projections and analysis and thereby affect policymakers’ incentives through external scrutiny and
democratic debate. They could also issue normative judgments, possibly involving formal procedures,
such as a special session in parliament.
The chapter first develops an analytical framework for policy delegation in general and fiscal policy
delegation in particular. Next it discusses the potential roles of IFAs and FCs. Then it examines the
experience with FCs and considers the complementary role that existing institutions—and especially the
IMF—can play. The chapter ends by summarizing the main conclusions.
1. Delegation and institutional innovation
Given the scope for institutional innovation, what role could fiscal agencies play? They could help
inform, analyze, assess, and implement fiscal policy.2 In one form or another their operation would entail
some delegation from the elected representatives or their administration. This raises a number of issues.
What are the general criteria for the delegation of policy or policy-related areas to new institutions? What
do these criteria suggest specifically about the appropriateness of delegation in fiscal policy? What would
be the types of institutions that could assume responsibilities in the fiscal area? These issues are
examined below.
1.1.When is delegation useful?
The proposition that institutional reform can improve the conduct of economic policy rests on two
premises. First, institutions directly shape policymakers’ incentives that in turn affect policy choices;
and, second, well-intended governments would be willing to adopt or modify institutions in a way that
effectively improves policymaking. Nonetheless, reforms are in general likely to encounter resistance
from entrenched interests: “All societies tend to see their current governing institutions as immutable, as
if they were the natural order of things” (Blinder, 1997). In particular, reforms that entail delegation of
policy mandates to politically independent, specialized bodies usually occur slowly and encounter stiff
opposition. The evolution of institutions that are now generally taken for granted—independent
judiciaries, central banks, or (financial) regulators—provides ample testimony in that regard.
Economic theory points to four basic criteria that should dictate whether it is desirable to delegate some
or all aspects of policy (Alesina and Tabellini, 2003):
- First, there must be socially harmful distortions in policymaking undertaken by political
representatives. If there are no such distortions, there would be no gain from delegation, and the
policy can be designed and implemented optimally by political representatives. In such circum-
stances, the other three criteria noted below would also not apply. - Second, there should be a broad consensus on what constitutes “sound policy” in any particular
domain. This is essential to establish a mandate for which the independent body can be held
accountable. The absence of such a consensus would indicate conflicts among social groups or
constituencies. This would in turn suggest difficult policy trade-offs that only an elected body
could legitimately resolve. - Third, delegated mandates should not be primarily distributive or have major distributive
consequences. Clearly, distributional decisions should reflect a popular mandate that can only be
exercised legitimately by the elected representatives.
(^2) Several countries already have such institutions that play varying roles in helping increase the transparency and
credibility of fiscal policy. The practices of these countries are examined in the section “Experience with Fiscal
Councils.”