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 FRLs. Middle-income countries: • Argentina, Brazil, Colombia, Ecuador, Hungary, India, Latvia, Mexico, Pakistan, Panama, Peru, Romania, Sri Lanka Low-income countries: • Ghana (draft), Nigeria. 1989 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 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Definition of a “Fiscal Responsibility Law” An FRL is a limited-scope law that elaborates on the rules and procedures relating to three budget principles: • 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: revenues/GDP) • 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 Objectives 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 Transparency Conclusions 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?