Roel Beetsma, Massimo Guiliodori and Peter Wierts have just released a very interesting paper that examines the gap between announced fiscal plans and final fiscal outcomes for a panel of EU member countries. These authors find that ‘implementation errors’ are sizeable and in fact fiscal outcomes tend to be more correlated with these errors than with the original plans. Recommending reading: you can download it here.
7 replies on “Fiscal Policy: Plans versus Outcomes”
Maybe it can be used as a corruption index.
May I suggest an inverse relationship between the number of economists and accuracy?
There are economists in the Dept of Finance?
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I confess I skimmed through this paper rather superficially, but in terms of recommendations, the bottom line seems to be the importance of governance, both in terms of monitoring the implementation of budgetary plans and also in the form of fiscal rules which automatically place some form of discipline on budgetary policy. While some non-economists make baulk at the idea, it does seem to suggest a role for a form of Council of Economic Advisors, consisting of independent economists who can monitor the implementation of budgetary policy. And there would have to be some mechanism whereby the recommendations/comments of this group would have a formal input into policy. It could be argued that the Department of Finance are or should be carrying out this role, but as “insiders” it is not clear that they always have the incentive to blow the whistle when they see plans going awry. The ESRI does carry out this function to a limited degree, but whatever comment/analysis of budgetary policy they make in the Quarterly Commentary is typically lost in the publicity surrounding their forecasts. At the moment what independent monitoring does go on is carried out by reputable journalists like Brendan Keenan and Jim O Leary in weekly newspaper columns or on blog sites like this one. But such monitoring is inevitably non-systematic and can go no further than comment.
David,
Great points. You might be interested in a recent Canadian innovation: The Parliamentary Budget Officer. Although brought in by the current government, this new institution is turning out to be a real thorn in its side, and all the more valuable for that. It “Economic and Fiscal Assessments” serve a high profile monitoring function.
Here is a link to its website: http://www2.parl.gc.ca/Sites/PBO-DPB/index.aspx?Language=E
The gap between budgetary projections and fiscal outcomes may be our downfall in the next three years. Has there ever been a more ambitious set of projections at a less auspicious time?
No Government wants to highlight this discrepency and each year the Minister presents a Budget with undiminished conviction. Despite the efforts at budgetary process reform, there is a thesis to be written on the extent to which Irish budgets missed their targets. Haughey’s slight of hand in 1981 was only the most egregious example of wishful thinking substituting for planning.
Alan Matthews has an article in today’s IT on the problem of “legitimate expectations” as an alleged legal barrier to achieving real change, an issue which was aired on this website.
http://www.irishtimes.com/newspaper/finance/2009/0508/1224246116913.html
A fascinatinb paper indeed.
The data is particularly interesting. I’d have never thought it could yield such rich conclusions. It’d be great to see more individual country analysis… we just get glimpses here and there… e.g. “”An increase in the MTBF index over the maximum available range among our EU-14 countries (from 0.14 for Greece and Portugal to 1.00 for the Netherlands, for example)” confirming what out intuition might have told us. Or “a maximum increase in FISRUL (from 0 for Greece to 1.00 for the U.K.). But even the UK is characterized by a delegation approach. Little surprise there given how its budget has exploded of late.
To ensure the longer term stability of the eurozone, it is imperative to improve monitoring and control over national budgets.
Effectively is often difficult to distinguish between the impact of overoptimistic planning and the impact of incidental factors that occur during implementation. Progress on this score would be valuable indeed.
Beetsma, Giuliodori & Wierts argue is the task of the Courts of Auditors (not all countries have one) to check if budgets have been implemented correctly. So “these institutions could start using econometric evidence based on longer time series of fiscal data”. That is a pipedream, if only because of the poor level of skills available.
While monitoring is poor in the EU, is non existent elsewhere. So Beetsma, Giuliodori & Wierts say that for “other OECD countries, we have not even been able to find information about the existence of similar accountability days”. No surprise. They already did well with the EU.
OF course, it is the job of the EC and Eurostat to monitor implementation. They do have competent staff, but are clearly constrained. Not good to play both the roles of taskmaster and monitor at the same time.
It world require quite a dose of political good sense to improve on these structure.
@ Pat
There is certainly not an inverse relationship between the number of economists and accuracy in a ministry, but a positive one, at least in my experience. Competency in decision making does shine through, and there are big differences that are immediately apparent once you walk in the doorway. Not a surprise that this paper is written by Dutch. Corruption is not an issue that I have come across in eurozone ministries. Outside the eurozone can be a different kettle of fish.