The use and effectiveness of fiscal rules and independent fiscal institutions

It is increasingly recognised that fiscal rules and independent fiscal institutions other than governments and parliaments can make a major contribution to sound fiscal policy. The main arguments put forward by the specialist literature on political economy in favour of such rules and institutions are the tendency shown by governments to record excessive budget deficits (deficit bias) and the characteristics of a monetary union. Such rules and institutions should restore the balance in the incentives of politicians, impose limits on the fiscal policy pursued and introduce fiscal coordination mechanisms. Fiscal rules can be extremely useful within the scope of a sound fiscal policy. There are clear indications that such rules can facilitate the maintenance of budget discipline and encourage consolidation efforts, where necessary. In order to attain that objective, however, it is essential for the fiscal rules to conform to the principal properties inherent in any ideal fiscal rule. Certain current or former fiscal rules applied in Belgium are strictly complied with, whereas in other cases there appears to be virtually no connection between the rule and what actually happens. There is therefore still room for improvement in some of Belgium’s fiscal rules. Independent fiscal institutions can also play a key role in fiscal policy. For instance, making such institutions responsible for the economic growth forecasts used in drawing up the government budget is an effective way of curbing excess optimism in those forecasts. Moreover, institutions issuing normative budgetary recommendations have fostered fiscal discipline in the countries where such institutions exist. Belgian independent fiscal institutions – namely the National Accounts Institute and the “Public Sector Borrowing Requirements” Section of the High Council of Finance – are often cited as good examples.