balances are weak, such an FC is more likely to be ignored in the political process.^15 Substantial fiscal
decentralization might raise the potential gains from an FC, as it could assume the role of an independent
arbitrator between the central and the subnational governments and contribute to the coordination of
fiscal policies (see the Belgian example discussed in the section “Can Other Institutions Play the Role of
Fiscal Agencies?”). At the same time, such decentralization could complicate the FC’s mandate as it
would have to monitor the fiscal policies of the local governments as well.
A number of conditions could bolster the effectiveness of an FC. Given that it would exert influence
primarily through the public debate, two main conditions are crucial: (1) its mandate needs to be clearly
defined and reflect a relatively broad social consensus on what constitutes sound policy;^16 and (2) the
government must be willing to integrate the FC into its work—perhaps even by using it to bolster its case
for unpopular measures or reforms. Additional conditions that could strengthen the effectiveness include
(1) the existence of fiscal rules, because they provide a clear benchmark against which the government’s
policies can be assessed; (2) a central role for the FC in the budget process—for example, the budget vote
could require a hearing with the FC or an explanation from the government if its recommendations are
ignored; and (3) legislated provisions regarding the FC, because they could bolster its position in a
possibly unfavorable political environment.
5. Experience with fiscal councils
This section reviews the experience with FCs in a number of countries. It yields four main lessons. First,
the establishment of an FC is a realistic institutional reform that seems to have contributed to fiscal
discipline in a number of countries. Second, FCs providing normative assessments of fiscal policy appear
to have been more effective than those limited to nonnormative analysis. Third, the effectiveness of
either hinges on the government’s commitment to fiscal soundness. If a certain degree of commitment
exists, it can be bolstered by an FC; if not, its impact is likely to be limited. Fourth, the desirable mandate
and setup of FCs should be country specific, depending on the nature of the fiscal problems, the existence
of fiscal rules, the role of the legislature in the budget process, and the checks and balances existing in
the political process.
There are several examples of FCs with a mandate to issue normative judgments regarding a
government’s fiscal policy and assessment of whether it is consistent with its own predefined goals. In
the process, these councils undertake independent analysis of fiscal developments, as well as provide
forecasts and projections for macroeconomic variables.
Belgium’s High Council of Finance recommends specific annual borrowing requirements for all levels of
government (Box 6.2).^17 Each year, the council publishes two reports: one on the future public sector
borrowing requirement and another on the implementation of the Belgian stability program. The
council’s mandate is explicitly limited to the borrowing requirement, but it provides recommendations on
the requisite fiscal stance for all levels of government consistent with that requirement.
(^15) It has been argued that a higher degree of separation of powers tends to reduce the size of deficits (Aghion, Alesina, and
Trebbi, 2002; and Persson and Tabellini, 2003 and 2004), while a lower degree of internal unity in the government
(typically under plurality electoral rules) tends to increase it (Balassone and Giordano, 2001; Fiorina, 1996; and Persson,
2004). These arguments are typically based, among others, on a government’s degree of accountability, its susceptibility
to rent-seeking, or the resistance to reform.
(^16) The social consensus could, however, itself be shaped to some degree by increased transparency that could be provided
by a fiscal council.
(^17) Website: docufin.fgov.be/websedsdd/intersalgen/hrfcsf/onzedienst/Onzedienst.htm. Belgium also has a second FC-type
institution, the Federal Planning Bureau (FPB). While technically part of the government, it has some independent
standing. The FPB provides independent economic forecasts that must be used for official purposes, long-term forecasts,
and policy analysis.