INDEPENDENT FISCAL

COUNCILS IN CONTINENTAL

EUROPE: OLD WINE IN NEW

BOTTLES?

XAVIER DEBRUN* AND

KEIKO TAKAHASHI**

Fiscal councils and the quest for fiscal discipline

The budgetary footprint of the economic and finan-cial crisis of 2008–09 brought to the fore renewedconcerns about governments’ commitment to sus-tainable public finances, leaving financial marketsincreasingly jittery. Indeed the crisis-related spike ingovernment debts came in addition to worrying up-ward trends observed since the 1970s and before ra-pidly intensifying demographic pressures on unfund-ed entitlement spending have reached their peak.While today’s debt levels are not unprecendented,current dynamics are inconsistent with public sectorsolvency, unless action is urgently taken (Figure 1).

Action certainly means ambitious, sustained andprobably painful consolidations combined with pro-found entitlement reforms. However, with financialmarkets on the watch and rapidly eroding credibility,present governments also need toanchor future fiscal policy in acorridor of trajectories deemedconsistent with sustainable debtdynamics.

For governments, committing tooperate within a range of sociallydesirable policies is a perennial

challenge. As formally shown by Kydland andPrescott (1977), time-inconsistency looms large be-cause short-term considerations often lure policy-makers into undesirable deviations from ex-anteoptimal strategies. The commitment problem is par-ticularly severe for fiscal policy, as distributive con-cerns – across groups and over time – complicate po-licy formulation in ways that make excessive deficitsand debts irresistible. This problem is generally for-mulated as the “common pool” theory of deficit bias(Krogstrup and Wyplosz 2010). Other related causesof deficit bias include politicians’ myopia resultingfrom re-election concerns or a collective failure byvoters to appreciate the consequences of the inter-temporal budget constraint for current policies. (Fora useful survey, see for instance Calmfors 2005).

Fiscal policy rules have long been used to contain

tendencies toward fiscal profligacy (e.g., Fabrizio and

Mody 2006; Debrun et al. 2008). Yet the operational

limitations of rules undermine their own credibility,

as they have to be simple and are therefore likely to

be inadequate in a non-trivial set of “unusual” cir-

cumstances.This led some to argue that non-partisan

agencies could more effectively constrain fiscal dis-

cretion for the good of all. The institutional raw

model of the constrained-discretion regime is the

delegation of monetary policy instruments – not ob-

jectives – to independent central banks subject to a

well-defined mandate.

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* Deputy Chief, Fiscal Policy and Surveil-lance Division, IMF Fiscal Affairs De-partment, Washington, DC.** Deputy Director, Office of the ViceMinister for International Affairs, Japan.The views expressed in this paper arethose of the authors and do not necessari-ly represent those of the institutions theyare affiliated with or the policy of theseinstitutions.

0

50

100

150

200

250

1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

FranceGermanyItalySpain

Source: IMF Historical Public Debt Database (Abbas et al. 2010).

PUBLIC DEBT IN SELECTED CONTINENTAL EUROPEAN COUNTRIES1880–2009

in % of GDP

2009

Figure 1

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However, there are fundamental differences be-tween monetary and fiscal policies that preclude thedelegation of fiscal policy instruments to an inde-

pendent fiscal authority (IFA). The first argumentagainst delegation is normative: policy instrumentsthat have first-order distributive implications – as domost fiscal levers – should stay in the hands of elect-ed policymakers (Alesina and Tabellini 2007). Someauthors, although they do not dispute this general-ization of the “no taxation without representation”principle, have nevertheless argued that imposingbinding deficit limits to elected officials was a suffi-ciently neutral task from a distributive standpoint tobe delegated to an IFA (Wyplosz 2005). This propo-sition does not survive the second argument againstfiscal delegation, which is purely positive. To theextent that the deficit bias is a feature of the ex-antepolitical equilibrium, elected policymakers simplyhave no incentive to delegate any policy-setting pre-rogative to an IFA – nor to establish really bindingpolicy rules for that matter (Debrun 2011). Thirdly,the greater variance of opinions about what consti-tutes an appropriate fiscal policy in given circum-stances (as opposed to monetary policy) would makedelegation even more difficult to establish and sus-tain in practice.

If delegation or any form of binding constraint ondiscretion is unlikely to be supported in a politicalequilibrium, how can we establish a regime of “con-strained discretion” for fiscal policy? The only credi-ble option in a representative democracy is byenabling the principal –i.e., voters – to hold politi-cians accountable for implementing “sensible” poli-cies (which is generally understood as stabilizing andconsistent with debt sustainability). Greater trans-parency increases the visibility of deviations fromthese policies and correspondingly raises the reputa-tional costs of deviations. As a result, accountablepolicymakers are less likely to misuse policy discre-tion. Independent fiscal councils (FCs) can help byimproving the quality of the public debate on fiscalpolicy. Formally, their effectiveness arises from theirability to reduce the informational asymmetries thatprovide fertile ground for the deficit bias. Only well-informed voters can credibly sanction poor policies.In practice, FCs can in particular:

(i) provide unbiased analyses of the likely econom-ic and budgetary consequences of alternativepolicy strategies with respect to ultimate societalobjectives (growth, employment, equity, stabili-ty) and constraints (sustainability, possiblyexpressed as numerical fiscal rules),

(ii) publish nonpartisan assessments of the extent to

which current and planned policies contribute to

achieve the government’s stated objectives,

(iii) enhance transparency through unbiased macro-

economic and budgetary forecasts, including the

costing of specific measures,

(iv) foster fiscal policy coordination among different

government entities (central administrations,

decentralized entities, social security, large pub-

lic enterprises benefitting from explicit or

implicit guarantees), and

(v) assess fiscal risks and propose risk-mitigating

strategies.

An effective fiscal council can take many forms.

Indeed, the sources and manifestations of the deficit

bias vary across countries so that the specific remit

of a council should only incorporate a subset of these

tasks, and many combinations are possible. Also, the

specific institutional form and modus operandi of a

fiscal council depends on elements of the political

system shaping the intereaction between voters and

elected policymakers (proportional vs. majoritarian

voting rule, presidential vs. parlementarian system,

centralized vs. decentralized state, transparency re-

quirements, etc.). The implied diversity of possible

FCs explains why despite a fairly active public de-

bate, no full-fledged theory has either established

the desirability of such institutions or derived first-

order principles likely to secure their effectiveness.1

Unsurprisingly, the literature on independent fiscal

agencies covers a wide array of specific (and some-

times outlandish) academic proposals as well as a

number of existing institutions. Although some pa-

pers propose a taxonomy (Debrun et al. 2009; Calm-

fors 2010), there is no consensus on the tasks these

agencies should be assigned, what institutional form

they should take, and on whether they should com-

plement or instead substitute for a rules-based

framework.

What qualifies as an independent Fiscal Council?

In principle, any non-partisan institution seeking to

actively inform and foster the quality of the public

debate on fiscal policy could qualify as a fiscal coun-

1 See Debrun (2011) for further discussion and Kopits (2011) for adescription of the emerging international best practice. The latteremphasizes four pillars for FC effectiveness: political ownership ofthe mandate and modus operandi, guarantees of operational inde-pendence, adequate staffing, and a remit focused on a neutralassessment of fiscal policy, the analysis of sustainability and thepromotion of transparency in budget preparation.

cil. This includes specialized think tanks or researchinstitutes – e.g., the Institute for Fiscal Studies in theUnited Kingdom, or the Austrian Institute of Econo-mic Research (WIFO) – but also official bodies ex-erting macroeconomic surveillance, such as theOECD, the IMF and the European Commission.

In line with Debrun et al. (2009), our definition ismore restrictive. First, we exclude private bodies notexplicitly mandated by the government to performat least one of the tasks listed above.The existence ofan official mandate – and the related public funding– is arguably a necessary condition for sufficientlylarge reputational costs to materialize if govern-ments deviate from their own commitments or fail todeliver on announced objectives. Second, interna-tional agencies are also excluded. Their surveillanceresponsibilities are often too broad to generate thekind of reputational costs a national body with a spe-cific fiscal mandate can deliver; they lack the localanchorage needed to effectively influence the na-tional policy debate through continuous interactionwith policymakers and a deep understanding of po-litical customs; and they are not expected to fullyinternalize the objectives of the government in of-fice. In sum, full ownership of the institution is nec-essary for effectively shaping the national publicdebate and fostering accountability, a point formallyillustrated by Debrun (2011) and emphasized byKopits (2011) as part of best practice. Finally, we donot treat audit institutions as FCs. Although theycontribute to democratic accountability and trans-parency, their approach is essentially backward-look-ing and legalistic, as opposed to the primarily for-ward-looking and economic work of FCs.

The issue of independence from politics is less clear-cut. The notion of independence as it is used andundertsood in the case of central banks calls forexplicit guarantees against any type of interference byelected officials on the bank’s actions within the lim-its of its mandate.While such guarantees are desirablefor fiscal councils as well, the absence of de jure inde-pendence does not exclude considerable de facto au-tonomy. Indeed, FCs, unlike central banks, are not ex-pected to have actual decision-making responsibilitiesor to be able to impose hard constraints on policychoices, which reduces the immediate reward of regu-lar interfering for the government. That said, de facto

independence is unlikely to survive repeated diver-gences of views between elected officials and the FC,especially if the latter has some direct leverage on theconduct of fiscal policy through high-impact norma-

tive analysis and recommendations, or the provisionof forecasts. The experience with the High Council ofFinance (HCF) in Belgium is telling in that respect(Coene and Langenus 2011).

In the remainder of this paper, we review key featuresof actual (or in-the-making) institutions across conti-nental Europe that have been (or can be) commonlyclassified as fiscal councils. We identified 15 FCs in12 countries (Belgium and Slovenia each have twoseparate FCs, according to our definition). This in-cludes the defunct Hungarian fiscal council and theFC being created in Portugal. Other countries – forinstance Slovakia – are currently fairly advanced intheir reflection on the introduction of FCs. In our sur-vey, we make a distinction between the “veterans”and the new generation of councils.

Veterans vs. the new generation?

The veterans are relatively old institutions, the“dean” being Belgium’s High Council of Finance,created in 1936 to advise the Ministry of Finance.The HCF has since then considerably evolved alongwith the transition towards federalism in a context ofsustained fiscal consolidation. HCF’s new responsi-bilities include recommending specific borrowinglimits for subnational entities consistent with Bel-gium’s commitments under the EU convergence andstability programs. Other veterans in our sample arethe Belgian Federal Planning Bureau, Denmark’sEconomic Council, the German Council of Econo-mic Experts, the Netherlands’ Bureau for EconomicPolicy Analysis, and Slovenia’s Institute for Macro-economic Analysis and Development. New institu-tions have emerged since the late 1990s, starting withthe Swedish Fiscal Policy Council, Austria’s Govern-ment Debt Committee – created in 1970, but whichreceived new responsibilities in 2002 – and more re-cently, numerous Fiscal Councils in Central andEastern Europe (Bosnia-Herzegovina, Hungary,Romania, Serbia, and Slovenia) and in Portugal.

A natural question is whether the new generation isfundamentally different from the veterans.The designof these institutions may have been influenced by theintensifying academic debate on their potential rolein improving the conduct of fiscal policy (von Hagenand Harden 1994; Eichengreen, Hausmann and vonHagen 1999; Calmfors 2003; Fatàs et al. 2003; andWyplosz 2005 to cite the most prominent contribu-tions) but also by the experience with setting up polit-

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ically independent agencies in other policy areas suchas central banking and various regulatory or supervi-sory responsibilities. After screening publicly avail-able information on fiscal councils (mainly the Euro-pean Commission’s surveys of 2005 and 2009 on “fis-cal institutions” and national sources), only a few no-table differences emerge between the two groups.

Looking at the remit, all FCs under review are man-dated to provide independent positive assessments offiscal policy (Figure 2). A majority of them are alsorequired to analyze long-term sustainability and eith-er to assess the quality of macroeconomic and/or bud-getary forecasts or to prepare such forecasts them-selves. However, only Belgium, The Netherlands andSlovenia generally (or are obliged to) use these fore-casts for budget preparation.2 Interestingly, newerinstitutions are less frequently involved in forecasting,in part because they are often lean in terms of staffing(see below). Checking compliance with national orsupranational fiscal policy rules isa fairly common task assigned toFCs on the European continent,particularly among the new insti-tutions, pointing to a growing per-ception that rules and institutionsare complements rather than sub-stitutes.3 This is in contrast with anumber of early papers advocat-ing the introduction of FCs andIFAs to replace ineffective rules(e.g., Wyplosz 2005 and Fatàs etal. 2003). Normative assessmentsand policy recommendations areonly required from one half of allcouncils (regardless of their age).FCs are rarely involved in coor-dinating budgets among govern-ment entities. Finally, newly es-tablished councils are more oftentasked to score specific measuresthan older agencies, perhaps re-flecting a greater awareness of theimportance of transparency in pol-icymaking.

The channels through which councils can influencefiscal performance vary widely, ranging from infor-mal or technical advice to public communicationsand formal procedures specifically aimed at magni-fying the reputational and political costs of devia-tions from ex-ante commitments. In line with theory,relatively “soft” channels of influence – public re-ports and analysis – clearly seem preferred to “hard-er” channels whereby the council’s activity createsan obligation for the government, such as public ex-planations of policy slippages or biased forecasts,and the possibility for the council to access electedrepresentatives through formal hearings in Parlia-ment. The latter feature is more prominent in recentcouncils, possibly to compensate for the lack of pre-existing reputation and the correspondingly lowervisibility of (and lesser public trust in) their work.Indeed, veteran councils generally enjoy significantmedia impact which helps them influence the publicdebate on fiscal policy (Figure 3).

0.0

0.2

0.4

0.6

0.8

1.0

Positiveanalysis

Normativeanalysis &recommen-

dations

Forecastpreparation

orassessment

Long-termsustainability

Compliancewith rules

Fiscal policycoordination

Scoring ofmeasures

Source: Authors' assessment based on publicly available information.

REMIT OF FCSRelative frequencies

VeteransNew generation

Figure 2

0.0

0.2

0.4

0.6

0.8

1.0

Public reports Formalconsultation/

hearings

High mediaimpact

Can stallbudget process

Bindingforecasts

Comply orexplain

Source: Authors' assessment based on publicly available information.

CHANNELS OF INFLUENCERelative frequencies

VeteransNew generation

Figure 3

2 Jonung and Larch (2006) show that inde-pendent forecasts reduce the risk of anoptimistic bias.3 Numerical rules provide simple guide-posts facilitating assessments by the FC.Conversely, the existence of an FC mayhelp in the implementation of simplenumerical rules by providing an objectiveevaluation of the causes for deviationsand eventually proposing options forremedial actions.

Still reflecting a revealed preference for soft influ-ence, the new councils are rarely tasked to providebinding forecasts for budget preparation – again areflection of their often parsimonious staffing – andgovernments are in general not compelled to formal-ly respond to the council’s assessments. Of course,such an obligation need not be enshrined in law andcan emerge spontaneously, as the council’s work pro-gressively gains traction in the public. It is importantto note that no FC is allowed to block the budgetprocess in case a draft budget violates objectives orconstraints the council is mandated to monitor.4

Turning to the degree of political and operationalindependence, we looked at three dimensions: theexistence of legal guarantees similar to those in placefor central banks (e.g. long, non-renewable tenuresfor the council’s management, prohibition of politi-cal activities prior to the appointment, etc.), the ap-pointment and retention of dedicated staff commen-surate to the tasks of the council and secured multi-year financing (Figure 4). The latter dimension isparticularly important because, unlike central banks,FCs cannot generate significant own revenues. Andit is indeed through financial starvation that certaingovernments – in Sweden and most egregiously inHungary – have attempted to curtail (or virtuallyeliminate) their FC. Only a handful of FCs enjoyssome form of guaranteed financing, most likely amanifestation of elected policymakers’ natural reluc-

tance to permanently cede too much influence onthe discretion to tax and spend.

Regarding the other dimensions of independence,there appears to be a sharp contrast between theveterans and the new generation. While the latterrely more on legal safeguards, the former count onthe expertise and size of their staff to continue toinfluence the budget debate. Of course, this styl-ized fact is more a reflection of history than of anex-ante trade-off between adequate staffing andlegal guarantees of independence. Ideally, the twoshould go hand in hand, as was the case for theHungarian FC.

A key question is whether certain combinations ofthose features are more likely to improve fiscal per-formance than others. Assessing the effectiveness ofFCs is clearly beyond the scope of this paper andexisting attempts are rather unconvincing. It isindeed vexingly difficult to test the impact of FCs onfiscal performance. Not only the small size of thesample severely impedes a rigorous statistical analy-sis, but the subtle and varied ways in which a fiscalcouncil can shape policy outcomes dramaticallycomplicates attempts to quantify its influence on theconduct of fiscal policy.To end on a positive note, thegood news for researchers is that as more FCs arelikely to emerge, the universe of potentially interest-ing case studies will expand significantly.

Conclusions

Fiscal councils have been a fairly old fixture of bud-get institutions in some countries of continental Eu-

rope. While academic curiosityand the recent policy debate onways to maintain or regain fiscalcredibility have revived interestin them, the newcomers have lit-tle to do with the independent fis-cal authorities imagined in acade-mic circles as a substitute for inef-fective numerical fiscal rules. Thispaper has presented descriptiveevidence that the newly estab-lished councils are not radicallydifferent from their ancestors, ex-cept for the stronger legal anchor-age (most notably in terms of for-mal guarantees of independence),a tendency to limit their size to a

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0.0

0.2

0.4

0.6

0.8

1.0

Own staff commensurate totasks

Legal guarantees on FCmembers

Ring-fenced budget

Source: Authors' assessment based on publicly available information.

DETERMINANTS OF INDEPENDENCERelative frequencies

VeteransNew generation

Figure 4

4 This was a feature of a first proposal of the Hungarian FC.According to the proposal, the council would have had the right toprevent – through a rubber-stamp ruling of the constitutional court– that a draft budget deemed inconsistent with the overarchingprinciple of budget responsibility be tabled in parliament.

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strict minimum and an explicit mandate to monitorcompliance with numerical fiscal rules.

Our discussion rejoins Kopits (2011) views on anemerging best practice in setting up effective FCs: (i)they should be fully owned by the local politicalsphere in terms of their objectives and modusoperandi, (ii) they should have their own staff andring-fenced long-term resources, (iii) their manage-ment should enjoy formal guarantees of indepen-dence from elected officials, and (iv) their remitshould be strictly limited to informing budget prepa-ration and fiscal policy formulation. Looking for-ward, limited resources available to create new insti-tutions could be a constraint on FCs operational in-dependence and effectiveness, especially if the cor-responding appropriations are not adequately ring-fenced or if extra-budgetary resources (e.g., a claimon central bank’s seigniorage) are not available.

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