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Do fiscal councils impact fiscal performance?

Author

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  • Giovanni Coletta
  • Carmen Graziano
  • Giancarlo Infantino

Abstract

The lack of budget transparency and projections accuracy have been among the determinants of the last four decades high deficit and debt, as the recent 2008-2009 economic crisis has highlighted. In order to improve fiscal policy process and budget transparency, the European Union (EU) stated more stringent fiscal rules monitored by Independent Fiscal Bodies, that have the capacity to “tie the hands” of policymakers tempted by deviations from socially optimal choices according to the academic circles. The present paper aims at empirically verifying if Fiscal Councils (FCs) in Europe (as a complement or substitute for the Fiscal Rules - FRs) have an impact on Governments’ fiscal decisions and if this impact exists and is positive which feature of their functioning is relevant for their effectiveness. The data elaborated with a panel regression model are the actual and foreseen (one year ahead) public finance and economic data of eleven European Countries1. The yearly planned change of the Cyclically Adjusted Budget Balance (CAB) 2 is interpreted as the discretionary fiscal policy and data about FCs and FRs are those of the European Commission (EC) Database on Fiscal Governance (data on fiscal institutions of the European database were opportunely adjusted, controlled and rebuilt for the missing years to construct the Fiscal Council Index - FCI). This work (with the caveats related to the used data) provides empirical support for the hypothesis of a positive impact of FCs on fiscal performance; leading to the conclusion that if there are clear and strong FRs, the presence of fiscal institutions with solid basis in national institutional framework (strong legal basis) could positively affect political decisions.

Suggested Citation

  • Giovanni Coletta & Carmen Graziano & Giancarlo Infantino, 2015. "Do fiscal councils impact fiscal performance?," Working Papers 1, Department of the Treasury, Ministry of the Economy and of Finance.
  • Handle: RePEc:itt:wpaper:wp2015-1
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    File URL: http://www.dt.tesoro.it/modules/documenti_en/analisi_progammazione/working_papers/WP_N._1_2015.pdf
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    References listed on IDEAS

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    1. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 949-963.
    2. Xavier Debrun & David Hauner & Manmohan S. Kumar, 2009. "Independent Fiscal Agencies," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 44-81, February.
    3. Francesca Castellani & Xavier Debrun, 2005. "Designing Macroeconomic Frameworks: A Positive Analysis of Monetary and Fiscal Delegation," International Finance, Wiley Blackwell, vol. 8(1), pages 87-117, July.
    4. Xavier Debrun & Laurent Moulin & Alessandro Turrini & Joaquim Ayuso-i-Casals & Manmohan S. Kumar, 2008. "Tied to the mast? National fiscal rules in the European Union," Economic Policy, CEPR;CES;MSH, vol. 23, pages 297-362, April.
    5. Lars Jonung & Martin Larch, 2006. "Improving fiscal policy in the EU: the case for independent forecasts," Economic Policy, CEPR;CES;MSH, vol. 21(47), pages 491-534, July.
    6. Beetsma, Roel M.W.J. & Debrun, Xavier, 2007. "The new stability and growth pact: A first assessment," European Economic Review, Elsevier, vol. 51(2), pages 453-477, February.
    7. Xavier Debrun & Manmohan S. Kumar, 2007. "The Discipline-Enhancing Role of Fiscal Institutions; Theory and Empirical Evidence," IMF Working Papers 07/171, International Monetary Fund.
    8. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    More about this item

    Keywords

    Financial crisis; fiscal policy; fiscal institutions; stability programs and convergence programs;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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