THE ROLE FOR FISCAL AGENCIES*
Xavier Debrun, David Hauner, and Manmohan S. Kumar (International Monetary Fund)Paper completed: 2007Introduction
There is a growing recognition that the design and implementation of economic policies depend to a
considerable extent on the incentives of policymakers. It is also generally recognized that even well-
intended governments may end up pursuing unsound policies. This may happen in part because
incentives of policymakers change over time, with policies agreed to previously not being implemented.^1
It may also reflect the impact of the political environment, such as the influence of special interests or
immediate electoral concerns that generally results in short-time horizons. These factors have contributed
to unsatisfactory fiscal performance in many advanced and developing economies (IMF, 2003).
The emphasis on policymakers’ incentives has paved the way for institutional innovation expected to
improve policy. A common objective of reform has been to reshape policymakers’ incentives. One way
to achieve this is to delegate activities susceptible to “government failure” to independent agencies or to
establish arrangements that raise the reputational and electoral costs of distorted policies. The case for
delegation has been at the core of the recent developments regarding the independence of central banks
and financial regulators. The success with delegation of monetary policy has led some to argue that
analogous fiscal agencies could play a useful role in reducing undesirable tendencies, such as the
emergence of unsustainable debt, policy procyclicality, and inefficient tax and expenditure policies.
This chapter examines the rationale for fiscal agencies, explores issues relating to their implementation,
and reviews country experiences. These agencies could improve fiscal policy by exercising policy
mandates explicitly delegated to them or by influencing the democratic debate through independent
analysis, forecasts, or judgment. Their specific mandate and structure would depend on the nature of the
fiscal policy problem and on the country’s policymaking environment. Hence, unlike the structure and
role of independent central banks, which is fairly uniform across countries, the characteristics of fiscal
agencies would be much more country specific.
The chapter identifies two types of fiscal agencies: Independent fiscal authorities (IFAs) to some extent
mimic on the fiscal side independent central banks. For instance, they could be mandated with the
objective of attaining a short-term fiscal balance target consistent with debt sustainability, and/or with
output stabilization. They may also be provided with some discretion over tax rates or spending.
Fiscal councils (FCs) would not receive any specific authority over fiscal policy but would undertake
analysis and assessment of fiscal developments and policies. They would essentially provide independent
∗ “The Role for Fiscal Agencies,” first appeared in Promoting Fiscal Discipline edited by Manmohan S. Kumar and
Teresa Ter-Minassian (Washington, DC: International Monetary Fund, 2007). This chapter is reprinted by permission of
the International Monetary Fund. For additional information on this title please visit, http://www.imf.org/external/pubind.htm.(^1) This is the familiar problem of time inconsistency.