Six reasons why fiscal councils can help create sustainable public finance in the post-pandemic world
Creating sustainable finance in a post coronavirus world. Graphic: Shutterstock
Fiscal discipline is critical for a resilient recovery in a post-COVID world , especially in developing countries.
Public Expenditure and Financial Accountability (PEFA), the global framework for assessing Public Financial Management (PFM) performance, emphasizes the importance of macroeconomic forecasts and fiscal policies as the foundation for sustainable public finance.
Successive PEFA assessments in several developing countries, even before the pandemic, indicated weaknesses in policy based budgetary processes. COVID-19 exacerbated this situation with unprecedented increase in government debt, fall in revenues and higher fiscal spending by governments.
As countries emerge out of the pandemic, Fiscal Councils could help governments refocus on sustainable public finances because of their 6 unique characteristics and functions :
- Independent & non-partisan nature: Fiscal councils are expert bodies staffed by technical personnel, for oversight, guidance and advice on fiscal policies, plans and performance. They can be either legislative offices (often found in Presidential form of governance) or executive offices (reporting to Ministry of Finance). While the exact composition, role and mandate needs to align with country requirements, fiscal councils need independence, political support and technical expertise to effectively analyze and inform fiscal policy proposals. Governments can pass legislation to constitute a fiscal council, providing secure operational funding and with membership comprising of career civil servants and external independent experts.
- Ex-ante role in fiscal policies: The ex-ante role of fiscal councils in policy making could help Ministry of Finance and legislative committees better understand the medium-term implications of fiscal policy targets. Fiscal councils can improve the credibility of projected figures by validating macro-economic and fiscal forecasts in the budget process. Wherever fiscal rules are established, fiscal councils can be tasked with responsibilities to monitor the compliance with fiscal rules. They could help assess the fiscal impact of the interventions by governments to ensure long term sustainability.
- Help build trust in government: Countries that have adjusted traditional budget spending oversight or taken recourse to escape clauses in their fiscal rules in response to the COVID-19 crisis for greater and faster emergency spending, and to reassure the public that their actions are objective. A fiscal council could provide an added layer of objective impartial oversight and inform the public that their government is indeed planning and spending resources in an accountable manner. They can also help monitor and guide the government’s post-crisis path towards normalization and improvements in public finances.
- Coordinate fiscal policies: In countries where substantial authority over fiscal policies is also discharged by sub-national governments, fiscal councils can play the role of coordinator between them. Fiscal policies, even though executed by different national or sub-national authorities, should have a common objective and direction for better effectiveness especially in crisis like COVID-19. For instance, when the national government is attempting to stimulate the economy by increasing government spending, if a sub-national government cuts its spending then their efforts would be counter-productive resulting in reduced effectiveness of stimuli. Fiscal councils can play a coordinating role between different levels of governments to reduce such counter-productive actions.
- Improve quality of financial reporting: Fiscal policies are informed by financial information about the past as well projections into the future. A well-structured financial reporting system based on credible accrual basis accounting system (aligned with International Public Sector Accounting Standards (IPSAS)) could support fiscal councils understand not only the assets, liabilities, revenues and expenditure of the government, but also the medium-term impact of pandemic responses on the government balance sheets. Fiscal councils could also provide valuable insights and recommendations to improve quality of financial reporting to make it more accountable, transparent and credible.
- Strengthen public accountability chain: Supreme Audit Institutions (SAI) are increasingly playing a key role in providing oversight on governments’ commitment to fiscal discipline in countries. SAI’s ex-post audit reports on government finances provide a key source of input for fiscal councils in their assessment of fiscal policies and performance. Effective functioning and complementary roles of SAIs and fiscal councils could also contribute to enhanced transparency and accountability in public finances.
Experiences of recovery from the global financial crisis of 2008 indicated a doubling of the number of countries with independent fiscal council in the last decade. Advanced economies like the USA, UK, Australia, and Canada have fiscal councils in place, while developing countries like India and Indonesia have been considering constitution of fiscal councils. Empirical evidence suggests that countries which established fiscal councils have been able to reduce budget forecast errors, reduce deficit bias and has strengthened governments’ capacity to comply with numerical fiscal rules.
Though establishing a fiscal council is a step in the right direction, it might not be enough to achieve fiscal sustainability unless there is a strong political commitment to make them effective. However, it is a desirable step that can enable governments to pursue better informed fiscal policies for a post-COVID world.