Independent Fiscal Institutions Research Articles

What Type of Fiscal Rule Promotes the Fiscal Soundness?

Empirical studies on the impact of fiscal institutions such as fiscal rule and the establishment of independent fiscal institutions on fiscal performance have often overlooked the endogeneity issues. This study utilizes the system GMM model in dynamic panel analysis to control for the endogeneity inherent in fiscal institutions. This study is distinctive from the previous researches in the following aspects: ① It indices the levels of fiscal rules and independent fiscal institutions, ② Furthermore, it includes an interaction term between the level of fiscal rule and the level of independent fiscal institutions, ③ It analyzes the type of fiscal rules that affects fiscal soundness effectively. The study finds the followings: First, the level of fiscal rules has a positive (+) impact on the fiscal balance. Second, among fiscal rule types, the level of expenditure rule has a positive (+) impact on the fiscal balance. Third, the interaction term between the level of expenditure rule and the level of independent fiscal institutions has a positive (+) impact on the fiscal balance. The implications of this study are as follows: Countries with strict fiscal rules tend to reduce fiscal deficits, and among various fiscal rule types, expenditure rule has a significant impact on fiscal soundness improvement. Moreover, it was confirmed that countries with well-established expenditure rule experience an increased impact on fiscal soundness when activating independent fiscal institutions.

National Independent Fiscal Institutions Need to Be Stronger to Perform Effectively

Abstract In April 2023, the European Commission issued a directive proposal on EU economic governance reform. The Council cut some tasks of Independent Fiscal Institutions (IFIs) that were in the Commission directive proposal; whether this cutting is justified is an open question. Early this year, the Council and the Parliament reached a provisional agreement on the proposed reform of the EU economic governance framework. The vision of the Commission that would involve IFIs in the assessment of fiscal-structural plans is not groundless. But structural reforms and investment analysis demand expertise that hardly exists in most national IFIs, and their involvement in policy design could be perceived as a technocratic inroad into democratic decision-making. In order to play a more significant and effective role, national IFIs need adequate resources and enhanced analytical capacity; their activity depends heavily on the policy design of the EU economic governance. National IFIs should view their role from a macroprudential perspective, too. The role of IFIs should not go beyond what most of them can deliver effectively, so that their status and reputation are not harmed.

Independent Fiscal Institutions: Considerations in the Context of Current Challenges in Public Finance and Law

Abstract This paper discusses the idea of the functioning of an independent fiscal institution (IFI) in Poland according to the EU’s requirements. The first section provides an overall description of the institution. Section 2 provides theoretical insights into possible institutional models of IFIs which are established in the EU: the purpose is to discern what lessons can be learnt from IFI models in other EU countries. Section 3 discusses the legal basis of and standards in this area of public-sector control; section 4 addresses how that adoption would look in Poland. The objective of the article is to determine what the challenges in the Polish state fiscal policy are.

Застосування фіскальних правил у період подолання наслідків війни

Introduction. During the period of overcoming the consequences of the COVID-19 pandemic and the full-scale Russian invasion of Ukraine, the risks of compliance with fiscal rules have intensified. Fiscal policy restrictions imposed by them restrained the active budget expansion necessary to increase spending and attract resources to finance adopted state programs. The task of revising the application of fiscal rules, determining rational levels of state budget financing, and preventing critical levels of the state debt from exceeding has arisen. Problem Statement. The negative effects of the pandemic and the war required a sharp increase in public expenditures, adjustments to their structure, and an increase in financial resources to cover them. Compliance with the requirements stipulated by the fiscal rules in force at that time did not allow to go beyond the accepted limits (regarding the maintenance of the indicators of the budget deficit and state debt). There was a need to make changes to the implementation of the budget policy to take into account the restrictions imposed by the fiscal rules. The purpose is to assess the application of fiscal rules in the period of overcoming the consequences of the war, as well as their adjustment in the aspect of reform programs in the EU. Methods. Conceptual approaches to complying with fiscal rules during the war and overcoming its consequences are defined. The issue of methodical provision of fiscal rules, application of mechanisms and budgetary procedures with the aim of their implementation in the practice of state administration is revealed. Results. In Ukraine, the introduction of fiscal rules into the practice of public finance management is in the initial stages. Unlike the EU, they contain only digital limits of budget aggregates, but do not provide for the use of mechanisms for maintaining fiscal stability and debt sustainability. It is also not provided for the application of the necessary budgetary procedures directing the state administration bodies to comply with these rules. During the period of overcoming the consequences of the pandemic and the war, fiscal rules began to restrain the implementation of an active expansionary policy, and therefore their effect was suspended. The recovery of Ukraine involves a review of the use of fiscal rules, taking into account the experience of their reform in the EU. Conclusions. The application of fiscal rules in Ukraine requires significant changes for their application in the practice of budget management, which take into account the results of their use in the EU member states, as well as the features of the economic and social development of our country. Such changes include: the adoption of real medium-term budget goals, the use of preventive mechanisms aimed at developing the state budget taking into account updated approaches, the adjustment of budget operations (in cases of deviations from the accepted requirements), the use of budget procedures that direct the government to comply with fiscal rules for the early correction of such deviations, deepening the transparency of budget operations, strengthening monitoring and evaluation of the use of budget rules by the parliament and specially created independent fiscal institutions.

A republican fiscal constitution for the EMU

ABSTRACT The democratic management of macroeconomic externalities between Members of the Economic and Monetary Union requires abandoning the legal entrenchment of fiscal rules as well as their technocratic administration. The fiscal constitution of the EMU can instead become an instrument that guarantees European citizens’ and peoples’ reciprocal non-domination. This republican goal can be attained once a core set of fiscal principles are agreed upon and later interpreted in a political way by the Council and the European Commission. To be non-dominating the interpretations of these executive bodies on the management of macroeconomic externalities must be subject to a ‘dual contestatory system’. Citizens should not only control, through their national parliaments, what their own governments decide, but also what a collective of governments decide at the EU level. This requires stepping up of the contestatory powers of the European Parliament. Finally, this kind of democratic control should be epistemically supported and facilitated by a network of national Independent Fiscal Institutions who should allow citizens and parliaments to monitor what executives decide both at the national and at the EU level.

Is the road to hell paved with good intentions? An empirical analysis of budgetary follow-up in the EU

We study the one-year-ahead budgetary projections from the Stability and Convergence Programmes (SCPs) of EU Member States since the start of the Economic and Monetary Union (EMU) until the start of the coronavirus crisis. First, we consider errors of the general government’s headline budget balance, which we then split into expenditure and revenue errors. Next, we split the latter two into “base”, “growth” and “denominator” effects. We find that the most important explanatory variable is the GDP growth error: more optimism in GDP growth projections produces more optimistic budgetary projections. This effect goes beyond a mechanical denominator effect on spending and revenues as shares of GDP; it also works through the numerator of these ratios. Our findings may call for delegating the construction of output projections to adequately equipped national independent fiscal institutions. Finally, we explore how independent fiscal institutions shape projection errors. Those with high media impact producing or assessing the macroeconomic forecast appear to lead to actual budgetary improvement relative to projections.

Costing policy proposals: Guidelines for independent fiscal institutions (IFIs)

This paper provides good-practice guidelines for parliamentary budget officials and independent fiscal institutions (IFIs) that estimate the costs of policy proposals. It covers topics including which costs to capture, how to handle behavioural responses and macroeconomic feedback, how to communicate results, and how to work with stakeholders. It also contains a section on the special considerations for costing election platforms.

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.

To Tie Each Other’s Hands: Italy Negotiating the Introduction of Constitutional Balanced Budget Rules and Independent Fiscal Institutions (2010-2013)

This article presents an in-depth qualitative case study on the negotiations underlying the introduction of an Independent Fiscal Institution and a Constitutional Balanced Budget Rule in Italy. The article looks at the interests of the relevant actors in the negotiation process of the Six Pack, Euro Plus Pact, Treaty on Stability, Coordination and Governance, and Two Pack by conducting interviews with the negotiators and analyses of parliamentary records and press declarations. The article demonstrates that functional mechanisms explain the outcome of such negotiations better than the consolidated literature of Liberal Intergovernmentalism, which expects that the preferences of the constellation of national actors are the key drivers of EU grand bargains impacting on member states’ core state powers. As a matter of fact, Italian negotiators decided to accept the introduction of such instruments because they were potentially helpful in reducing macroeconomic risks both domestically and in other EU member states without having particular political costs, and not because domestic actors showcased clear preferences in favour of them. The results contribute to the academic debate on the integration of the Economic and Monetary Union by testing hypotheses deriving from traditional EU integration and International Relations literature and paves the way for future research allowing for a greater generalisation.

Spending Reviews and the Public Expenditures Efficiency: How Independent Fiscal Institutions and Fiscal Rules Shape This?

Spending Reviews and the Public Expenditures Efficiency: How Independent Fiscal Institutions and Fiscal Rules Shape This?

More than words: Potential roles for independent fiscal institutions (IFIs) in green budgeting

Budgetary frameworks and instruments are increasingly being used to support and accelerate progress towards climate and environmental goals. This paper provides an overview of how OECD countries are implementing green budgeting and potential roles for independent fiscal institutions (IFIs) in monitoring these initiatives or in providing climate-related analysis as part of their existing mandates. It concludes with some key questions for the path ahead.

How can independent fiscal institutions make the most of assessing past economic forecasts?

Forecasts of economic variables like GDP, inflation and unemployment are the starting points for budget planning. Most OECD countries have designated an independent fiscal institutions to scrutinise or endorse the economic forecasts prepared by finance ministries. Although external assessments of past forecast errors can help uncover systematic bias or underperformance in official forecasts, there are several conceptual and practical problems with doing so that limit their usefulness. This paper describes the limitations of ex post forecast assessments and offers some suggestions on how independent fiscal institutions can add the most value in providing them.

Official fiscal forecasts in EU member states under the European Semester and Fiscal Compact – An empirical assessment

The efficacy of official forecasts in the EU has been under the spotlight since the introduction of the euro, with biases widely reported prior to the 2008–12 financial and sovereign bond market crisis. Changes to the EU fiscal rules and procedures, in the form of the European Semester and Fiscal Compact, in the early 2010s were adopted to improve forecasting, including through providing a role for independent fiscal institutions. Using data for 22 countries between 2013 and 2019, this paper shows that, despite these changes, biases, of a pessimistic form, remain in forecasts of budget balance and output variables in Stability and Convergence Programmes and the European Commission's Spring Forecasts. Econometric analysis indicates forecast errors in both the headline budget balance and the structural budget balance being explained by forecast errors in output variables and by EU fiscal rule requirements. Member states under an excessive deficit procedure provide optimistic headline budget balance forecasts compared to non-EDP countries, while those that have not met their medium-term objective report smaller forecast errors for the structural budget balance. Independent fiscal institutions are linked to a smaller bias to forecasts of the structural budget balance but have no effect on the forecast errors of the headline budget balance.

Do independent fiscal institutions cause better fiscal outcomes in the European Union?

This paper explores the budgetary implications of the independent fiscal institutions (IFIs) in the European Union (EU). We employ a dynamic panel model for the period 2000–2019 and find that these fiscal watchdogs have a positive and significant influence not only on government budget balance for the EU member states, resulting in smaller government budget deficits, but also on countries’ compliance with fiscal rules, results that hold across alternative fiscal balances. IFIs appear to have a beneficial impact on fiscal performance and compliance with numerical targets in countries with poorly designed fiscal responsibility norms but weaker influence when fiscal rules are less binding (well-designed fiscal rules). The findings remain significant regardless the year of accession to the EU (old vs. new members) or euro-area status (euro-area vs. non-euro-area members). However, we document that IFIs play a larger role in countries that established these monitoring bodies before 2013, indicating that experience matters in IFI performance. Also, our findings show that the influence of IFIs remains if we take into account institutional reforms in which their mandates were extended with different powers and tasks, which has a positive and significant effect on fiscal balances. Moreover, we find that, under the circumstance of systemic and banking crises, these institutions are associated with improved fiscal outcomes, reflecting their increased concern about the path of public finances and their role in reducing budgetary forecasting biases. Our results are robust to a variety of specifications and models, including alternative measures of the government budget balance and after controlling for a set of institutional characteristics and for potential endogeneity in the estimations.

The Constitutional Role of Independent Fiscal Institutions in the Eurozone

AbstractThe new European economic governance has made the creation or reform of independent fiscal institutions (IFIs) compulsory, in particular for Eurozone countries. While these institutions have been subject to extensive investigation by the economic literature, a constitutional analysis of their prospective and actual impact on national legal systems is lacking. In fact, depending on their design and powers, they could alter the ordinary inter-institutional dynamics on budgetary decisions. IFIs could redress the marginalization of parliaments in budgetary procedures in so far as they are able to offer reliable and independent information from the executive, and should mechanisms of “comply or explain” be put in place. By contrast, in the event an IFI operates within the executive branch and is not autonomous in the exercise of its mandate, parliamentary accountability could be further jeopardized. IFIs could also affect democratic rule-making over the budget, should their technocratic determinations be able to replace those of the budgetary authorities. Through a comparative constitutional analysis and based on selected case studies—France, Italy, Spain, and the Netherlands—the article aims to assess the constitutional impact of IFIs on parliaments and on the problem of information asymmetry on the budget.

Fiscal Rules, Independent Fiscal Institutions, and Sovereign Risk

Fiscal Rules, Independent Fiscal Institutions, and Sovereign Risk

EU Fiscal Governance Reforms: A Perspective of Independent Fiscal Institutions

The fiscal framework needs in practice to achieve a balance between, on the one hand, effective budgetary rules that allow governments to commit to sound policies and, on the other, judgements and discretion in how these are applied so that the framework adequately reflects the complexity of the situations that countries may find themselves in.

OECD Review of Finland’s Independent Fiscal Institution

This review was originally published on 23 June 2021 and reflects the situation at that time. This version has been reformatted and lightly edited from the original to be in line with the OECD Journal on Budgeting guidelines.

Do Independent Fiscal Institutions Enhance Parliamentary Accountability in the Eurozone?

Independent fiscal institutions (IFIs) have been established or reformed in all eurozone countries following the reform of economic governance. As they are expected to counter the deficit bias of the governments and the information asymmetry of the legislatures and the public over the management of the budget, IFIs may support or even strengthen parliamentary accountability. This hypothesis is tested with regard to three IFIs, the Irish Fiscal Advisory Council, the Italian Parliamentary Budget Office, and the Spanish Independent Authority for Fiscal Responsibility. Although the economic context in which the IFIs were created was similar in the three eurozone countries, as was their mandate, these institutions have a rather different institutional positioning, being within the Parliament, in Italy; within the Executive, in Spain; and a stand-alone body in Ireland. This is likely to influence the IFIs’ contribution to parliamentary accountability, we hypothesize that the closer the position of an IFI and its contacts to the parliament, the stronger is the scrutiny of the executive on budgetary policies. The analysis of parliamentary questions, hearings, and of the activation of the ‘comply or explain’ procedures shows that, overall, the IFIs’ potential role to enhance parliamentary accountability has remained underexploited by the three legislatures, with no significant differences as for the institutional positioning of the IFI.

Rising to a Challenge? Ten Years of Parliamentary Accountability of the European Semester

As a result of the euro crisis, EU economic governance has been reformed and EU institutions have gained new competences regarding national budgets, with the European Semester (the annual cycle of economic surveillance of the member states) being the most prominent example. With the Commission and the Council being the main actors, and the European Parliament playing only a minor role, a debate about the democratic legitimacy of the Semester and the role of national parliaments (NPs) in this regard has unfolded. This thematic issue, therefore, addresses the question of how parliamentary accountability of the European Semester has evolved: Have NPs met the challenge by adapting to the new situation in a way that allows them to hold the executive accountable? While the contributions to this thematic issue show significant variation across NPs, overall they reveal a rather pessimistic picture: Despite several institutional innovations concerning the reforms of internal rules and procedures, the rise of independent fiscal institutions, inter-parliamentary cooperation, and hearings with the European Commissioners, NPs have remained rather weak actors in EU economic governance also ten years after the Semester’s introduction. Whether recent changes linked to the establishment of the Recovery and Resilience Facility introduced in response to the Covid-19 crisis will change the picture significantly remains to be examined.