Should Advanced Countries Adopt Fiscal - PFM blog

Should Advanced Countries Adopt
Fiscal Responsibility Laws?
Ian Lienert
Formerly IMF Fiscal Affairs Department
Fiscal Responsibility Laws (FRLs)
are Rare in Advanced Countries
Advanced Countries (WEO definition)
• Only Australia and United Kingdom have
Middle-income countries:
• Argentina, Brazil, Colombia, Ecuador,
Hungary, India, Latvia, Mexico, Pakistan,
Panama, Peru, Romania, Sri Lanka
Low-income countries:
• Ghana (draft), Nigeria.
Figure 1. Fiscal Responsibility Laws in OECD Countries
Australia: Charter of Budget Honesty
Hungary: Fiscal Responsibility Law
Mexico: Federal Budget and Fiscal Responsibility Law
New Zealand: Fiscal Responsibility Law
United Kingdom: Fiscal Responsibility Act
Definition of a
“Fiscal Responsibility Law”
An FRL is a limited-scope law that elaborates on
the rules and procedures relating to three budget
• Accountability (of the government to parliament)
• Transparency
• Stability
Optional principles/provisions:
• Comprehensiveness
• Institutions to implement the FRL
Four essential components of a FRL
The following four features are chosen to be essential
components of a fiscal responsibility law, notably the legal
requirement for the government to:
1. Specify the medium-term path of fiscal
aggregates (transparency of fiscal policy intentions).
2. Describe the medium-term and annual budget
strategy for attaining the chosen fiscal objectives
(policies to support fiscal stability).
3. Regular reports, including a mid-year review on
the attainment of fiscal objectives or targets
(accountability for achieving fiscal strategy).
4. Assure timely audited annual financial statements
(accountability for quality of fiscal reports).
Optional components of a FRL
• Numerical fiscal rules—quantitative targets in law.
• Debt sustainability analysis (if debt is measured in net
terms, then asset management is included).
• Existing fiscal policies versus new measures
(baseline projections; impact analysis).
• Reasonable stability in tax policies (ratio:
• Reporting of tax expenditures
• Reporting of fiscal risks, comprehensively
• Quarterly in-year fiscal reporting and projections.
• Long-term fiscal scenarios, especially for ageing.
Optional coverage for FRLs
• Comprehensiveness: assuring
that the FRL applies to all levels of
government (important in federal countries
where subnational governments pose risks).
• Organizational: ensuring that
institutional arrangements are in place for
implementing the FRL.
Why Most Advanced Countries
Have Not Adopted a FRL
1. Existing Legal Framework for Budget
System is Adequate
2. Law Perceived to be Less Necessary, or
Unnecessary, for FRL Issues
3. Independent Institutions Contribute to the
Accountability of Government
4. In EU countries: Supranational Fiscal Rules
and Fiscal Reporting to Brussels
5. Coalition Agreements, or National/Domestic
Stability Pacts, can Specify Fiscal
Why Most Advanced Countries Have
Not Adopted a FRL (continued)
6. Limited Success of Including Quantitative
Fiscal Rules in Law: Credibility diminishes
7. The Political Difficulty of Adopting FRLs
8. Strong Legislatures Reject Executive
Dominance in Budget Matters
9. Freedom of Information Laws Set Tone for
The need for a FRL in advanced countries is obviated to the extent that:
• Pre-existing legal framework. There is usually already a
comprehensive law governing the budget and public financial
management. In several countries, the Constitution impinges on the
objectives of FRLs.
• Fiscal stability objectives can be achieved by
arrangements other than by a FRL: e.g., coalition agreements
and, for EU countries, the quantitative targets for debt and fiscal deficits of
the Stability and Growth Pact (and enforcement procedures).
• Credibility. The experience of embedding numerical fiscal rules –
debt, deficit or spending targets – in FRL-type legislation has been
disappointing. FRLs do not buy credibility.
• Transparency. Institutional arrangements for providing quality fiscal
information to the public are already in place: independent external audit
bodies function well; Freedom of Information Acts are widespread.
• Accountability. When there a clear separation of executive and
legislative powers, parliaments hold the government to account. In some
countries, an independent fiscal council, reinforces accountability.
Issues for Discussion
• Do you agree that FRLs are not generally needed in
advanced countries? Is Greece (Ireland…) an exception?
Should FRLs be “pushed” on to fiscally profligate countries?
Or low-income countries, by donors?
• The scope of a FRL has been defined by four minimal
provisions (especially the transparency of, and accountability for,
medium-term fiscal strategies). Should some of the “optional”
provisions be obligatory (e.g., comprehensiveness, institutions)?
• Do you agree that a regularly updated MTBF provides an
adequate “anchor” for fiscal policy? Or would it be better to
embed numerical fiscal rules in FRL-type law (as is the case
for EU supranational rules)?
• If FRLs do not buy credibility, what does?

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