Fiscal Councils Research Articles

Independent Fiscal Institutions as a Part of European Traditions

Fiscal councils are independent public institutions aiming to promote the sustainability of public finances through various functions, such as assessing budgetary plans and their implementation or preparing budgetary and macroeconomic forecasts. Thus, synthesising the attempts made in the literature to define the concept of independent fiscal institutions, it should be emphasised that by providing an independent, impartial and objective assessment of fiscal policy and performance, they promote sound fiscal decisions and sustainable public finances. Independent fiscal institutions also reduce information asymmetries and promote transparency in public finances, thereby raising the reputation and electoral costs for governments that pursue imprudent policies or breach key commitments. As such, they can support contemporary states in addressing the tendency to increase spending and deficits. To better understand the contemporary factual and normative state of the analysed dissertation topic, it is worth tracing, even in some summary, the process of emergence and the directions of development and evolution of independent fiscal institutions. Although independent fiscal institutions are relatively new bodies in the political architecture of the vast majority of the EU Member States, a small group of countries pioneered the creation of these institutions. It is necessary to trace the systemic solutions that have determined the legal and constitutional status of fiscal institutions in recent decades in order to understand the factors that have led to their reassessment.

The OBR and the fragilities, complexities and promise of technocratic economic governance

AbstractThis contribution explores how technocratic economic governance rests on underlying principles of political economy—normatively informed judgements about how the economy and policy operate. It shines light on how fiscal councils such as the OBR can open up (or close down) policy possibilities through the way they narrate economic crises, the trajectory of the economy and the fiscal stance. Noting the epistemic limits of technocracy, it shows how fiscal forecasting is based on a presumed knowability and legibility of the economy and the fiscal stance looking years or decades ahead—a questionable and problematic presumption. It highlights increasing tensions between expert oversight and populist and ‘post truth’ politics within Britain’s economic governance regime since Brexit. The Office provides oversight, and a form of accountability for government policy, and is itself accountable to parliament. Nevertheless, many of its key and consequential assumptions are obscured from democratic debate and oversight. The Office, and UK economic governance, would benefit from more robust mechanisms of democratic engagement and deliberation. Under-developed democratic accountability is a source of crucial fragility for technocratic economic governance. The piece ends by exploring the scope of OBR fiscal assessment of climate change and its costs—underlining the ‘politics of economic method’ and how subterranean methodological techniques in putting OBR economic ideas into practice can be of first-order political and policy significance. They can shape policy possibilities for tackling climate change for decades to come.

The Impact of Fiscal Councils on Public Perception: A Survey Experiment in the Czech Republic

Abstract This study examines the influence of fiscal councils on public opinion regarding fiscal issues. Using a survey-framing experiment on a representative sample of 900 inhabitants of the Czech Republic, the study evaluates how the framing of a message regarding the negative effects of rising government debt would impact the attitudes of respondents. The results show that framing the message as coming from the Czech Fiscal Council does not increase its credibility. Fiscal councils should not focus on persuading the public of their viewpoint on public finance issues, but rather utilize the knowledge of agenda-setting theory to gain media attention for fiscal issues.

Dynamic panel analysis of the EU's fiscal reaction function with threshold effects

AbstractThis study contributes to the ongoing reform of the EU's economic governance, particularly about fiscal performance. We opt for a fiscal reaction function of the cyclically adjusted primary balance. Given concerns over underlying endogeneity and heterogeneity across countries we employ a threshold dynamic analysis. The findings confirm that the fiscal policy in the EU has been procyclical overall. However, we identify two regimes of output gap. Fiscal policy has been countercyclical for EU member states in the higher output gap regime while EU member states follow a procyclical fiscal policy in the lower regime. We reveal also that the endogenous debt‐to‐GDP ratio threshold is at 75.6% for the EU and 78.7% for the Euro area, which notably exceeds the EU Treaty's reference value of 60%. Fiscal rules and fiscal councils mitigate procyclical fiscal policies, being more effective for low debt countries. In terms of policy implications, the identified fiscal thresholds and variability across countries warrant a higher degree of fiscal coordination in the EU, particularly in the Euro area.

Do balanced budget practices of U.S. states make sense? Alternatives from the Eurozone

Purpose The purpose of this article is to challenge the balanced budget practices of U.S. state governments and offer alternatives that may lead to better fiscal, economic and policy outcomes. We contend that the norm of balance may be leading U.S. states to make fiscal decisions that result in less-than-ideal outcomes, especially during economic downturns.Design/methodology/approach This is a normative article. We examine the scholarly evidence regarding balanced budget practices to assess the appropriateness of balanced budget norms. We also examine the fiscal rules followed by Eurozone countries to draw potential lessons for U.S. states.Findings We conclude that state governments should move away from strict norms of budget balance and seek more flexible approaches. We suggest that instead of following strict rules and norms of balance, U.S. states should consider implementing escape clauses, debt and deficit ceilings, and fiscal councils. We also suggest that the Federal Reserve be open to lending directly to states during fiscal crises to ensure that states have access to affordable credit.Originality/value The balanced budget norm has become ingrained in U.S. state budgeting practices, so much so that public officials and scholars alike rarely question it. The novel contribution of our article is to question this practice in a systematic way and propose alternative approaches.

Rule-based budgeting and the financial stability – the European solution

From the perspective of his twelve years of service at the Fiscal Council of Hungary (Fiscal Council, FC, Council), the author reviews the so-called rule-based budgeting practices that have been in use in some sixty countries around the world for decades, and their role in creating and maintaining financial stability. The article refers to the possibilities of contribution of institutions overviewing the enforcement of fiscal rules while strengthening resilience to economic crises. It presents the links between EU and Hungarian legislation, and the main ideas that emerged in the preparation of the professional-political decisions for the further development of the system in order to better enforce fiscal responsibility. It proves that the framework and the body that enforces it have become a useful and indispensable part of the fiscal policy and, as its annual implementation, of the Hungarian budgetary practice.

STATE OWNED ENTERPRISES: 05 YEARS OF THE NEW CORPORATE GOVERNANCE RULES

ABSTRACTObjective: This article intends to address the new Brazilian regulatory environment created by the SOEs Law (Law No. 13,303, of June 30, 2016) which created new corporate governance rules in state-owned enterprises for the election of directors, officers and fiscal council members, with the purpose of protecting the public companies, the mixed joint-stock corporation and its subsidiaries ("state-owned") against any possible (and unfortunately common) political-partisan interference in the appointment of the members of these top-level management positions in the SOEs. The article will also present cases of progress, setbacks, and the future of this new Brazilian legal norm.Methodology: Review of the bibliography and analysis of judicial and administrative precedents involving the application of new corporate governance rules for state-owned enterprises.Results: It is possible to conclude that the new corporate governance rules were created by Law No. 13,303, of June 30, 2016 with the purpose of protecting the state-owned enterprises (SOEs) against any possible (and unfortunately common) political-partisan interference in the appointment of the members of the top-level management positions in the SOEs.Contributions: From the results found, it is possible to verify: (a) One of the most relevant aspects of the Law No. 13,303, of June 30, 2016 was the creation of academic background, professional experience and professionalization for the top-level management of state-owned enterprises, as usual in the private sector. (b) that the Brazilian Securities and Exchange Commission (CVM) determined the application of the new corporate governance rules for state-owned enterprises; (c) the Judiciary, especially the Federal Supreme Court (STF), can make a relevant contribution if it decides to apply these new rules of governance corporate in order to mitigate political-partisan interference in the appointment of the members of these top-level management positions in the state-owned enterprises (SOEs).

INSTITUTIONALIZATION OF FISCAL RULES: INTERNATIONAL AND RUSSIAN EXPERIENCE

Economic instability forces governments to urgently support businesses and the public at the expense of budgetary imbalances. Such circumstances test flexibility of fiscal rules - restrictions on the main budget parameters. They are often suspended, the limit values of their indicators are adjusted, temporary concessions for their use are introduced. Both the introduction of such instrument and its sustainability over time depend primarily on thegovernment and policymakers. At the same time world experience proves that budget restrictions supported by the authorities need a complementing system of adaptation and controlling conditions allowing for a better adaptation to economic challenges and following their original task - to ensure medium-term budget balance while maintaining a conditionally constant level of budget expenditures. The subject in the paper is the institutional conditions for fiscal rules’ functioning. The purpose of the study is to identify the institutional framework used to ensure proper performance of fiscal rules and assess its practical applicability in Russia. Using the methods of descriptive statistical and comparative analysis of international and Russian practice in applying fiscal rules, the authors identify and analyze the list of such institutional conditions as medium-term expenditure frameworks, fiscal councils, correction mechanisms, escape clauses. The results of the study consist in formulated required and sufficient institutional framework for effective fiscal rules. Due to the use of only medium-term budget planning in Russia the remaining three may serve as a guideline for implementing budget restrictions during the current reform .

The effects of fiscal institutions on fiscal adjustment

Using a panel of 40 advanced economies over the period 1990–2020, this paper investigates the effect of various characteristics of fiscal institutions on the probability of starting a fiscal adjustment, as well as on the probability that this fiscal adjustment will be successful. We find that, an enriched and cleverly designed fiscal rule which incorporates both strict and flexible features increase both the probability to initiate and to successfully conclude a fiscal adjustment. The design features that are associated with stricter fiscal rules lead to a more pronounced increase in the probability of success vis-à-vis features that allow some flexibility e.g., by taking into account cyclical economic conditions. A fiscal council with enhanced powers which involve enhanced remit, independence and accountability and enhanced tasks & instruments increase the probability to initiate a fiscal adjustment. However, it is primarily fiscal councils with enhanced tasks & instruments that can lead to a successful fiscal adjustment. The results remain valid after conducting several robustness checks. Our findings contribute to the on-going debate on the revision of the EU fiscal framework and the importance it should be assigned to improved fiscal rules and national fiscal councils.

A Republican Assessment of Independent Fiscal Institutions

Some economists have suggested that fiscal councils, rather than the government, should manage public debt. What are the democratic credentials of these institutions? This article answers this question from the point of view of republican democratic theory. In doing so, it develops a critique of Pettit’s strategy of depoliticization as a proper way to preserve the nondomination of citizens. Borrowing from the literature on deficit bias, the article argues instead that citizens and parliaments should be given the informational resources needed to keep the executive under sufficient republican control. This suggests that fiscal councils should not manage public debt but rather be used as tools to reduce the information asymmetry between executives and parliaments that drives deficit bias and that results in public powers being used arbitrarily.

IMPLEMENTATION OF THE “GOLDEN RULE” IN THE FISCAL MECHANISM FOR REGULATING INVESTMENT PROCESSES IN UKRAINE

Introduction. After the global financial and economic crisis, which led to the deterioration of fiscal stability, the growth of the budget deficit and public debt in many countries, ensuring the quality and long-term sustainability of public finances is one of the priority areas of fiscal policy. In this context, the implementation of the “golden rule” becomes especially relevant. Such a rule makes it possible to release state investments from the corresponding target indicators of the budget deficit. Accordingly, fiscal policy is being modernized, which will provide more opportunities for budgetary maneuvering and public investment. The purpose of the article is to reveal the content, advantages and disadvantages, as well as the peculiarities of the implementation of the “golden rule” in the fiscal mechanism for regulating investment processes in Ukraine. Results. It was found that the “golden rule” provides for public borrowing only for the purpose of investing in projects that will pay off in the future, as well as financing current budget expenditures at the expense of taxation. The advantages and disadvantages of the implementation of the “golden rule” in the fiscal mechanism for regulating investment processes are determined. Modified versions of the “golden rule” are considered: the “limited golden rule” proposed by the European Fiscal Council and the “asymmetric golden rule” substantiated by scientists. The ways of introducing the “golden rule” into domestic fiscal practice are outlined. Conclusions. The need to implement the “golden rule” into the fiscal mechanism for regulating investment processes in Ukraine is clarified. The creation of the Agency for State Investment Management in the context of the “golden rule” is substantiated. It is proposed to apply a more flexible approach to the formation of the budget deficit in the transitional post-war period before the full implementation of the “golden rule” in Ukraine. It is advisable to direct further scientific research to the search for alternative options for increasing the efficiency of public investments under the conditions of compliance with fiscal stability.

FISCAL COUNCILS IN EU MEMBER STATES: IMPACT ON FISCAL DISCIPLINE

This paper presents the impact of fiscal councils in the European Union on public fi- nance. Using a fiscal reaction function, the impact of fiscal councils on the discretionary component of fiscal policy is examined. The impact of fiscal councils is a topical issue due to the fact that most EU countries have established fiscal councils in response to the EU legislation adopted after the last financial crisis. The empirical results imply that fiscal councils are complementary to numerical fiscal rules and instrumental for limiting deficit bias in the EU countries, most importantly through monitoring of compliance with fiscal rules and endorsement of macroeconomic and budgetary forecasts. Despite certain research limits, the empirical results point to similar conclusions as from recent papers. Out of the empirical findings, several recommendations can be made for fiscal policy-making.

Sustainable Fiscal Policy in India: Post-Pandemic Challenges


 The burgeoning fiscal deficit and debt sustainability in India have been a matter of concern for a long time. The levels of deficit and debt in India have been much higher than the levels seen in emerging economies. The Coronavirus Pandemic has brought the issue to the fore once again. The Russian invasion of Ukraine and the consequent sanctions have only worsened the situation. The attempts to control them by implementing rule-based fiscal policy, like in most other countries, have not been successful. The numerical targets on deficit and debt recommended by successive Finance Commissions and taken in FRBM Acts have been observed in their breach rather than compliance. The targets have been repeatedly revised and suspended, escape clauses have been invoked, and compliance, when shown, is done through creative accounting. To impart greater effectiveness to fiscal management, the paper argues for reforms in budget management and the creation of an independent institution to monitor the implementation of rule-based fiscal policy – the Fiscal Council as recommended by the Finance Commissions.

Do fiscal councils reduce fiscal policy procyclicality?

ABSTRACT Using a panel of 35 advanced economies over the period 1990–2020, we investigate the effect of fiscal councils and their individual characteristics on fiscal policy. We find that the response of fiscal policy was procyclical; however, fiscal councils with enhanced remit, strong independence and accountability, and sufficient resources can mitigate procyclicality. A series of robustness checks revealed that the ability of fiscal councils to mitigate fiscal policy procyclicality is particularly relevant in the EU and euro area countries, in countries with weak governance and in particular in the period after the Global Financial Crisis. The results are robust when accounting for the likely endogeneity between fiscal councils and fiscal procyclicality.

The effect of social ties between the CEO and board of directors and fiscal council's members on earnings management

PurposeSocial factors can shape economic decisions. Corporate governance (CG) studies and guidelines usually neglect that the chief executive officer (CEO) and board members may be socially tied. This study investigates the effects of social ties between the CEO and board members on earnings management (EM).Design/methodology/approachThe authors run a series of regressions using a sample of Brazilian companies listed on the Brazilian Stock Exchange [B]³ between 2011 and 2017 to assess the effect of the social ties between the CEO and board members on EM using a social ties index. The authors also employ five robustness tests to verify the consistency of results, including alternative proxies of EM and social ties and an estimation using fixed effects.FindingsAfter developing and computing a social ties index between the CEOs and members of the board of directors (BD) and the fiscal council (FC), the study’s findings indicate that a significant level of social ties between the CEO and BD has a negative impact on EM. However, for FC members, the authors found non-significant results.Originality/valueUnlike previous studies, the authors built a social tie index (STI) from five elements of social ties assessed in an environment with a two-tier board system. Results show that elements of social interactions and personal relationships can benefit the company, as a CEO's level of social ties with the BD reduces EM practices.

Is EU Fiscal Governance Effective? A Case Study for the Period 1999–2019

This paper examines the factors that influence the effectiveness of fiscal governance in the EU through a panel of 19 Eurozone countries for the period 1999–2019 using an OLS method. The results show the positive effects of economic growth, inflation and the change in the general government balance on the fiscal forecast error. Furthermore, the fiscal forecast error is negatively affected by the level of public debt and by elections. Fiscal transparency is integrated into the analysis through independent financial institutions, which positively influence the general government balance forecast error. Finally, Economic Adjustment Programs have a positive effect on the fiscal forecast error, thus improving the efficiency of fiscal governance. This paper suggests that independent budgetary institutions, such as fiscal councils, and the delegation of further responsibilities to them increase countries’ sustainability of public finances.

Reforming public debt governance in Turkey to reach debt sustainability

The paper argues that the achievement of sustainability of public debt requiring the fulfillment of solvency and liquidity conditions in countries for which real interest rates are above the real growth rates is challenging and difficult. Since solvency is a rather complex concept and its governance is difficult and delicate, the paper maintains that such countries could try to achieve the sustainability of public debt by delegating the tasks of securing the observance of solvency and liquidity conditions to fiscal councils (FC) that need to be formed as autonomous public institutions with sufficient financial and technical resources. In Turkey FC needs to be assigned the further task of improving policymakers’ incentives to opt for sound government procurement and taxation policies that would lead to the achievement of efficient allocation of resources and elimination of corruption and nepotism in the economy.

Overconfidence and audit fees: does the fiscal council influence this relationship?

Purpose: This study aims to investigate the role of fiscal council as a mechanism capable of changing the manager's ability to influence audit fees.
 Methodology: 231 observations of publicly-held companies that traded their shares on [B]³ in 2017 were analyzed. To investigate the relationship object of this study, an analysis was performed using multiple linear regression with the OLS estimator.
 Results: In the analyzed sample, it was identified that managers' overconfidence increases audit costs, which is consistent with the argument that managers' overconfidence can increase the risk of material error. However, possibly due to characteristics of the emerging environment or different levels of efficiency of the fiscal council, it was not possible to confirm the hypothesis that the fiscal council exerts a significant influence on the relationship between manager overconfidence and audit fees.
 Study Contributions: In the empirical field, this research provides subsidies for investors and regulators regarding the role of governance mechanisms - more specifically the fiscal council - in the relationship between the auditor and the client. From a theoretical perspective, the accounting literature is added to fill in the existing gap about the consequences of behavioral biases of managers on the audit fees under the moderation of the supervisory board.

Fiscal Consolidation The Indian Experience

Fiscal consolidation methods have always been under lens since their origin with newer and more stringent way of monitoring them. Still the elected policymakers tend to find a way to manage them so as to not to lose the externality benefits of higher fiscal deficits in term of electoral gains. This paper analyses the fiscal adjustment programme adopted by the central government of India since the inception of FRBM act 2003. A comparison of the consequences of fiscal adjustment on public finance under discretionary phase of economic reforms with the initial rule phase has also been discussed in this paper. Analysis indicates that fiscal reforms has led to consolidation of public finances in India but some crucial challenges remain i) setting up of Fiscal Council ii) not to use creative accounting to maneuver accounts to meet the fiscal targets iii) implementing countercyclical fiscal policy in totality and iv) starting a countercyclical fund. JEL Classification: E 62, E 60

The political economy of fiscal transparency and independent fiscal councils

This paper develops a theory of fiscal transparency aimed at highlighting the potential contribution of independent fiscal councils to fiscal responsibility. In a political economy model with electoral competition, voters care about the candidates’ competence to supply valuable public goods and about their congruence (subjective sense of proximity). Voters observe candidates’ congruence but must form views about their competence based on the expected amount of public goods they could provide, and on other random signs about competence, public debt and the state of the economy. More transparency reduces noise around these relevant considerations. The model exhibits a bias towards excessive public debt for both “partisan” (myopia) and “opportunistic” (signaling competence through additional spending) motives so that institutional arrangements mitigating the debt bias carry welfare gains. While transparency about public debt itself is irrelevant, clearer signals about competence raise public debt if the incumbent enjoys a sufficiently large electoral advantage but reduce debt otherwise. Increased transparency about the state of the economy raises debt and is less valued by voters and the incumbent than greater transparency about competence. The latter is preferred by all players if the incumbent does not hold too large an electoral advantage. Otherwise, the incumbent and the public may have diverging preferences regarding greater transparency. Our analysis reveals the ambiguity about the potential contribution of independent fiscal councils (IFCs) to fiscal responsibility through increased transparency, and points to the inherent fragility of the political backing for such institutions.