Independent Watchdogs Can Improve Fiscal Performance

Fiscal councils help promote sustainable public finances

Well-designed fiscal councils associated with stronger fiscal performance

More than half of twenty-nine existing fiscal councils established since the crisis

As countries struggle to maintain or restore fiscal credibility following the crisis, a new study by IMF staff takes stock of policymakers’ growing interest in establishing fiscal councils to complement fiscal rules and analyzes their effectiveness. Fiscal councils are independent public institutions that through their work aim to strengthen governments’ commitments to sustainable public finances.

Fiscal policy rules, which impose numerical limits on budgetary aggregates such as deficits, debt, or government spending, have often been the solution used to tackle out-of-control deficits and rising debt. However, these rules have limitations that can undermine their credibility. In particular, fiscal rules can be inflexible in the face of adverse economic shocks, leading policymakers to suspend or even abandon them.

Fiscal councils can be set up to help address some of the shortcomings of fiscal rules. Based on existing experience, fiscal councils appear to encourage greater fiscal discipline by fostering fiscal transparency and stimulating a productive public debate on fiscal issues. Greater accountability makes it less likely that governments renege on their commitment to maintain a sustainable fiscal position.

Growing number of fiscal councils

The number of fiscal councils surged after 2005, reaching 29 by the end of January 2013 (see chart). Prominent examples of fiscal councils include long-established institutions such as the Congressional Budget Office in the United States and the Central Planning Bureau in the Netherlands, as well as recent institutions such as the Parliamentary Budget Office in Canada and the Office for Budget Responsibility in the United Kingdom. A number of emerging and frontier economies have also recently established fiscal councils (notably Chile, Kenya, and South Africa).

“An important finding of the study is that countries often use fiscal councils to complement the discipline-enhancing role of fiscal policy rules, not as a substitute for them. About 80 percent of countries with fiscal councils also have numerical fiscal rules; and the councils in these countries often monitor compliance with fiscal rules,” said Xavier...