The Political Economy of Fiscal Transparency and Independent Fiscal Councils

Abstract

The global surge in independent fiscal councils (IFCs) raises three related questions: How can IFCs improve the conduct of fiscal policy? Are they simultaneously desirable for voters and elected policymakers? And are they resilient to changes in political conditions? We build a model in which voters cannot observe the true competence of elected policymakers. IFCs' role is to mitigate this imperfection. Equilibrium public debt is excessive because policymakers are "partisan" and "opportunistic." If voters only care about policymakers' competence, both the incumbent and the voters would be better off with an IFC as the debt bias would shrink. However, when other considerations eclipse competence and give the incumbent a strong electoral advantage or disadvantage, setting up an IFC may be counterproductive as the debt bias would increase. If the incumbent holds a moderate electoral advantage or disadvantage, voters would prefer an IFC, but an incumbent with a large advantage may prefer not to have an IFC. The main policy implications are that (i) establishing an IFC can only lower the debt bias if voters care sufficiently about policymakers' competence; (ii) not all political environments are conducive to the emergence of IFCs; and (iii) IFCs are consequently vulnerable to shifts in political conditions.

Under threat: Rules-based fiscal policy and how to preserve it

“…By influencing the public debate and clarifying the meaning of traditional signals about fiscal policy-official budget documents and statements, parliamentary debates-IFCs inform all interested parties in the budget process (from parliaments to markets and the voting public). Doing so, IFCs can trigger meaningful discussions on the broad adequacy of the fiscal stance, and there is suggestive evidence that stronger fiscal performance has followed (see Kopits, 2011;Beetsma, Debrun and Sloof, 2017;Jonung, 2015;.…”

Measuring the fiscal governance instruments: a synthetic index for EU countries

“…Their research reveals that the effectiveness of rules is higher when they are supported by independent fiscal councils. The existence of independent fiscal institutions favours compliance with fiscal rules, especially those relating to balanced budget and expenditure (Beetsma et al, 2017). The positive impact of independent monitoring and of real time warnings issued by independent bodies when there is a risk of non-compliance with fiscal rules is demonstrated by Reuter's research (2017).…”

“…Most of the research conducted so far to determine the impact of fiscal governance instruments on the fiscal outcomes deals with respective instruments separately. Only some of the studies point to the need for support from independent fiscal institutions to ensure compliance with fiscal rules (Beetsma et al, 2017;Hallerberg, Strauch and von Hagen, 2007;Wyplosz, 2012). In accordance with those studies, those instruments are complementary to one another and hence it would be legitimate to determine the combined impact of using them in respective countries on the fiscal outcomes.…”

On the Legitimacy of Fiscal Councils in the European Union: Trustees or Orchestrators of Fiscal Discipline?

“…This signal will be the stronger, the higher the reputation of the fiscal council for non-partisanship. Third, by enhancing fiscal transparency better informed citizens will make better decisions when judging the government's fiscal competence (Beetsma, Debrun, and Sloof 2017). Hence, the ideational support provided by the orchestrator is crucial in flattening out any existing informational imbalances.…”