Fiscal Policy and Its Watchers: Do Fiscal Councils Help Close the Tax Gap?

Independent fiscal institutions, or fiscal councils, have no authority to set or collect taxes, yet their scrutiny of fiscal policy may shape governments’ incentives to mobilize revenue. This paper examines whether fiscal council adoption helps close the tax gap, defined as the share of estimated revenue potential that remains uncollected. Using a panel of 159 countries over 1990–2021, we estimate revenue potential with a stochastic frontier and exploit the staggered adoption of fiscal councils using a difference-in-differences estimator robust to heterogeneous treatment effects. On average, countries leave about 36% of their estimated revenue potential uncollected, with a mean tax gap of 0.38 in emerging and developing economies compared with 0.30 in advanced economies. We find that fiscal council adoption reduces the tax gap by 5.0 percentage points, or roughly 15% of its pre-adoption level. The effect builds up gradually after adoption and holds across a range of robustness checks, including alternative frontier specifications and estimators. It is concentrated in emerging and developing economies, where the scope for improving revenue mobilization is greatest, and remains significant across pre adoption fiscal conditions, whether or not a fiscal rule is in place and whether public debt and deficits are high or low. The adjustment operates on the revenue side rather than the expenditure side, mainly through VAT, trade and property taxes, consistent with governments mobilizing revenue sources that were available but left untapped. Overall, the findings suggest that fiscal councils can support domestic revenue mobilization by strengthening fiscal scrutiny.