Swedish Fiscal
Policy Council (2010).
Finansdepartementet (2010) and Spring Fiscal Policy Bill (2010).
24 Swedish Fiscal Policy Council (2010) contains such a proposal.
12 Studier i Finanspolitik 2010/9
3 Independent fiscal watchdogs
A way of strengthening incentives for fiscal discipline that has recently received
widespread interest is to set up independent fiscal watchdogs. The establishment
of such institutions with a remit to monitor public finances have recently been
endorsed by European institutions such as the Ecofin Council, the European
Council, the European Commission and the ECB as well as by IMF staff
members. Several countries have also in recent years set up such independent
fiscal institutions. They include Sweden (2007), Canada and Hungary (2008),
Slovenia (2010) and the UK (2010).
The recent trend towards establishing fiscal watchdogs has two sources of
inspiration. The first comes from earlier existing institutions with a similar
remit. These include the High Council of Finance (HCF) in Belgium (originally
established in 1936 but with an extended remit in 1989), the Central Planning
Bureau (CPB) in the Netherlands (from 1947), the Economic Council in
Denmark (from 1962), the Congressional Budget Office (CBO) in the US
(from 1975) and the Government Debt Committee in Austria (from 2002).
The second source of inspiration has been a series of academic proposals on
independent fiscal institutions. The first one was von Hagen and Harden
(1994). Later ones include Wren-Lewis (1996, 2002), Ball (1997), Blinder
(1997), Calmfors (2003, 2005), Wyplosz (2002, 2005) and Kirsanova et al.
(2007). In several cases delegation of some actual fiscal policy decisions to
independent fiscal policy committees (“hard option”) has been proposed. For
reasons of political realism the discussion here focuses only on independent
institutions with advisory or monitoring tasks but without decision-making
power (“soft option”). I label such institutions fiscal policy councils. All existing
fiscal watchdogs are of this type.
3.1 Tasks of fiscal policy councils
To analyse what the soft power of a fiscal policy council can achieve, it is
helpful to start out from the discussion in Section 2.1 of various explanations
of fiscal profligacy. It also makes sense to distinguish between the impact that
could occur also in the absence of fiscal rules and the impact that may arise in
conjunction with such rules.
Fiscal councils could obviously have a direct disciplining effect to the extent
that a deficit bias depends on insufficient understanding of the long-run
consequences of fiscal policy among both politicians and voters or on politicians
acting in their own interest. A council could increase awareness of the future costs
of current deficits. It could help offset tendencies to overoptimism and
overconfidence by highlighting historical examples and providing analysis of
See, for example, Council of the European Union (2006), European Commission (2009), van Rompuy Task Force
(2010), European Council (2010a, b) and ECB (2010) as well as Annett et al. (2005) and Debrun et al. (2009).
See Debrun et al. (2009) and von Hagen (2010) for surveys of independent fiscal institutions. Mihály (2010) and
Delpla (2010) also provide informative accounts of such institutions.
See Calmfors (2005), Jonung and Larch (2006) and Debrun et al. (2009) for surveys of such academic proposals.
28 This is the terminology used by, for example, Calmfors (2005), Wyplosz (2005), Rogoff and Bertelsmann (2010),
Wren-Lewis (2010a) and von Hagen (2010).
See Rogoff and Bertelsmann (2010) and von Hagen (2010) for elaboration of these points.
30 Studier i Finanspolitik 2010/9 13
the sensitivity of budget calculations to various risks. By increasing fiscal
transparency a council would make governments more accountable and thus
make it harder for politicians to pursue their own interests. This could be done
through monitoring of off-budget items and various attempts at creative
accounting as well as through sustainability analyses. Since too optimistic
forecasts seem often to have been used by governments to hide prolific fiscal
policies, the provision of unbiased forecasts by an independent fiscal
institution may also contribute to more fiscal discipline. Independent analysis
of macroeconomic developments also makes it more difficult for incumbent
governments to try to signal competence to the electorate through deficit-
increasing policy that raises output and employment only in the short term.
The discussion in Section 2.1 also pointed to short-sightedness of governments
and time-inconsistency problems as important causes of excessive debt
accumulation and to fiscal rules as an appropriate method to address these
problems. Monitoring by independent fiscal policy councils that governments
adhere to such rules is a way of making the rules more binding. It is well-
known that fiscal rules strengthen the incentives for creative accounting. A
fiscal policy council can help spot such attempts and renounce them publicly.
A council can therefore be a complement to a rule: it gives the council a
benchmark to evaluate government policy against. At the same time, more
elaborate monitoring by an independent institution can allow a fiscal rule to be
more flexible, permitting more contingencies: independent evaluations make it
less necessary for a government to earn credibility through mechanical
application of a simple and more easily monitored rule. For example, a fiscal
policy council could add to the public’s understanding of whether a
government’s explanation of a deviation from the fiscal target is convincing.
To the extent that one tries to address the common pool problem through a fiscal
rule, an independent council again helps if it strengthens the incentives to
observe the rule. But some fiscal institutions have also been designed to deal
more directly with the common-pool problem by acting as mechanisms for
coordinating various interests through the formulation of fiscal targets that are
to serve as basis for budget negotiations. The Government Debt Committee in
Austria and the HCF in Belgium are two examples. Both these institutions
have members nominated by various levels of government. However, this
form of “representative” nomination could make it more difficult to fulfil an
independent watchdog function. This risk appears particularly great in the
Belgian case as the HCF is chaired by the Minister of Finance. The risk seems
much smaller in the Netherlands where the CPB, which is a pure expert body,
provides analyses of the macroeconomic and public-finance consequences of
This point has been emphasised in particular by Jonung and Larch (2006).
31 See for example von Hagen and Wolff (2006).
32 See also Debrun et al. (2009).
33 See the discussion in Section 2.3.
34 von Hagen (2010).
14 Studier i Finanspolitik 2010/9
draft agreements between prospective coalition partners in the negotiating
process preceding the formation of a new government. 36
3.2 Tasks of a fiscal watchdog
A number of possible tasks for a fiscal policy council can be identified from
both actual practice and various proposals. They can be summarised as
• The provision of “objective” macroeconomic forecasts on which
government budget proposals can be based. This is done by, for example,
the CPB in the Netherlands, the Economic Council in Denmark and the
newly created Office for Budget Responsibility (OBR) in the UK.
• Costing of various government policy initiatives as done by, for example,
the CBO in the US, the CPB in the Netherlands and the Parliamentary
Budget Office (PBO) in Canada.
• Ex ante evaluation of whether fiscal policy is likely to meet its medium-term
targets. Two examples are the Fiscal Council in Hungary and the OBR in
• Ex post evaluation of whether fiscal policy has met its targets. This is a key
task for the Swedish Fiscal Policy Council.
• Analysis of the long-run sustainability of fiscal policy. Such analyses are
performed by, for example, the CPB in the Netherlands, the CBO in the
US, the Government Debt Committee in Austria, the Fiscal Council in
Hungary and the Fiscal Policy Council in Sweden.
• Normative recommendations on fiscal policy. Only a few independent fiscal
institutions engage in this. They include the Austrian Government Debt
Committee, the Danish Economic Council and the Swedish Fiscal Policy
The appropriate tasks for an independent fiscal policy council depend on the
institutional environment. For example, the Swedish Fiscal Policy Council
specialises in broader, overall evaluations of fiscal policy of a less-routine
character with a heavy academic input, but does not engage in forecasting or in
detailed budget projections. This is a natural choice given the existence of
other government agencies with an acquired reputation for independent
analysis. These include the National Institute for Economic Research
(Konjunkturinstitutet), which provides independent macroeconomic forecasts as
well as analyses of the effects of various tax and labour market reforms, and
the Office for Budget Management (Ekonomistyrningsverket), which is
responsible for continuously updating government budget forecasts and for
the government’s annual financial statement. In countries where such other
institutions do not exist, these activities could instead be performed by a fiscal
Bos and Teulings (2010).
36 See Debrun et al. (2009), von Hagen (2010) and Mihály for surveys of the tasks of various fiscal institutions. Bos and
Teulings (2010) provide specific information on the Netherlands, Calmfors (2008, 2010a) on Sweden, Kopits and
Romhányi (2010) on Hungary, Office for Budget Responsibility (2010a,b) on the UK, and Page (2010) on Canada.
Studier i Finanspolitik 2010/9 15
policy council. This is the reason why macroeconomic forecasting is done by,
for example, the CPB in the Netherlands, the Economic Council in Denmark
and the OBR in the UK.
The scope of activities of a fiscal watchdog obviously determines the resources
needed. These also vary strongly among countries depending on the tasks. At
one extreme is the CBO in the US with around 230 employees. The size is
explained by the remit which includes macroeconomic forecasting, annual
analysis of the President’s budget, cost estimates of bills reported by
congressional committees, long-term projections of macroeconomic trends as
well as of federal revenues and expenditures, and analysis of the impact of
policy changes on future budgets (“scoring”). At the other extreme is the
Swedish Fiscal Policy Council, which carries out its more overall evaluations
with a hired staff of only four persons (and a council of eight members
performing their work as side activities to their ordinary employment). In
between these polar cases are, for example, the Hungarian Fiscal Council and
the Danish Economic Council (with staff of around 35 persons in addition to
three full-time council members in Hungary and four chairs performing their
work as side activities to their normal employment in Denmark). Given the
variation in tasks it is impossible to define an optimal size. However, it is the
view of the Swedish Fiscal Policy Council that its resources fall substantially
short of what is required for a sustainable activity. 39
There might emerge goal conflicts between the possible tasks for a fiscal policy
council listed above. There is a risk that making forecasts and giving normative
ex ante policy recommendations could make it more difficult to do unbiased ex
post evaluations of government policy. As forecasts are likely to be wrong most
of the time – and sometimes very wrong – engaging in this activity could also
weaken the credibility of the council in the public eye and make it harder to
fulfil other tasks.
Does a watchdog need official status?
It is sometimes asked why academics and other economic experts cannot just
participate in the general public debate with forecasts, analyses, evaluations and
recommendations either as individuals or as groups set up by various private
institutions? Why would they need the stamp of being an official fiscal policy
council? There are three possible answers to these questions.
1. A first answer is that having an official status does give more influence.
Since there are many players competing for media attention, an official
status gives an edge. Influence in the long term must, however, mainly
build on the reputation (the institutional capital) that can be built up over
time only through analysis that is perceived to be impartial and of high
See Debrun et al. (2009).
38 Calmfors (2010a).
39 Wren-Lewis (2010a).
16 Studier i Finanspolitik 2010/9
2. A second answer is that an official council can be given a formal role in the
budget process, such that an arena for repeated exchange between
politicians and civil servants on the one hand and council members on the
other hand are created. This can be done in several ways: through the
provision of forecasts and analytical input to be used in the preparation of
the budget, through explicit policy recommendations to the government at
some stage of the budget process, through evaluation of government
proposals or through regular hearings with council members in the
3. The most important motivation for having an official fiscal watchdog may,
however, be to commit independent academics and other economic
experts to a sustained and consistent participation in the public discussion
about fiscal policy. Being appointed to a fiscal policy council means a
commitment to be up to date on fiscal policy issues that may be difficult to
get otherwise. With increasing research specialisation and increasing
requirements on academic publishing, it seems to be becoming gradually
more difficult to get academics to set aside time to take part in the
economic policy debate. At the same time, the number of issues that
economists study has widened dramatically. The establishment of an
independent fiscal policy council can be seen as an institutional
arrangement to re-direct academic talent in the direction of fiscal policy
evaluation. This could be interpreted as a remedy for a “market failure”:
private demand for the services that a fiscal policy council can provide may
not be large enough to generate the resources needed to make academics
allocate sufficient time to such work.
A criticism sometimes advanced against independent fiscal watchdogs is that is
“undemocratic” to have unelected experts evaluate elected representatives.
The obvious counterargument is that such a watchdog provides a basis for
decisions that take account of both the preferences of the majority of voters
and economic constraints in a more rational way than would otherwise be the
case (see Section 2.1). By providing better information for citizens, the
possibilities of holding policy makers accountable are also increased.
It is important how the mandate of a fiscal policy council is formulated. From
a democratic point of view it is hard to see objections against forecasts or
analyses of the consequences of specific proposals by an independent council.
The issue is more contentious when a council evaluates policy or makes
normative recommendations. Even if the council is only advisory, agenda-
setting power could mean a large influence over policy. For this reason, a
council should not itself formulate the economic-policy objectives that guide
its activities but instead base them on objectives formulated by the political
See also Calmfors (2010a).
41 When the Swedish Fiscal Policy Council was established, the Social Democrats voted against. An argument used was
that “ultimately it should be the elected representatives of the Swedish people who evaluate the policy pursued”. It was
stated that “for this reason we reject the government’s proposal to give a fiscal policy council the task of evaluating the
contents of policy” (Motion 2006/07:Fi10).
+1 anno fa
Dispensa al corso di Economia dell'integrazione europea della Prof.ssa Lilia Cavallari. Trattasi del saggio di Lars Calmfors dal titolo "The role of independent fiscal
policy institutions". Al suo interno sono analizzate le conseguenze della crisi economica mondiale con particolare riguardo all'indebitamento e all'instabilità finanziaria di molti paesi. L'autore propone un rafforzamento dei poteri degli organismi independenti di vigilanza fiscale, al fine di incentivare gli stati al riequilibrio dei conti pubblici.
I contenuti di questa pagina costituiscono rielaborazioni personali del Publisher Atreyu di informazioni apprese con la frequenza delle lezioni di Economia aziendale e studio autonomo di eventuali libri di riferimento in preparazione dell'esame finale o della tesi. Non devono intendersi come materiale ufficiale dell'università Roma Tre - Uniroma3 o del prof Cavallari Lilia.
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