The Political Economy of Fiscal Transparency and Independent Fiscal Councils

51 Pages Posted: 15 Aug 2017

See all articles by Roel M. W. J. Beetsma

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); European Commission; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Tinbergen Institute; Netspar

Xavier Debrun

International Monetary Fund (IMF) - Research Department

Randolph Sloof

University of Amsterdam - Faculty of Economics & Business (FEB); Tinbergen Institute

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Date Written: August 4, 2017

Abstract

The global surge in independent fiscal councils (IFCs) raises three related questions: How can IFCs improve the conduct of fiscal policy? Are they simultaneously desirable for voters and elected policymakers? And are they resilient to changes in political conditions? We build a model in which voters cannot observe the true competence of elected policymakers. IFCs’ role is to mitigate this imperfection. Equilibrium public debt is excessive because policymakers are “partisan” and “opportunistic.” If voters only care about policymakers’ competence, both the incumbent and the voters would be better off with an IFC as the debt bias would fall. However, when other considerations eclipse competence and give the incumbent a strong electoral advantage or disadvantage, setting up an IFC may be counterproductive as the debt bias would increase. If the incumbent holds a moderate electoral advantage or disadvantage, voters would prefer an IFC, but an incumbent with a large advantage may prefer not to have an IFC. The main policy implications are that (i) establishing an IFC can only lower the debt bias if voters care sufficiently about policymakers’ competence; (ii) not all political environments are conducive to the emergence of IFCs; and (iii) IFCs are vulnerable to shifts in political conditions.

Keywords: Independent fiscal councils, fiscal transparency, public debt, partisan bias, opportunistic bias, competence, congruence

JEL Classification: E62, H6

Suggested Citation

Beetsma, Roel M. W. J. and Debrun, Xavier and Sloof, Randolph, The Political Economy of Fiscal Transparency and Independent Fiscal Councils (August 4, 2017). ECB Working Paper No. 2091, Available at SSRN: https://ssrn.com/abstract=3018367 or http://dx.doi.org/10.2139/ssrn.3018367

Roel M. W. J. Beetsma (Contact Author)

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Randolph Sloof

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Tinbergen Institute ( email )

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