Irish Fiscal Advisory Council Issues Report

by Jason Gorringe, Tax-News.com, London

27 January 2012

Ireland's Fiscal Advisory Council has issued its latest report which assesses elements of the government's plans for overhauling the country's budgetary framework.

The Council was set up in June, 2011, as part of a wider agenda of reform of Ireland’s budgetary architecture. In introducing its report, the Council is clear that it is issued at a time of discussion of major changes in economic governance in the eurozone and the commitment by Ireland to introduce numeric fiscal rules as part of the forthcoming Fiscal Responsibility Bill.

In this context, the report assesses elements of the fiscal framework proposed in the Department of Finance’s March 2011 Discussion Document "Reforming Ireland’s Budgetary Framework" and contains recommendations for the design both of a set of fiscal rules and a permanent independent fiscal advisory council. The document proposed three fiscal rules as part of a future Fiscal Responsibility Bill: a Public Finance Correction Rule (PFCR), a Prudent Budget Rule (PBR), and a Sustainable Expenditure Growth Rule (SEGR).

The Council is chaired by Professor John McHale, and his fellow members and co-authors of the publication are: Sebastian Barnes (OECD), Professor Alan Barrett (TCD, on secondment from ESRI), Dr. Donal Donovan (adjunct professor University of Limerick and formerly IMF staff), and Dr. Róisín O’Sullivan (Associate Professor, Smith College, Massachusetts).

The main findings of the report, "Fiscal Institutions for Better Fiscal Policy", are as follows:

• Sound management of the public finances should follow three key principles: sustainability, stability and counter-cyclicality. However, the Council acknowledges that committing to these principles is difficult, as evidenced by the persistent deficits and high debt-to-GDP levels in many industrialised countries.
• Well-designed fiscal rules and independent fiscal agencies can help to narrow the gap between unconstrained fiscal outcomes and desirable budgetary policies.
• Designing effective fiscal rules is challenging, as this requires an appropriate balance between the principles of sound fiscal management (flexibility) and the capacity to influence fiscal policy (credibility).
• There is a growing interest in the use of independent fiscal councils, which can both substitute for, and be a complement to numerical fiscal rules. Fiscal councils can provide an additional mechanism for raising the political costs of inappropriate policies and can be used for monitoring fiscal plans and performance.
• While the proposed rules to be included in a Fiscal Responsibility Bill have many good features, the Council sees a risk that they do not always strike the right balance between prudent management of the public finances and the desirability of pursuing counter cyclical policies. Moreover, the proposed “comply or explain” enforcement mechanism is insufficiently strong.
• On rule design, the Council advocates increased flexibility, including specifying required fiscal adjustments in cyclically adjusted terms and setting reasonable limits on required rates of debt reduction.
• The Council also proposes that each new government be required to set out in a Fiscal Statement explicit five year targets for the debt to GDP ratio that would include planned consolidation measures. The
  Government should also be required to formally report annually to parliament on its retrospective fiscal performance and prospective fiscal plans. Consistency of policy plans with legislated fiscal rules would be assessed by the Fiscal Council.
• The Council needs to be viewed as a body that is both sound in terms of its economic analysis and independent of political influence. The design of the Fiscal Council must contain some key elements to be effective in supporting sound fiscal management.
• Members of the Council must be qualified professionals with expertise in the areas of macroeconomics and fiscal policy to ensure analytical competence. The council should have sufficient resources to allow it to produce and disseminate high-quality analysis.
• The Council should have independence with respect to membership and budgetary management. The Council needs to be protected from the risk of inappropriate involvement in detailed budgetary/staff matters or from the risk of termination of appointments due to policy differences.
• There must be full transparency concerning the work of the Council, and accountability with regard to the quality of the Council’s output and fulfilment of the mandate it has been given, including periodic international peer review.

Recommended