Should Advanced Countries Adopt Fiscal Responsibility Laws?

Should Advanced Countries Adopt Fiscal Responsibility Laws?

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

.

Middle-income countries:

Argentina, Brazil, Colombia, Ecuador,

Hungary, India

,

Latvia, Mexico, Pakistan

, Panama, Peru, Romania, Sri

Lanka

Low-income countries:

Ghana (draft), Nigeria.

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 FRL

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).

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.

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.

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 Objectives

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 Transparency

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.

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?