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Role of independent fiscal policy institutions Appunti scolastici Premium

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... Vedi di più

Esame di Economia aziendale docente Prof. L. Cavallari

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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

accumulation

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

been identified.

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

shocks). 3

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.

5

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.

7

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

8

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

10

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

8

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

9

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).

10

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.

11

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

handled. 12

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

policy: 13

• 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.

14

• 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.

15

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

14

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

16

more in line with an objective for distribution across generations. Such

17

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,

18

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

17

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

19

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).

20

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

abandoned. 21

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

Sweden.

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

22

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

23

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.

24

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

25

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

23

Policy Council (2010).

Finansdepartementet (2010) and Spring Fiscal Policy Bill (2010).

24 Swedish Fiscal Policy Council (2010) contains such a proposal.

25

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

26

fiscal institutions. They include Sweden (2007), Canada and Hungary (2008),

Slovenia (2010) and the UK (2010).

27

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

28

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

29

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

30

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

26

(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

27

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),

29

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

31

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

32

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

33

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.

34

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

35

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).

35

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

follows:

37

• 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

the UK.

• 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

Council.

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

37

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

38

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.

40

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

quality.

See Debrun et al. (2009).

38 Calmfors (2010a).

39 Wren-Lewis (2010a).

40

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

parliament.

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”:

41

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.

Democratic legitimacy

A criticism sometimes advanced against independent fiscal watchdogs is that is

“undemocratic” to have unelected experts evaluate elected representatives.

42

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

42

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). Studier i Finanspolitik 2010/9 17

system. Policy evaluations and recommendations should only concern the

possibilities of reaching these objectives. This is also the way existing councils

function.

One cannot, of course, dismiss the possibility that a fiscal policy council could

misuse its powers and define its own political agenda, although this is likely to

lead to a loss of reputation and influence. How large this risk is depends to

some extent on how council members are chosen (see Section 3.2). One way

of reducing the risk of improper “political” behaviour could be to organise

recurring international “peer reviews” of council activities.

A related issue is how a fiscal watchdog should time its activities relative to the

political debate. The CPB in the Netherlands has a deliberate policy of trying

to be ahead of the debate but to be more cautious once a debate on a certain

topic is running between the political parties or between other interest groups.

43

In a similar vein, the independent chairs of the Danish Economic Council do

not participate in the public debate before elections. Such a stand is not,

however, unproblematic. It could just as well be argued that the input of an

independent council is particularly important in situations of on-going political

debates if citizens are to be able to form informed opinions. For this reason,

the Swedish Fiscal Policy Council has not formulated similar constraints on its

activities as the CPB in the Netherlands and the Economic Council in

Denmark.

44

A particular problem concerns the relationship between fundamental, higher-

level objectives and intermediate targets. If the government has formulated a

fiscal rule entailing a medium-term, intermediate budget target, it is a

straightforward task to evaluate whether fiscal policy conforms to that target.

But one could very well argue that a fiscal policy council should also have the

task of analysing whether such a target conforms to the higher-level objectives

of fiscal policy. Indeed, given the expertise that a fiscal policy council is likely

to have, it may be considered particularly suitable to make such an analysis.

45

The terms of reference for the Swedish Fiscal Policy Council state that it

should assess “to which extent the government’s fiscal policy objectives are

being achieved. These objectives include long-run sustainability, the surplus

target, the ceiling on central government expenditure and that fiscal policy is

consistent with the cyclical situation of the economy.” The council has

interpreted sustainability as a fundamental, higher-level objective and has for

this reason evaluated the consistency of the surplus target (for government net

lending) with it at the same time as it has evaluated to what extent fiscal policy

has conformed to the surplus target in the medium term.

However, it could also be argued that it could be (or could be believed by the

general public to be) more difficult for a fiscal watchdog to evaluate whether

Bos and Teulings (2010).

43 Another reason is that it is part of the remit of the Swedish council to act as a “watchdog in the public debate”, as

44

discussed in Section 4.2.

See Finanspolitiska rådet (2008), Swedish Fiscal Policy Council (2009a, 2010), and Calmfors (2005, 2010a).

45

18 Studier i Finanspolitik 2010/9

the intermediate target is met if it views this target as inconsistent with the

fundamental, higher-level objectives. In my view, the advantages of analysing

the consistency between higher-level objectives and intermediate objectives are

likely to outweigh the disadvantages. It should be possible to distinguish

between the two types of considerations provided that the analysis is

transparent enough.

46

3.3 The set-up of a fiscal policy council

Regarding the set-up of a fiscal policy council, several aspects should be

considered:

• Independence

• Composition

• Influence

Independence

If a fiscal policy council is to act successfully as a countervailing force to fiscal

irresponsibility arising from inherent tendencies in the political process,

independence from the political sphere should be granted in much the same

way as for central banks. A council should have a clear mandate to pursue its

47

remit in an independent way without government intervention in its activities.

There should be a long-term budget for the council so that it does not have to

fear that its resources may be cut if it reaches politically unpopular

conclusions. Long-term and non-renewable appointments are a way of

48

reducing the risk that council members are unduly affected by re-appointment

concerns. The benefits of this must, however, be balanced against the risk that

long periods of office could make it harder to recruit members, especially from

academia (see also the next section). There is also the problem that “low

turnover” of council members could hamper the influx of new ideas. The

Fiscal Council in Hungary where appointments are for nine years and non-

renewable is an example of long periods of office. In contrast, appointments

49

to the Swedish Fiscal Policy Council are only for (maximum) three years. 50

An important question is whether a fiscal policy council should be an agency

under the government or under the parliament. The CBO in the US and the

PBO in Canada are examples of fiscal watchdogs attached to the parliament. 51

So is the Fiscal Council in Hungary in the sense that its members are elected by

the parliament. In contrast, for example, the Economic Council in Denmark,

52

See Wren-Lewis (2010a) for a similar conclusion.

46 See also Debrun et al. (2009) and Calmfors (2010a).

47 Lessons from the PBO in Canada show that this is a relevant concern. Its budget was reduced in 2009-10 after

48

publication of reports that were regarded as politically controversial (Page 2010).

Kopits and Rományi (2010).

49 The first members were appointed for a three-year period (2007-2010). After the first three-year period,

50

appointments were made for only one year. The probable reason is that the government wanted an option to re-

organise the council.

The director of the CBO in the US is appointed jointly by the House of Representatives and the Senate and can be

51

removed by either house (Debrun et al. 2009).

The President of the Republic, the Governor of the National Bank and the President of the State Audit Office

52

nominate one candidate each (Kopits and Rományi 2010). Studier i Finanspolitik 2010/9 19

the Fiscal Policy Council in Sweden and the OBR in the UK are all formally

government bodies with appointments made by the government. Putting a

53

council under the parliament rather than the government is a way of

emphasising that the council has a more independent standing than an ordinary

government agency. It would also mean that decisions on the council’s budget

are taken in a different way than for other government agencies. Still, in a

parliamentary democracy the difference between being under the parliament

and being under the government may not be large, as MPs usually do not act in

an independent way relative to the government.

A possible protection against political appointments is to have members

appointed after proposals from the council itself. This procedure has been

followed for the Economic Council in Denmark and it has been replicated in

Sweden. The idea is to create a reputational cost for the government of not

following the proposals.

A pertinent question concerns the nature of contacts between a fiscal policy

council and the government: should they be both ex ante and ex post or only ex

post. It may be thought that a council could exert greater influence on policy if

it can give advice to the government in the process of preparing the budget

before the government has made its stand public which it may be difficult to

back from. Such ex ante advising behind “closed doors” would, however, make

it more difficult for the council to make an independent ex post evaluation. For

this reason, the Swedish Fiscal Policy Council has chosen not to have any ex

ante contacts with the government (before publication of its annual report). 54

The council meets the Minister for Finance only in connection with the

delivery of the report. In contrast, the arrangements for the Office for Budget

Responsibility in the UK are less clear in this respect, as the terms of reference

allow it “to consult the Chancellor in preparing documents”. The experiences

55

of the CPB in the Netherlands illustrate the risks associated with such

procedures. Bos and Teulings (2010) claim that the regular meetings that take

place with cabinet ministers are sometimes used to put pressure on the bureau

to change parts of its analysis that do not fit the views of the government.

The UK provides an example of how problematic close cooperation between a

fiscal watchdog and the ministry of finance can be. The institutional set-up is

that the OBR prepares a pre-budget forecast that is used by the Treasury in its

work on the budget bill. But the office also prepares an analysis of the actual

budget which is presented simultaneously with the budget. This timing would

seem to invite problems, as it requires an on-going exchange between the

office and the Treasury during the budget process that could make it difficult

to make an independent evaluation. At least it is obvious that such a

56

It is stipulated in the terms of reference of the OBR in the UK that it should be accountable to the Parliament. The

53

OBR is now being transformed from an interim into a permanent office. The Treasury Select Committee in Parliament

has obtained the right to veto the appointment of the chair of the OBR.

Calmfors (2010a).

54 Office for Budget Responsibility (2010a,b).

55 Indeed, the independence of the OBR’s analysis of the new British government’s first budget in June this year was

56

immediately called into question. The credibility problem has been exacerbated by the fact that the OBR was at its start

20 Studier i Finanspolitik 2010/9

procedure makes the relationship between the watchdog and the ministry of

finance less transparent. A more transparent procedure would be for the

watchdog to deliver its analysis of the budget ex post.

A risk that should not be underestimated derives from the fact that in a small

county – almost – everybody in a field such as economic policy-making and

economic policy analysis knows each other. This means that when evaluating

government policy, council members are likely to be evaluating people they

know well and may have worked or studied together with. This may create a

psychological bias to be “too kind”. This problem is difficult to cope with. A

partial remedy may be to recruit also foreign members to the council.

57

Composition

58

There are at least four possible pools of people from which council members

could be recruited:

• Academic researchers

• Public finance experts from various parts of government administration

• Analysts in the financial sector

• Ex-politicians

Academics and public finance experts from government administration seem

to be the most common recruitment pools for existing fiscal policy

watchdogs. Academics could be expected to apply fresh research perspectives.

59

Another important advantage of academics concerns independence: since

academics’ main arena is another one than politics and government

administration, their judgements are likely to be less affected by political

concerns than those of most other groups. There would be a high reputational

cost in the academic arena for researchers who were seen to be acting in a

political way in the council rather than making research-based judgements.

60

Academics are not, however, likely to have the expert knowledge of

government budgets and government accounting that may be necessary to

make detailed assessments of budget bills and public finance forecasts. This is

an argument for also including public finance experts with a background in

government administration. But there could be a risk that they are to a larger

extent than academics influenced by concerns over future career possibilities in

government administration. An alternative are analysts from the financial

sector. A disadvantage with them might, however, be loyalties to earlier or

(expected) future employers in the sector.

provisionally staffed by economists on temporary leave from the Treasury. See Giles (2010), Financial Times (2010)

and Calmfors (2010b).

In the Swedish Fiscal Policy Council’s first years of existence the vice chair has been from Denmark.

57 See also Calmfors (2010a).

58 See Debrun et al. (2009) and von Hagen (2010).

59 A similar argument has been advanced by Alesina and Tabellini (2007) when analysing the relative merits of political

60

and bureaucratic decision-making. Alesina and Tabellini emphasise the incentives for non-political decision-making by

technocrats, because the career concerns in this group are mainly related to peer evaluation.

Studier i Finanspolitik 2010/9 21

A final possibility is to use ex-politicians. In the Swedish Fiscal Policy Council,

two ex-politicians (a former Social Democratic Minister for Finance and a

former Vice Chair of the Swedish Tory Party) complement six academics. The

presence of well-known former politicians, in addition to economic experts,

may be important for the legitimacy of a fiscal policy watchdog. It may help

fend off the usual critique that academics are too far-off from the “real world”

to be able to make useful inputs in the public policy debate. More importantly,

the impact of a council is promoted if politicians from different parts of the

political spectrum endorse its conclusions. A possible drawback is that former

politicians may be restricted in their analyses by the earlier positions they have

taken in public. They might for this reason be less open than academics to new

thinking when new problems arise and in this way confine the analysis.

An alternative way of linking independent evaluations to the political sphere is

to let a broader set of people representing various interests express their views

on reports written by pure experts. This is done in Denmark, where the

Economic Council’s four independent chairs produce semi-annual reports that

are commented on by representatives (in fact as many as 26) of unions,

employers, the central bank and the government. 61

My overall conclusion is that, for reasons of independence, the majority of the

members of a fiscal council should be academics, but that it could be wise to

complement them with members with other backgrounds.

Influence

In the long term, the influence of a fiscal watchdog is determined by the quality

of its work. To be influential it must earn a reputation for good and impartial

analysis. Such a reputation can create a media pressure that makes it difficult

for the government to ignore the watchdog’s analyses and recommendations.

Examples of institutions that have over time acquired a reputation that gives

them a strong position in the public debate are the CPB in the Netherlands and

the Economic Council in Denmark. In contrast, similar bodies in Germany do

not seem to have succeeded in this respect.

62

It is important that the analyses of an independent council are not perceived as

always mechanically recommending more fiscal restraint than the government,

but as being genuinely open-minded and taking account of the specifics of

every situation. For this reason, the Swedish Fiscal Policy Council’s

recommendation to the government in 2009 to take stronger stimulative fiscal

action to counter the recession (at the same time as long-term fiscal restraint

was advocated) probably enhanced the council’s reputation for an open-

minded analysis. 63

Debrun et al. (2009). Formally, these representatives are also members of the Economic Council, although they are

61

not involved in the preparation of the reports by the independent chairs.

According to von Hagen (2010) institutions such as the Council of Wise Men (Sachverständigenrat), the Council of

62

Academics Advisors to the Minister of Finance and the Joint Business Cycle Forecasting Group “lack visibility and

respect by the government and or their professional peers, with the result that their reports and recommendations do

not catch much public attention”.

Swedish Fiscal Policy Council (2009a,b and 2010) and Calmfors (2010a).

63


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DESCRIZIONE DISPENSA

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.


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Corso di laurea: Corso di laurea in consulente esperto per i processi di pace, cooperazione sviluppo
SSD:
A.A.: 2011-2012

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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