As mentioned in the introduction, the questions related to the desirable characteristics of the budgetary
process are outside the scope of this chapter. The main findings of the literature on this issue are
summarised in Box 1. The following sub-sections focus on the role of numerical fiscal rules and
independent institutions, other than government and Parliament, which may have an influence on the
conduct of fiscal policy.
2.4.1. Numerical fiscal rules
A simple way to promote or ensure the implementation of time-consistent policies is the introduction of
numerical fiscal rules. Such rules can be defined in many different ways. They can for instance introduce
limits on the deficit or debt of entities of the general government sector (budget balance and debt rules),
on a yearly basis or on average over a given period. Alternatively, they can impose constraints on some
categories of government expenditure or tax revenues (expenditure and revenue rules). A detailed
typology and review of the properties of different types of fiscal rules is included in section 3.2 of this
Chapter.
While not fully ruling out discretionary policy, fiscal rules, if enshrined in constitution or law and having
strict monitoring and enforcement mechanisms, can impose binding constraints on the conduct of fiscal
policy, and thereby directly contribute to fiscal discipline. The influence of numerical fiscal rules based
on political commitments or informal agreements between different tiers of general government is more
indirect. Such rules provide guiding principles for the conduct of fiscal policy and benchmarks against
which it can be assessed. Apart from their influence on the deficit bias, numerical fiscal rules can also
positively contribute to policy coordination between different levels of government, help mitigate
uncertainty as to future government actions and, if properly designed, contribute to improving the quality
of public finances.
Numerical fiscal rules are also subject to a number of drawbacks. Notably, they may be ineffective if
they are not backed by strong political commitment or if they are not complemented by domestic
budgetary institutions ensuring an appropriate monitoring and enforcement (von Hagen and al., 2005).
Other well-known criticisms are that numerical fiscal rules do not easily allow dealing with unexpected
circumstances, changes in the economic situation and preferences. For instance, some categories of fiscal
rules may hamper the stabilisation function of fiscal policy (e.g. some types of balanced budget rules).
Several authors (see notably Wyplosz, 2002a) also argued that rules tend to be rigid and artificial (setting
arbitrary debt or deficit limits) and that they can be easily circumvented, e.g. through creative
accounting. As argued by Kopits and Symanski (1998), there is therefore a need to carefully consider the
design of fiscal rules (see also European Commission, 2005).^11
2.4.2. Independent institutions, other than government and Parliament, influencing the conduct of
fiscal policy
Another way to address the deficit bias is to complement the existing national institutional framework by
independent public bodies designed to limit or ensure an appropriate use of discretion in the conduct of
fiscal policies. In principle, such bodies can contribute to improve the conduct of fiscal policy in two
different ways.
The first possibility would be to delegate part of fiscal policy to an 'independent fiscal agency'. There is
currently no example of such 'independent fiscal agency' and their creation is not seriously envisaged
(^11) According to Kopits and Symanski (1998), eight criteria should be taken into account when assessing the design of fiscal
rules. Fiscal rules should be well-defined (no ambiguous definitions and competence divisions and clear escape clauses);
there should be a transparent data reporting and accounting conventions; rules should be simple and flexible (rules
should allow to deal with exceptional events). Rules should be adequate in relation to their final objectives, credible and
enforceable. Finally, they should be consistent internally and with other policy objectives and supportive of structural
reforms.