We have a new fiscal council. Congratulations to the five appointees, they’ve got a lot of work to do. Which of course begs the question–what should they be doing?
The daddy of fiscal councils is the Swedish Fiscal Council. It’s chairman, Lars Calmfors, and Oxford’s Simon Wren-Lewis, have written at length on what they think fiscal councils should do.
Briefly, a fiscal council should be an independent body that conducts some of the following activities to a greater or lesser degree:
* Ex ante and ex post evaluation of fiscal policy, including fiscal rules;
* Evaluation of the attainment (or non attainment) of fiscal objectives like a primary balance target, decreased public sector net borrowing,
* Evaluation of fiscal sustainability;
* Evaluation of forecasting by the DoF (and perhaps the ESRI);
* Evaluation of the budgetary process, in particular for transparency;
* Explain the fiscal position to the public.
I believe the people appointed by the Minister have the capacity to perform these functions.
The question is will be they able to do all of them, given their resourcing, their mandate, the constraints this and successive governments will be under because of the EU/IMF conditionality agreements affecting our fiscal stance, and their size?
Another worry, expressed by commenters in a previous thread on the announcement of the council, is that the council is set up at the behest of the IMF and has no real mandate within the DoF and government to affect the budgetary process. The council could be seen as simply a credibility enhancing exercise for the markets, or worse, a toothless quango.
Then there’s the question of the council’s independence. Calmfors and Wren-Lewis argue that fiscal councils should not be instated underneath the wing of the Department of Finance, but rather be housed underneath the Oireachtas. The Council will be surely staffed with DoF support also. What will happen when the council say something that is contrary to the interests of the government in power? Given the individuals on the council, I’ve little doubt they’ve the balls to go up against the government when required, but will the council’s structure give them the teeth (so to speak) to affect a wayward Minister for Finance? Even the Swedish fiscal council saw its resources threatened when it argued publicly with their Minister. The Hungarian Fiscal Council got shut down when it disagreed with their Finance Minister. It should also be noted that Greece has had a fiscal council for years.
Only time will tell whether these issues can be answered. I think three things will help the council both do its job better and allay concerns simultaneously.
First, there is a need for transparency and accountability. The council should be visible in public debates, and its reports should be part of the budgetary process. The council should make public its models and assumptions (especially around targets, fiscal rules, and fiscal sustainability). The council’s work should be peer reviewed by international experts at the end of every 3 year term of office. The council should be free to avail of any and all external expertise required to do its job.
Second, the council’s budget and remit should not be the exclusive purview of the Minister. You can’t be biting the hand that feeds you.
Third, the council should have a clear process for the revision of its fiscal rules and targets over, say, two cycles. The important thing to know is that the council *don’t know* what a correct target set might look like for the Irish economy at the moment. Echoing Bertrand Russell, I do not think the council can start with anything precise. They’ll have to achieve such precision as they can, as they go along. This means adjusting things like fiscal rules on expenditure in a credible way. They’ll need a methodology for doing this.
Finally, is there evidence these councils have any real impact? There is a small literature on the evaluation and impact of these councils, particularly a cool study looking at the Belgian fiscal council, and they do seem to be beneficial.
So, here’s hoping.
(Oh, and if you’re wondering where I got this blog post’s title from, wonder no more.)