perspective. The Finance Minister has strong monitoring and enforcement powers in the execution stage. The
Parliament has in general strong powers to amend the budget proposal.
The choice of the approach to centralisation depends on country-specific characteristics. Literature (Hallerberg
and Hagen 1999) has underlined that the ideal way for a country to address common pool problems (see section
2.3.1) depends on its electoral system and the resultant degree of political dispersion of governments. Countries
with an ideologically unified government (i.e. a one-party government or in which parties in government are
close ideologically) generally rely on the delegation approach. Countries in which the government is less
unified ideologically generally rely on fiscal contracts (e.g. coalition agreements). Several studies have shown
that the approach followed by countries is also linked to their size (see European Commission (2005) and Von
Hagen et al. (2002)). Large EU Member States are mostly delegation countries. In practice, the classification of
countries according to the approach chosen to centralise the budgetary process is not always evident. Indeed,
some countries combine features of both approaches (e.g. Denmark and Sweden), which complicates the
categorization, and reforms of fiscal institutions may change the classification of some countries over time.The second possibility consists of institutions whose work may contribute to improving the conduct of
fiscal policy in a more indirect way. These institutions, denominated as 'Fiscal Councils' in some pieces
of literature, are not mandated to carry out any particular fiscal policy task (no delegation). Among other
activities, they can ensure that fiscal policy is based on unbiased inputs (e.g. through the provision of
independent macroeconomic forecasts), provide analysis on fiscal policy issues (e.g. independent
estimates of the cost of policy measures; analysis of the sustainability of government finances), and
release regular assessments and recommendations related to fiscal policy, with the view notably to
increasing ‘reputation costs’ for the conduct of unsound policies.
These institutions differentiate from existing ‘think tanks’, such as some private banks' research
departments, by the fact that they are primarily financed by public funds. Specific arrangements (legal
provisions, appointment procedures etc.) are foreseen with a view to ensuring a high degree of
independence vis-à-vis political authorities. As discussed in the Public Finance Report in EMU 2006
(pp. 168-183, 189-195), several institutions of that kind are already in force in EU and other advanced
economies and seem to have contributed to the conduct of sound fiscal policies.
2.4.3. Concluding remarks
Numerical fiscal rules and independent institutions: complements or substitutes?
At first sight, independent institutions can be viewed as an alternative to numerical fiscal rules since they
also aim at eliminating possible distortions in the conduct of fiscal policy. However, in general,
numerical fiscal rules and institutions should not be seen as mutually exclusives but rather as
complements.
The existence of numerical fiscal rules reflecting the main fiscal policy objectives of a country can help
specifying the mandate and facilitate the work of independent institutions. Fiscal institutions, on their
side, can effectively contribute to an independent monitoring of the respect of the existing numerical
fiscal rules, thereby increasing the chances that rules are respected. At the stage of budgetary planning
and implementation, independent institutions can provide an assessment of whether budgetary plans and
developments are in line with the rules. Ex post, independent institutions can increase the public
accountability of the government, e.g. by providing a critical assessment of the reasons for possible non-
compliance with the rule.
Another reason why rules and institutions could complement each other is that they potentially focus on
different aspects of government finances. Numerical fiscal rules often apply to one sub-sector of the
general government and generally have a short to medium-term orientation. On the contrary, independent
fiscal institutions potentially conduct analysis covering the whole of government finances and may also
consider the situation of government finances in a long-term perspective.