Ian Lienert Formerly IMF Fiscal Affairs Department Fiscal Responsibility Laws FRLs are Rare in Advanced Countries Advanced Countries WEO definition Only Australia and United Kingdom have FRLs ID: 493504
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Slide1
Should Advanced Countries Adopt Fiscal Responsibility Laws?
Ian Lienert
Formerly IMF Fiscal Affairs
Department Slide2
Fiscal Responsibility Laws (FRLs) are Rare in Advanced Countries
Advanced Countries
(WEO definition)
Only Australia and United Kingdom have FRLs
.
Middle-income countries:
Argentina, Brazil, Colombia, Ecuador,
Hungary, India
,
Latvia, Mexico, Pakistan
, Panama, Peru, Romania, Sri
Lanka
Low-income countries:
Ghana (draft), Nigeria.Slide3Slide4
Definition of a
“
Fiscal Responsibility Law”
An FRL is a limited-scope law that
elaborates
on the rules and procedures relating to three budget principles:
Accountability
(of the government to parliament)
Transparency
Stability
Optional principles/provisions:
Comprehensiveness
Institutions to implement the FRLSlide5
Four
essential components
of a FRL
The following four features are chosen to
be
essential components
of
a fiscal responsibility law,
notably
the legal
requirement for the government to:
Specify the
medium-term path of fiscal aggregates
(
transparency
of fiscal policy intentions).
Describe the medium-term and
annual budget strategy
for attaining the chosen fiscal objectives (policies to support
fiscal stability
).
Regular reports, including a mid-year review
on the attainment of fiscal objectives or targets (
accountability
for
achieving fiscal strategy).
Assure
timely
audited
annual financial statements
(
accountability
for
quality of
fiscal reports).Slide6
Optional components of a
FRL
Numerical fiscal rules—quantitative targets in law.
Debt
sustainability analysis
(if debt is measured in net terms, then asset
management
is included
).
Existing fiscal policies versus new measures (
baseline
projections; impact analysis).
Reasonable stability
in tax
policies (ratio: revenues/GDP)
Reporting
of tax expenditures
Reporting of fiscal risks, comprehensively
Quarterly in-year fiscal reporting and projections.
Long-term fiscal scenarios, especially for ageing.Slide7
Optional
coverage for FRLs
Comprehensiveness:
assuring that the FRL applies to all levels of government (important in federal countries where
subnational
governments pose risks).
Organizational:
ensuring that institutional arrangements are in place for implementing the FRL.Slide8
Why Most Advanced Countries Have Not Adopted a FRL
Existing Legal Framework for Budget System is Adequate
Law Perceived to be Less Necessary, or Unnecessary, for FRL Issues
Independent Institutions Contribute to the Accountability of Government
In EU countries: Supranational Fiscal Rules and Fiscal
Reporting to Brussels
Coalition
Agreements, or National/Domestic Stability Pacts,
can Specify Fiscal ObjectivesSlide9
Why Most Advanced Countries Have Not Adopted a FRL
(continued)
Limited Success of Including Quantitative Fiscal Rules in Law: Credibility diminishes
The Political Difficulty of Adopting FRLs
Strong Legislatures Reject Executive Dominance in Budget Matters
Freedom of Information Laws Set Tone for TransparencySlide10
Conclusions
The need for a FRL in advanced countries is obviated to the extent that:
Pre-existing legal framework
.
There is usually already a comprehensive law governing the budget and public financial management. In several countries, the Constitution impinges on the objectives of FRLs.
Fiscal stability objectives
can be achieved by arrangements other than by a FRL
:
e.g., coalition agreements and, for EU countries, the quantitative targets for debt and fiscal deficits of the Stability and Growth Pact (and enforcement procedures).
Credibility.
The experience of embedding numerical fiscal rules –debt, deficit or spending targets – in FRL-type legislation has been disappointing.
FRLs do not buy credibility.
Transparency.
Institutional arrangements for providing quality fiscal information to the public are already in place: independent external audit
bodies function well; Freedom of Information Acts are widespread.
Accountability.
When there a clear separation of executive and legislative powers, parliaments hold the government to account. In some countries, an independent fiscal council, reinforces accountability.Slide11
Issues for Discussion
Do you agree that FRLs
are not generally needed in advanced countries?
Is Greece (Ireland…) an exception? Should FRLs be
“pushed” on to
fiscally profligate countries? Or low-income countries, by donors?
The
scope
of a FRL
has been defined
by
four minimal
provisions
(especially the
transparency of, and accountability
for, medium-term fiscal strategies).
Should some of the “optional” provisions be obligatory
(e.g.,
comprehensiveness, institutions
)?
Do you agree that a regularly
updated
MTBF provides
an adequate “anchor” for fiscal
policy? Or would
it be better to embed
numerical fiscal
rules
in FRL-type law
(as is the case for EU supranational rules)?
If FRLs do not buy credibility, what does?