FCs can have varied structures. They can range from a small group of academics to a full public agency
with extensive technical and financial resources as in the U.S. (see Box 6.4). In Mexico and the United
States, the council is attached to the legislature, only the respective director is appointed by congress. In
Japan, the council is an organ of the ministry of finance and is composed of scholars, journalists, and
business executives. In Chile, the two panels of 12–14 members each are appointed each year.
The experience with these FCs appears to suggest that their effectiveness depends even more than for
those with stronger mandates on the government’s commitment to fiscal prudence. Fiscal performance
has varied substantially both across countries and across time despite their existence. This suggests that
the political cost of ignoring the analysis of a purely advisory body is generally limited. The cost is likely
to be smaller than ignoring normative assessments and recommendations, because the latter provide a
benchmark against which the government’s policies can be scrutinized in public forums. The more open-
ended the advice, the less it is likely to have weight in the political and public debate.
6. Can other institutions play the role of fiscal agencies?
A number of existing institutions—most notably central banks, private financial institutions, and regional or
multilateral institutions—already help shape policymakers’ incentives in ways that discourage the abuse of
discretionary fiscal policy. However, for a variety of reasons noted below, they cannot fully substitute for
fiscal agencies. In particular, they are either not independent or do not have a domestic government mandate,
as an ideal FC would. Rather, FCs and the existing institutions could complement each other.
Where a nascent FC already exists, strengthening it may well be preferable to the setting-up of a new
institution. For example, a well-established and reputable policy institute could be provided with a formal
mandate to systematically undertake analysis of budgetary issues and to issue regular reports on the
government’s policies. There could also then be a mandatory requirement on the part of the government
to respond formally to its reports. These reports of course need not be restricted simply to analysis, but
could include also normative assessments, and recommendations (for instance in the “green budget”
produced by the Institute for Fiscal Studies in the United Kingdom). A prerequisite for credible operation
of such an institution is the provision of a formal mandate, as well as accountability.
In many countries, national central banks could—and to a certain extent already do—act as an FC.
Central banks often enjoy political independence, are granted an autonomous budget, and have a staff
able to analyze and assess fiscal policy issues as well as influence the policy debate. As the government’s
bank, the central bank is also well placed to monitor fiscal flows and stocks. Granting the central bank a
well-defined fiscal mandate could thus save the costs of creating a new institution, and make sure that the
“embedded” FC is credible. However, there is a danger that a central bank will be too narrowly focused
in its approach to fiscal policy. This could in turn elicit a response from the government that threatens the
independence of the central bank. Moreover, the concentration of policy- related mandates in the hands
of unelected representatives would magnify issues of democratic accountability.
Private financial institutions, such as commercial and investment banks, as well as rating agencies, also
provide independent assessments of fiscal policy. Their influence on policy outcomes works through
market pricing of government and quasi-government securities. However, there are two key reasons why
these institutions are unlikely to be able to substitute for FCs. First, their motivation and incentives, based
on profit considerations, and lack of democratic legitimacy, imply that they will not be guided by public
policy considerations. Private sector research is arguably subject to its own bias, and distortions. Second,
the transmission channel from the assessment to policy decisions is not the continuous democratic policy
debate, but the discontinuous, and often sharp, delayed reaction of financial markets. Conversely, FCs
can increase the flow of their information about fiscal policy, improve policy outcomes, and stabilize
expectations, leading to smoother functioning financial markets.
Regional or multilateral institutions, such as the OECD and, in particular, the IMF, also undertake tasks
similar to those of fiscal agencies. In the case of the IMF, its appropriate role will depend on whether it is