Thursday, 5 July 2012

Fiscal councils: births, and the trials of youth


                Fiscal councils, or independent fiscal institutions, are growing in popularity. In the last year or so they have been established in Portugal, Ireland, Australia and most recently, Slovakia. (See my fiscal council web page for details.) They provide an independent check on the fiscal numbers produced by government. The councils differ widely in focus, structure and remit (see Calmfors and Wren-Lewis, 2011, for a comparison), with some concentrating on the macro numbers, and others also doing substantial microeconomic project costing along the lines of the Congressional Budget Office in the United States. For just one example of why independent analysis is useful, see here.
                Establishing a fiscal council is only half the battle. Almost by definition, fiscal councils will be an inconvenience to governments. They are also highly vulnerable, as the government provides their funding. This is particularly true in their earlier years, when councils have not had time to build up public support. A contest between a fiscal council and the government is a David and Goliath encounter where the only weapon the council has is public support. A cynical view might be that therefore they are unlikely to be truly independent – why annoy the hand that feeds you? However experience suggests otherwise, largely as a result of the integrity of those that lead them.
 A recent example comes from the Parliamentary Budget Office (PBO) in Canada. The PBO has had a number of antagonistic brushes with government. The latest involves government departments refusing to disclose data. Now it appears a no-brainer that a fiscal council needs data to do its job – but then, as an active supporter of fiscal councils, maybe I’m biased. So read this report and this blog, and make up your own mind.
As the only weapon fiscal councils have in battles like these is public opinion, then it is very important that economists do what they can to provide their support when appropriate. I was shocked at the ease with which in 2011 the Hungarian government effectively closed down their two year old fiscal council (see here for details). Economists have long been champions of the independence of central banks, but independent fiscal councils are just as important, and arguably they are far more vulnerable than central banks. 

5 comments:

  1. In my experience (admittedly from inside Government), Government-funded organisations tend to be even more critical of Government than non-funded organisations precisely because they feel the need to demonstrate their independence.
    Jim Groves

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  2. Prof Simon, I fully support your attempts to promote fiscal councils. Though I disagree on the extent to which central bank monetary policy committees and fiscal councils should work hand in hand. At the very least, each of these two needs to know what the other is planning, wouldn’t you say? Personally, I’d merge the two because I don’t believe that fiscal and monetary policy should be implemented separately. But I’m in a minority of about one there.

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    1. I'm afraid I'm not about to join your minority, but I think there are very interesting issues here. Exchange of information is certainly good, but some skepticism may also be healthy. For example, if a government cuts spending, should a fiscal council assume that the monetary authority will be able to completely counteract the impact of this on output and inflation, particularly in a liquidity trap? Normally I think the issues of short term stabilisation (monetary policy) and long term debt control (fiscal council) are sufficiently different for it to make sense to have separation, but it can lead to problems in exceptional times.

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    2. I feel like I have to join this discussion since I worked for the Mexican (dependent) fiscal council http://goo.gl/riybw
      I don't believe (as the post suggest) that a FC should have access to privilege data (many reasons, eg reliability, avoid collision, etc).

      In our case, one of our most important duties was to work with the available data and to construct our own models and estimates. So that we would be able to compare our projections with the Treasury Ministry and the Central Bank. In theory, if we would have inside information, our estimates should be very closely and no one would be able to replicate our results. That would add to the lack of credibility.

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