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Designing Effective Independent Fiscal Institutions Designing Effective Independent Fiscal Institutions

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Designing Effective Independent Fiscal Institutions Designing Effective Independent Fiscal Institutions Designing effective independent fiscal institutions Designing effective independent fiscal institutions Independent fiscal institutions (IFIs) serve to promote sound fiscal policy and sustainable public finances. Their numbers in the OECD have more than tripled in the past decade and continue to grow. To- day IFIs are considered among the most important innovations in the emerging architecture of public financial management. The OECD has identified good practices for designing and operating effective IFIs through the OECD Recommendation on Principles for Indepen- dent Fiscal Institutions. The analysis presented in this paper draws on the OECD IFI database compiled from a first set of case studies of 18 OECD IFIs in Australia, Austria, Belgium, Canada, Denmark, Fin- land, France, Ireland, Italy, Korea, Mexico, Netherlands, Portugal, Slo- vak Republic, Spain, Sweden, United Kingdom and the United States. by : Lisa von Trapp and Scherie Nicol IFIs TODAY – New Institutions, new gov- forecasting, adherence to fiscal rules, 1 ernance challenges longer-term sustainability and han- dling of fiscal risks – may also be sup- Independent fiscal institutions (IFIs) are in- ported” through the work of IFIs. dependent public institutions with a man- date to critically assess, and in some cases Although relatively few and novel worldwide, provide non-partisan advice on, fiscal policy diverse examples of IFIs have existed for de- and performance. While fiscal decision-mak- cades within the OECD membership in coun- ing is ultimately the responsibility of demo- tries such as Belgium (1936), the Netherlands cratically elected officials, IFIs serve – often (1945), Denmark (1962), Austria (1970) and in combination with credible fiscal rules – to the United States (1974). Based in part on the promote sound fiscal policy and sustainable experience of these older institutions in the public finances. Core IFI functions, such asmid-1990s a number of economists and aca- assessing or preparing macroeconomic and demics floated the idea that countries could fiscal forecasts and monitoring and evalu- adapt some of the positive experiences of in- ating fiscal plans and outcomes, can help to dependent central banking to the fiscal sphere. address biases towards spending and deficits. And by making their analysis public, IFIs fos- This idea was given new impetus with the ter greater transparency and accountability surge of government deficits and debts brought and enrich the public debate. As such, IFIs can on by the 2008-09 financial crisis. With com- raise reputational and electoral costs for gov- mitments to sustainable public finances un- ernments that choose to pursue imprudent der close scrutiny, policymakers searched for fiscal policies or break key commitments. new ways to safeguard fiscal discipline and re- build public trust in their capacity to manage In February 2014 the OECD Council adopted a public budgets prudently and transparent- Recommendation on Principles for Indepen- ly. The number of IFIs in the OECD has more dent Fiscal Institutions2. In doing so, OECD than tripled in the past decade and continues member states recognised the potential of in- to grow. Today IFIs are considered among the dependent parliamentary budget offices and most important innovations in the emerging fiscal councils within the OECD and globally architecture of public financial management. to enhance fiscal discipline, promote greater budget transparency and accountability, and Despite their growing popularity, IFIs across raise the quality of public debate on fiscalthe OECD face similar challenges, particularly policy choices. The potential positive role of in their early years. While it may be in coun- IFIs is also recognised in the OECD Recom- tries’ long-term interest to establish an IFI, poli- mendation on Budgetary Governance (2015), ticians may be tempted to constrain the actions which calls on governments to consider “how of an IFI to avoid criticism in the short term. the credibility of national budgeting – includ- ing the professional objectivity of economic 1. The analysis presented in this paper draws on the OECD IFI database compiled from a first set of case studies of 18 OECD IFIs. The full case studies can be accessed in Lisa von Trapp, Ian Lienert and Joachim Wehner (2016), “Principles for independent fiscal institu- tions and case studies”, OECD Journal on Budgeting, Vol. 15/2. DOI: http://dx.doi.org/10.1787/budget-15-5jm2795tv625. Where known, information on new institutions is noted in the footnotes. 2. Over two years of extensive consultation took place within the PBO, the Working Party of Senior Budget Officials (SBO) and the Public Governance Committee (PGC). 1 Figure 1. The growth of IFIs in the OECD 1. Hungary: The Office of the Fiscal Council in Hungary (established 2009) saw its resources significantly reduced at end 2010. 2. Slovenia: A first fiscal council with minimal resources ceased operations in 2012. As of 2017 a new fiscal council is in the process of being established. 3. Chile: A Fiscal Advisory Council was established by a decree of the Ministry of Finance in April 2013. There have been proposals for reform to give the Coun- cil independent legal standing. 4. Finland: In addition to the National Audit Office Fiscal Policy Evaluation Unit, a new Economic Policy Council was established in 2014 with a mandate to give ex ante policy advice. On a positive note however, the experience ownership was also identified as a potential- of countries with more long-standing insti- ly important factor in explaining the extent to tutions demonstrates that – even if they do which EU IFIs have sufficient resources to de- not always agree – IFIs are viewed in the lon- liver their effective oversight (Horvath, 2017). ger term as important partners for finance ministries and legislative budget commit- LOCAL OWNERSHIP tees in promoting credible fiscal policies. There is no one size fits all model for IFIs Given how new the majority of these institu- IFIs within the OECD are a heterogeneous group tions are, it is difficult to formally assess their – there is no one size fits all model. They vary effectiveness. Moreover, the establishment of considerably in terms of their governance pro- an IFI, particularly in those countries with older visions, breadth of their mandate and func- instructions, may reflect the government’s po- tions, leadership and staff arrangements, and budget. This underlines the importance of lo- litical commitment, underpinned by the elec- cal needs and the local institutional environ- torate’s preference, for discipline (Kopits, 2011). ment (including, in some cases, capacity con- Nevertheless, several points in the OECD prin- straints) to their design, even for those bodies ciples have been reaffirmed as key features of that were set up to meet the same European effective fiscal councils, for example, strict op- requirements (see OECD Principles 1.1 and 1.2). erational independence and a strong presence in the public debate, as well as a role in fiscal rule monitoring and production or assessment of forecasts (e.g. OECD 2012; IMF, 2013; Debrun, X. and Kinda, T., 2014). The principle of local 2 Regardless of the model chosen, it is useful for the IFI to have a legal basis for establishment. This en- sures that certain key aspects, such as its mandate, the leadership appointment process and access to information are clearly defined and can protect the institution from political pressures. Indeed, the vast majority (89%) of OECD IFIs are provided for in primary legislation. Where this is not the case, the IFI is provided for in constitutional legislation (the Slovak Republic) or by Ordinance (Sweden). Figure 2. Legal basis for IFI establishment Source: OECD IFI Database (2017) Across the OECD, IFIs have often been set up as part of wider package of reforms (61%), the ma- jority of which are budget management reforms. The principal growth in new institutions asso- ciated with budget reforms can be seen in the European Union (EU). Portugal and Ireland, which were particularly hard hit by the crisis, were among the first wave of EU countries to establish independent fiscal institutions as part of wider national budgetary reform efforts. New EU re- quirements (fiscal compact, “six-pack”, “two-pack”) calling for an independent body” to monitor compliance with national fiscal policy rules and assess or produce macroeconomic and budgetary forecasts further spurred the growth in new institutions (e.g. Estonia, Finland, France, Germany, It- aly, Latvia and Luxembourg), or the amendment of the mandates of older IFIs (Austria, Denmark). Figure 3. Type of reforms underpinning IFI establishment 6 5 4 3 2 undereachtype of reform 1 Number of OECD Numberof OECD IFIs established 0 EU National Constitutional Parliamentary Budget management reforms: Source: OECD IFI Database (2017) 3 Another driving factor behind the establish- The fiscal council model ment of new IFIs, particularly outside of the EU, has been parliamentary reform. The US Con- Over half of the institutions (56%) can be de- gressional Budget Office (CBO), one of the first scribed as under the statutory authority of the IFIs, was set up in 1974 as part of a package of executive or standalone (although they may, measures adopted by congress to reassert its like the United Kingdom Office for Budget Re- budgetary powers. The Korean National As- sponsibility (UK OBR), have dual lines of ac- sembly Budget Office (NABO), the Office of the countability to the executive and the parlia- Parliamentary
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