The political battle over delegating decisions over monetary policy to central banks has been fought and won. There may be serious concerns about accountability in some countries, and mandates in others, but there seems to be a political consensus in most places that delegation in this respect is a good thing. (I know some readers disagree with this consensus, but this post is a question about what could happen, rather than what ought to happen.)
There is no major country which delegates decisions over aggregate fiscal policy. I stress aggregate here: I’m not suggesting decisions about particular tax rates or types of spending could be delegated. Instead an independent fiscal institution could set a target level for the budget deficit, and leave it up to the government how that target was achieved. Furthermore the choice between meeting the deficit target using tax changes or spending changes would remain with politicians, so key questions about the size of the state would stay under democratic control.
I’m reminded of this question not by the impending UK autumn statement, but because I have just received my copy of a new collection of essays edited by George Kopits. Its title is “Restoring Public Debt Sustainability: The Role of Independent Fiscal Institutions”. The story behind the book is interesting in itself. Its basis is a conference in Budapest organised by the former Hungarian Fiscal Council. Although a few fiscal councils  existed a decade ago, in the last ten years many more have been established, and that included one in Hungary that George chaired. All such councils are advisory - none can tell governments what to do. The meeting in Budapest was I believe the first international gathering of these councils, as well as a few academics that had a particular interest in these institutions. (It is what led me to create this website.)
The conference was a prelude to both success and failure. The failure was that soon after the conference the Hungarian Fiscal Council was effectively abolished by a new government. For that government this act was a good indication of things to come, as others have documented. The brief story of Hungary’s Fiscal Council is told in one of the chapters of this book. However, the success is that, with George’s help, the OECD took on the task of holding regular gatherings of fiscal councils, and it has issued a statement of principles which are an appendix to the book’s introduction.
A few of the essays in the book touch on the question I posed at the beginning of this post, including my own, which compares the delegation of monetary and fiscal policy. In a sense the demise of Hungary’s fiscal council explains why most of the discussion at the conference was happy to see such councils as advisory only. Giving governments advice they may well not want to hear is difficult and dangerous enough, and so fiscal councils need to be well established (and therefore less vulnerable) before we can think of going any further. One step at a time.
Yet once these councils have been established, it becomes easier to imagine the possibility that delegation could go beyond advice to actual control. Take the UK case for example. The government sets its fiscal mandate (cyclically adjusted current balance in 5 years time), just as it does the inflation target. The OBR then tells the government what it needs to do to meet that mandate. So, having set the mandate, the amount of aggregate discretion left to the government in each budget is limited. It would seem quite a small step to let the OBR decide how quickly the mandate should be achieved. Another small step would be for the government and OBR to negotiate over the mandate itself (just as the central bank and government negotiate over the inflation target in New Zealand).
Small steps, but much too large in political terms right now, as I once discovered when giving evidence to the Treasury Select Committee. (See the second footnote to this post.) Yet in ten or so year’s time, when more of these councils are well established, I can see things might be quite different for two reasons. First, when the recession is finally over there will be a clear consensus that a slow (and state contingent) reduction in net debt levels is required, yet some governments may start to waver from this task for short term political gain. Second, it will have become even clearer that governments, by undertaking austerity at just the wrong time, inflicted substantial damage on their economies, and that maybe everyone would be better off if they were not given that opportunity again.
 I use the term fiscal council to cover much the same set that George calls Independent Fiscal Institutions. His term is probably more accurate, but I still prefer fiscal council!