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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:

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Should Advanced Countries Adopt Fiscal Responsibility Laws?

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  1. Should Advanced Countries Adopt Fiscal Responsibility Laws? Ian Lienert Formerly IMF Fiscal Affairs Department

  2. 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.

  3. 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

  4. 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).

  5. 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.

  6. 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.

  7. 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

  8. 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

  9. 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.

  10. 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?

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