Irish Fiscal Advisory Council

The government announced the establishment of the Irish Fiscal Advisory Council (IFAC) on July 7, 2011. The IFAC is mandated to provide an assessment of:
(i) the soundness of official macro-fiscal forecasts;

(ii) the appropriateness of the fiscal stance (including the government’s stated medium-term budgetary objective); and

(iii) the consistency between budgetary plans and fiscal rules (the latter are to be specified in a Fiscal Responsibility Bill by year-end).

The IFAC will submit, at least three times a year, written reports to the Minister for Finance, which will automatically be communicated to the Oireachtas within 24 hours. This effectively means that the IFAC’s reports are published with the Minister having advance notice of their content. There are no restrictions, otherwise, on the Council’s communication with the public.

The IFAC comprises five members, appointed by the Minister for Finance for initial tenures of two to four years. The members will serve in a voluntary capacity, assisted by a small secretariat including full-time economist staff. The Council has been allocated initial funding for the remainder of 2011.

Among the range of fiscal councils in Europe, the IFAC appears most similar to the Swedish Fiscal Policy Council, both in terms of mandate and funding. For instance, the IFAC is charged with assessing, rather than producing, the official macro-fiscal forecasts, which explains its relatively modest resources compared with say, the U.K.’s Office for Budget Responsibility

-Ireland: Third Review Under the Extended Arrangement - Staff Report

On Fiscal Rules

How Intelligent Budget Rules Help Chile Prosper: Lessons for the US


How Smart Fiscal Rules Keep Sweden’s Budget in Balance

We Promise to Obey IMF and adopt a Fiscal Responsibility Law

Ireland's Letter of Intent;

We are preparing institutional reform of the budget system taking into account anticipated reforms of economic governance at the EU level. A reformed Budget Formation Process will be put in place. Furthermore, we will introduce a Fiscal Responsibility Law which will include provision for a medium-term expenditure framework with binding multiannual
ceilings on expenditure in each area by end-July 2011 (structural benchmark). A Budget Advisory Council, to provide an independent assessment of the Government’s budgetary position and forecasts will also be introduced by end-June 2011 (structural benchmark). These important reforms will enhance fiscal credibility and anchor long-term debt sustainability.

'Long-run fiscal policy is health policy'

Is it a justification for earmarking a tax;

The National Commission on Fiscal Responsibility and Reform, co-chaired by former Clinton White House Chief of Staff Erskine Bowles and former Republican Senate Whip Alan Simpson, faces two over-riding problems. First, it must find a new source of revenue for the federal government, a source that is relatively stable, produces substantial proceeds, and does not create large disincentives for employment, saving, and investment. Second, it must bring the rate of growth of health care spending closer to the rate of growth of the rest of the economy. The gap over the last 30 years, 2.8 percent per annum, is unsustainable. As Alice Rivlin, a member of the new commission, has said, “Long-run fiscal policy is health policy.”1 Control of health expenditures will require comprehensive change in the way the country finances and delivers health care. A value-added tax (VAT) dedicated to funding basic health care for all through enrollment in accountable care organizations would help solve the revenue and health spending problems at the same time. A VAT, by itself, has much to recommend it. Unlike a payroll tax, it does not discriminate against employment. Unlike the income tax, it taxes only consumption, not saving. The base (consumer expenditures) is more stable than payroll or income over the business cycle and is large enough to provide a substantial yield at a relatively modest rate. While it is not immune to evasion or avoidance, a VAT is not as vulnerable to these problems as the income tax.

Recommended Reading

IMF- Selected Issues- Albania;

Comparative Inflation Performance in Southeastern Europe and Albania

Fiscal Rules for Sustainable Public Finances In Albania

Special Announcement: Focus on Fiscal Responsibility Laws

For the next 4 weeks this blog will be focusing on Fiscal Responsibility Legislations and their international experience. Comments and views welcome.

Enjoy the following post by YangHyun Jin over at IMF's PFM blog;
Pakistan: Monitoring Implementation of the Fiscal Responsibility and Debt Limitation Law

Creating More Fiscal Space in Good Times

One of the lessons from recent crisis, according to the Fund;

A key lesson from the crisis is the desirability of fiscal space to run larger fiscal deficits when needed. There is an analogy here between the need for more fiscal space and the need for more nominal interest rate room, argued earlier. Had governments had more room to cut interest rates and to adopt a more expansionary fiscal stance, they would have been better able to fight the crisis. Going forward, the required degree of fiscal adjustment (after the recovery is securely under way) will be formidable, in light of the need to reduce debt against the background of aging-related challenges in pensions and health care. Still, the lesson from the crisis is clearly that target debt levels should be lower than those observed before the crisis. The policy implications for the next decade or two are that, when cyclical conditions permit, major fiscal adjustment is necessary and, should economic growth recover rapidly, it should be used to reduce debt-to-GDP ratios substantially, rather than to finance expenditure increases or tax cuts.

The recipe to create additional fiscal space in the years ahead and to ensure that economic booms translate into improved fiscal positions rather than procyclical fiscal stimulus is not new, but it acquires greater relevance as a result of the crisis. Medium-term fiscal frameworks, credible commitments to reducing debt-to-GDP ratios, and fiscal rules (with escape clauses for recessions) can all help in this regard. Similarly, expenditure frameworks based on long-term revenue assessments help limit spending increases during booms. And eliminating explicit revenue earmarking for prespecified budget purposes would avoid automatic expenditure cuts when revenues fall. A further challenge, as governments come under greater pressure to display improved deficit and debt data and are tempted to provide support to ailing sectors through guarantees or off-budget operations, is to ensure that all public sector operations are transparently reflected in fiscal data and that well-designed budget processes reduce policymakers’ incentives to postpone needed adjustment.

Related;
The Case For Higher Inflation

I would add, however, that there’s another case for a higher inflation rate — an argument made most forcefully by Akerlof, Dickens, and Perry (pdf). It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis.

Model Fiscal Rules

The empirical and theoretical literature has identified the key characteristics of a model fiscal rule. The rule should be as follows:
• Well-defined: indicator, institutional coverage, specific escape clauses:
- Overall balance preferred over current balances as investment expenditure suffers from both conceptual and measurement weaknesses;
-Public sector rather than general government (to include off-budget operations and the cost of quasi-fiscal activities of public enterprises; however, it may be desirable to exclude the social security system as assets cover future contingent liabilities).
• Transparent: accounting, forecasting, and institutional arrangements.
• Adequate: contain inflation (limits on borrowing from the central bank), reduce remaining external vulnerabilities (limits on budget deficit), sustainability of public-debt-to-GDP ratio (limits on government debt, or a minimum primary surplus).
• Consistent: criteria need to be internally consistent and with other macroeconomic or policy rules (inflation targeting).
• Simple: appeal to legislature and public.
• Flexible: accommodate external shocks by allowing room for automatic stabilizers and discretionary policies to work (i.e., use of structural primary surplus rule or balanced-budget rules over a medium-term horizon).
• Enforceable: constitutional or legal statutes, perhaps with penalties; independent fiscal councils.
• Efficient: the rule should prevent structural one-off measures (frequent adjustment in tax rates); a fiscal rule should be a catalyst for fiscal reforms that ensure sustainability.

-FISCAL POLICY DURING DOWNTURNS AND THE PROS AND CONS OF ALTERNATIVE FISCAL RULES, chapter in
Philippines: Selected Issues

The latest edition to Fiscal Responsibility Laws

The Fiscal Responsibility Law adopted by parliament on November 17 provides a domestic anchor for fiscal policy and is in line with the program. The law introduces numerical and procedural rules for the preparation of annual budgets, including the obligation to achieve a decline in public debt in real terms, the prohibition of primary deficits, compliance with medium-term expenditure ceilings, and the requirement to offset the impact of legislative initiatives on the budget balance. During a transitory period, which applies to the preparation of budgets for 2010-12, the projected growth of real expenditure cannot exceed half the projected growth of real GDP. The law also establishes a fiscal council, consisting of three wise persons and a secretariat. The council, which should be operational by the end of 2009, will prepare macroeconomic forecasts and projections of budgetary aggregates; it will also assess the budgetary impact of draft legislation (scoring) and make recommendations on corrective actions when needed. Finally, the council will have an advisory role, providing information and assessments to all branches of government upon request. The authorities and staff agreed on the importance of implementing medium-term budget preparation and planning, and of providing the fiscal council and its secretariat with a budget appropriation commensurate to its mandate

-Hungary - Stand-By Arrangement - Interim Review Under the Emergency Financing Mechanism

Related;
The outlines of the Fiscal Responsibility Act

The Fiscal Council

- prepares macro-economic forecasts;

- prepares baseline projections for the budget figures;

- prepares methodological recommendations relating to fiscal planning, forecasting and impact assessment;

- prepares estimates, both following submission to Parliament and before the final vote, concerning the fiscal effects of the budget bills and supplementary budget bills as well as any other bills discussed by Parliament that may have an impact on the development of mandatory items;

- may prepare estimates concerning the budgetary impacts of draft bills other than those indicated above, as well as of motions for amendment submitted in the first or second phase of the Parliamentary debate or before the final vote which are subject to parliamentary decision;

- provides information, upon request, to the President of the Republic, the parliamentary commissioners, the president of the State Audit Office, the governor of the National Bank of Hungary and the committees of Parliament concerning issues within their competence;

- informs the budget committee of Parliament or the Government about its legislative recommendations to promote the maintenance of fiscal discipline and the transparency of public finances;

- comments on draft legislation relating to fiscal accounting rules.

Budget Simulation Model and its explanation

Design of Fiscal Rules

On design, it is useful to start the discussion with a simple comparison between budget balance rules that are combined with expenditure rules and those which are not. Historical observation is consistent with the regression results in suggesting that in general budget-balance rules that are not combined with expenditure rules are less effective. A striking example of this is the United States experience: neither the Gramm-Rudman-Hollings (GRH) Act of 1985 nor its revised version in 1987 succeeded in significantly reducing the fiscal deficit.16 A further example is the Stability and Growth Pact (SGP), which has not so far led to sustainable positions being attained, notably in large EU countries. On the other hand, when the United States turned to an expenditure-based rule, the Budget Enforcement Act (1990-2002),17 a surplus was achieved and maintained for a time. Some EU countries (e.g. Netherlands, Spain, Sweden, Finland and Czech Republic) supplemented the SGP by national rules (in most cases including some expenditure ceilings) and also enjoyed success. There were, however, some failures. For instance, after France introduced multi-year objectives for real government expenditure in 1998, its structural fiscal position deteriorated continuously until 2003, at which time it came under the European excessive deficit procedure.

There is no one-size-fits-all rule applicable to every country but there seems to be a consensus that, to be effective, rules should have several features. In particular, they should be simple to manage, understand and monitor, while flexible enough to respond to the cycle. Against this background, there are several features of expenditure rules that can explain why they have often been associated with success: not only do they exclude cyclically volatile revenues but they can be (and often are) designed to let economic stabilisers work in a downturn and to save windfall gains during an upturn; 19 they are typically more transparent than all but the simplest budget balance rule; they allow spending ministers/ministries to be held accountable;20 and they make the availability of financial resources predictable for policymakers and programme managers.

An important issue in designing fiscal rules is their possible impact on the quality of public expenditure. Both expenditure rules covering total spending and budget balance rules can potentially cause allocative inefficiencies by biasing spending towards items that are politically sensitive and difficult to cut.21 Typically governments have responded by excluding some capital items from overall spending (as done notably by Golden rules in the United Kingdom and Germany), but this may make the rule more difficult to monitor as well as easier to circumvent. Moreover, there is an element of arbitrariness in excluding physical investment from the rule but not current spending with investment attributes, such as spending on education.
The time period over which the target is to be met is also important, not least in providing flexibility to deal with cyclical fluctuations. Although enforcing the rule on a year-by-year basis appears strict, many countries do just that, with varying degrees of success. Switzerland is an example of a country combining year-by-year enforcement with cyclical flexibility by targeting a balanced budget in cyclically adjusted terms. The United Kingdom pursues another approach: its budget-balance rule22 holds over the business cycle. Such a procedure, however, provides less accurate short-term guidance. As well, rules defined over the cycle or embodying some kind of cyclical adjustment require a subjective23 assessment to be made about the cycle’s start and end dates and/or the size of the output gap, which (together with data revisions) creates a degree of uncertainty about whether or not the rule was (or will be) met. The same objections apply to rules such as the SGP that allow normal procedures to be waived in conditions of pronounced cyclical weakness.

-Fiscal consolidation: lessons from past experience

Assorted

Ukraine's Financial Ordeal

Lecture on Climate Change

Welfare gain of lower gas prices

Levitt on the banking crisis and mark to market accounting

How will the Chancellor repay debt?

If behavioral economists devised financial regulations…

How to Use the Enterprise Surveys

Netherlands Antilles- a New Fiscal Framework

Proposed fiscal reforms of Netherlands Antilles;

Background: The promise of fiscal discipline and debt relief, under the agreement to dissolve the Netherlands Antilles, has boosted investor confidence and growth. Implementation of the dissolution agreement has begun, although the actual constitutional changes are now scheduled for January 2010. The new fiscal framework (a balanced budget, debt limits and supervision) is already in place in the BES islands (Bonaire, St. Eustatius, and Saba) and due to start in 2009 in Curaçao and St. Maarten. The authorities are pushing ahead with welcome reform proposals to improve: tax policy, labor markets, public enterprise finances, pensions, and healthcare.

Challenges: The immediate challenge is complete the transition phase expeditiously by finalizing important details, including the terms of debt relief. An ongoing challenge will be economic management in the absence of key macroeconomic policy tools—structural reforms will be crucial for improving competitiveness and maintaining external viability. The authorities will also need to address the strain on public finances from entitlement costs, and the impact of debt relief-related liquidity on financial sector balance sheets...

Debt cancellation of about 80 percent of total public debt as of December 31, 2005 by the Netherlands. Details of the coverage, schedule, and modality of debt relief remain to be finalized, and the actual operations have been delayed. Debt relief will be conditional on the establishment of a fiscal framework, applicable to the local government of each island, and including:
• The introduction of medium-term budgeting;
• The establishment of a fiscal supervisor (chaired by a Dutch appointee) to supervise borrowing decisions, ensure that the fiscal rule (see below) is fully implemented, and advise responsible ministers.
• A balanced current budget rule, with borrowing restricted to within-year cash management needs. Deviations will be allowed only in case of a disaster, with disaster relief subject to the approval of the fiscal supervisor.
• Borrowing caps for capital expenditure, limiting annual interest payments to five percent of the average total revenue of the preceding three years, with loans for investments to be approved by the fiscal supervisor only if budget implementation is in line with the fiscal rule.

GFS data quality in Dominica

Statistical capacity problems affect the timely production of quality government finance statistics. In particular, the data are subject to frequent revisions stemming in part from omissions and misclassifications. Data on central government operations are incomplete and must be supplemented with additional information from external sources. For instance, some operations are undertaken outside the consolidated fund. These include certain investment spending, loan and grant receipts, and on-lending and transfers to public enterprises. As a result, capital expenditure data, recorded by the Treasury, must be supplemented with additional donor financing information, particularly because the public sector investment program (PSIP) data are not timely. Delays in the reporting of the PSIP data reportedly stem from reporting delays from the line ministries.

Several ongoing initiatives to strengthen expenditure management, should help minimize the extent of this problem. There is an ongoing effort to automate the expenditure execution process. A new automation technology installed in all line ministries in 2005 should allow all local purchase orders (LPOs) to be electronically generated and tracked. Commitments are charged against a specific budget allocation once the LPOs are generated. All ministries and suppliers of goods and services are compelled to use the new system. Only limited financing data are available. Although progress has been made in improving the measurement of the government's debt, there are concerns that there is still some under-recording of government commitments.

The authorities do not provide consolidated nonfinancial public sector data. Data for the rest of the public sector—Dominica Social Security and the public enterprises—must be obtained directly from each entity during Fund Article IV consultation missions.

No government finance data are reported to STA for publication in the International Financial Statistics (IFS) or the Government Finance Statistics (GFS) Yearbook.

via Dominica: 2008 Article IV Consultation - Staff Report

Working Paper of the Day

Federal Budget Rules: The US Experience by Alan J. Auerbach;

Like many other developed economies, the United States has imposed fiscal rules in attempting to impose a degree of fiscal discipline on the political process of budget determination. The federal government has operated under a series of budget control regimes that have been complex in nature and of debatable impact. Much of the complexity of these federal budget regimes relates to the structure of the U.S. federal government. The controversy over the impact of different regimes relates to the fact that the rules have no constitutional standing, leading to the question of whether they do more than clarify a government's intended policies.

In this paper, I review US federal budget rules and present some evidence on their possible effects. From an analysis of how components of the federal budget behaved under the different budget regimes, it appears that the rules did have some effects, rather than simply being statements of policy intentions. The rules may also have had some success at deficit control, although such conclusions are highly tentative given the many other factors at work during the different periods. Even less certain is the extent to which the various rules achieved whatever objectives underlay their introduction.

Budgeting in Small Towns

Postcards From Palin's Hometown

McCain had criticized earmarks from Palin;

But records show that Palin -- first as mayor of Wasilla and recently as governor of Alaska -- was far from shy about pursuing tens of millions in earmarks for her town, her region and her state.

This year, Palin, who has been governor for nearly 22 months, defended earmarking as a vital part of the legislative system. "The federal budget, in its various manifestations, is incredibly important to us, and congressional earmarks are one aspect of this relationship," she wrote in a newspaper column.

In 2001, McCain's list of spending that had been approved without the normal budget scrutiny included a $500,000 earmark for a public transportation project in Wasilla. The Arizona senator targeted $1 million in a 2002 spending bill for an emergency communications center in town -- one that local law enforcement has said is redundant and creates confusion.

McCain also criticized $450,000 set aside for an agricultural processing facility in Wasilla that was requested during Palin's tenure as mayor and cleared Congress soon after she left office in 2002. The funding was provided to help direct locally grown produce to schools, prisons and other government institutions, according to Taxpayers for Common Sense, a nonpartisan watchdog group.

Wasilla received $11.9 million in earmarks from 2000 to 2003. The results of this spending are very apparent today. (The town also benefited from $15 million in federal funds to promote regional rail transportation.)

The community transit center is a landmark: a one-story, tile-fronted building with a drive-through garage. Its fleet of 10 buses provides service throughout the region. Mat-Su Community Transit Agency officials say the building was made possible with a combination of federal money and matching gifts from a private foundation.

IMF on UK's fiscal rules

IMF calls on UK government to adhere to its fiscal rules;

The second issue that I would like to highlight concerns the appropriate macroeconomic policy response to these more difficult economic circumstances. Two key elements of the U.K.'s policy framework, namely, maintaining public net debt below 40 percent of GDP, and an inflation target of 2 percent, are likely to be breached for extended periods.

Despite the challenges, our view is that these are not the right circumstances in which to loosen the targets on either the budget or inflation sides. Such steps would unnecessarily complicate the management of the immediate threats to stability and growth.

That said, a balance does have to be struck between the need to respect the framework objectives by avoiding an excessively sharp policy adjustment to achieve that aim.

Accordingly, for fiscal policy, our recommendation is that concrete adjustment plans should be devised to bring debt back under the 40 percent ceiling in a reasonable time frame. In that regard, we welcome the already announced fiscal adjustment of 0.5 percent of GDP in each 2009 and 2010. But this adjustment should be regarded as a starting point and as a minimum. More should be done on that front over the next few years. Frontloading the adjustment and elevating the status of nominal expenditure ceilings would send a strong signal of the government's commitment.

More from the Staff Report;

The rules-based fiscal framework aims to improve credibility and transparency

The framework comprises two rules, together with periodically issued medium-term spending objectives:
• A sustainable investment rule. For the current cycle, this is expressed as a commitment to maintain net public debt below 40 percent of GDP and, since 2003, to observe this limit in every year.
• A golden rule, measured by the cumulative current balance since the beginning of the cycle, as a percent of GDP.
• Compliance with the two rules is supported by comprehensive spending reviews which set departmental spending limits three years ahead.

Like inflation-targeting, this is a framework of constrained discretion
Although medium-term sustainability is emphasized, discretion is considerable in several dimensions—annual budget balances can swing substantially, revenue and expenditure ratios are unanchored as long as they move together, the headroom to be maintained against the rules and the treatment of debt stock adjustments are undefined, and the authorities largely self assess compliance. And public debt remains low compared to other EU advanced economies, even though its continued rise in recent years goes counter to the reductions achieved by most of these countries.

However, some use of this discretion has created difficulties
In particular, despite output close to potential over the entire decade, headroom under the debt rule has been steadily eroded (see Annex 4). Expenditure has tended to exceed the multi-year projections, even when the latter anticipated significant increases. Recent revisions to external data underscore the toll the associated high deficits—in the context of buoyant private demand—took on the external balance. And in light of the uncertainties surrounding the cyclical position of the economy, the authorities have not yet established an end point for the cycle that began in 1997, complicating assessment of adherence to the fiscal rules.

The debt rule should be maintained, but other adjustments to the rules to constrain discretion may be appropriate
The net debt ceiling underpins the medium-term and sustainability focus of the current framework, which reflects aging and other factors (Figure 7). In this light, any softening of the ceiling—even a reversion to casting it “over the cycle”—would be inappropriate, especially at the current juncture because of elevated inflation expectations, current account developments, terms of trade losses, and the difficulty of establishing the credibility of a higher ceiling or an alternative framework.

Indeed, a stronger medium-term fiscal path than that implied by the authorities’ plan would support the necessary shift from domestic to external demand and help secure headroom under this cap to accommodate stabilizers in future. Further, any leeway arising from prospective upward revisions to official estimates of GDP, such as those expected from revised estimates for financial sector value added, would best be applied to headroom under the debt ceiling, not to a relaxation of the recommended fiscal stance. If, however, the ceiling is breached in coming years, as appears likely, prompt announcement of plans to bring it back under the ceiling on a sustained basis and create the necessary buffers over the medium term to allow automatic stabilizers to operate will be critical.

The status of the spending guidelines should be raised
The net debt rule needs the support of other elements of the fiscal framework. In that regard, nominal spending caps are simple and transparent, facilitate multi-year expenditure planning, constrain upward expenditure drift directly, allow automatic stabilizers to operate on the revenue side, and strengthen fiscal resistance to inflation. Binding three-year global current expenditure ceilings could be set on a rolling basis—building on the system of three year departmental expenditure limits as well as steps towards multi-year public service nominal pay awards—so that each new budget would introduce a further year, with limited scope for revision.

Cyclically-sensitive items such as unemployment benefits could be excluded if a contingency reserve to accommodate cyclical spending proves infeasible. Concern to secure investment spending could be reflected in adoption of a multi-year floor on investment. Medium-term policy on the revenue ratio would be implicit in the expenditure and debt targets. Adherence to the golden rule could still be monitored—much as nominal spending relative to target is now—but it would no longer play a primary role in the fiscal framework. Such a shift in emphasis would also reflect the success of broader policy frameworks, which have underpinned reduced economic volatility thereby diminishing the need to define fiscal or other rules “across the cycle.”

Related from News & Blogs;
IMF Slashes U.K. Economic Forecasts on `Grim' Outlook
Fiscal rules: a political question

Accounting rules for public duty and private failure
A prudent policy rethink is needed
Treasury to reform Brown’s fiscal rules

Last post for Brown’s fiscal non-rules

A conceptually attractive rule might look like the permanent balance rule advocated by Clemens Grafe and myself (see (in increasing order of illegibility) “How to reform the Stability and Growth Pact”", “Ten Commandments for a Fiscal Rule in the E(M)U” and “Patching up the Pact; Some Suggestions for Enhancing Fiscal Sustainability and Macroeconomic Stability in an Enlarged European Union”.)

A basic backgrounder: Fiscal policy: principles and practice