A minimalist approach to fiscal oversight

George Kopits, 24 December 2013

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The German government has received much criticism for its reluctance to support unified banking supervision under the European Central Bank and the European Commission. Whereas the case for leaving banking regulation and resolution to national authorities, linked by a loose supranational network, may have some merit (Mody 2013), Germany’s apparent preference for bypassing international standards of good practice in regulating its own banking institutions is difficult to justify.

Without attracting as much attention in the international media, a similar approach is evident with regard to fiscal oversight. Last summer, in a little noticed legislative action, the German parliament amended the Stability Council Act of 2009 by expanding the Stability Council’s mandate – beyond its initial task of overseeing ‘budgetary emergencies’ and of recommending corrective measures at the federal or Länder levels of government – to monitoring compliance with the new constitutionally mandated structural balanced budget rule (also known as the ‘debt brake’).1  Since the Stability Council (consisting of federal and Länder ministers of finance) can hardly be considered an independent body, the amended legislation creates an independent Advisory Council – made up of representatives of the Bundesbank, research institutes, and experts appointed by the federal and Länder governments – to assist the Stability Council in its surveillance task.

The heterogeneity of independent fiscal watchdogs across countries is well documented (Kopits 2013). Each watchdog has been designed to suit the country’s specific needs and traditions, on the one hand, and to approximate internationally accepted good practice on the other. While the German Advisory Council is designed to fit local customs and circumstances, it fails to take into account international standards of good practice.

Concerning local needs, the Advisory Council (like the Stability Council it serves) is rooted in German corporatist tradition and is meant to cope with the complexities of the federal fiscal system. Both councils have a role in the surveillance of national and subnational government finances, resembling the functions of Belgium’s High Council of Finance. Yet it is questionable whether the opinion of either the Stability Council or its affiliate, the Advisory Council, will have much influence – for example – on the finances of North-Rhineland Westphalia, a Land with a history of ignoring domestic fiscal rules. In the past, any attempt at disciplining a Land has been constrained by Constitutional Court decisions that require joint and unconditional bailout by the federation and the other Länder.

More significantly, the newly established Advisory Council lacks key features that characterize fiscal watchdogs elsewhere and are seen as necessary for contributing to sound and transparent policymaking. It has a very limited remit and analytical capacity, and its independence and nonpartisanship cannot be taken for granted. By contrast, the watchdogs in the UK, the US, and the Netherlands stand out among a rapidly increasing number of independent fiscal institutions whose practices are well worth emulating.

The UK Office for Budget Responsibility is entrusted with the preparation and publication of independent macro-fiscal forecasts and of long-run public debt sustainability analyses, which the government must adopt as the basis for formulating the annual budget. The US Congressional Budget Office, with a long track record of independence and professional excellence, is charged with producing quantitative estimates of the budgetary and economic impact of every major legislative proposal. For example, it recently estimated the effects of a controversial immigration bill. In addition to these tasks, the Dutch Central Planning Bureau has assumed a critical role in assessing the viability of the political parties’ promises in their economic platforms during election campaigns. 

Regrettably, the designers of Germany’s Advisory Council seem to have been unaware of the experience accumulated by fiscal watchdogs both within and outside the European Union. Instead, the Council is constructed with a view to narrowly complying with the EU requirement that calls for the creation of an independent fiscal council in each member country. By the same token, the EU prescription for each country to produce independent macroeconomic projections is supposed to be met by the Joint Economic Forecast – a compromise of forecasts prepared by several research institutes – with limited fiscal detail.

Such a minimalist interpretation of the EU mandate is perhaps warranted by the outgoing government’s demonstrated fiscal rectitude and ample space under the existing rule. In fact, so far the debt brake has been abided by, even in anticipation of the effective date of implementation. But the jury is still out on the viability of the rule. If and when the fiscal rule becomes binding, a future government with fewer scruples may be tempted to bend them through gimmickry in public accounts and procedures.

The newly formed coalition government will have an opportunity to revisit this important issue and rise to the challenge of turning Germany into a model for the much-touted new EU fiscal governance. It would stand to benefit from redesigning the Advisory Council and drawing on the Principles for Independent Fiscal Institutions recently formulated by the OECD, widely regarded as the template for fiscal watchdogs (OECD 2013). In accordance with these principles, the Council should be both independent and non-partisan (as distinct from bi-partisan), consisting of only experts, responsible for real-time monitoring of public finances on the basis of its own macro-fiscal projections and sustainability assessments, with the support of a dedicated technical staff, at arm’s-length from other public institutions.

It is hoped that, instead of adhering to the minimum requirement for banking and fiscal oversight, the new government will embrace the principle carpe diem to establish effective watchdogs in both areas. The latter would serve the welfare and security not only of German citizens, but of all Europeans.

References

Kopits, G (ed.) (2013), Restoring Public Debt Sustainability: The Role of Independent Fiscal Institutions, Oxford University Press.
Mody, A (2013), A Schuman Compact for the Euro Area, Bruegel Essay and Lecture Series, Bruegel, pp. 23-28.
OECD (2013), Principles for Independent Fiscal Institutions.


1 Stability Council Act of 10 August 2009 (Federal Law Gazette I, p. 2702), as amended by Article 2 of the Act of 15 July 2013 (Federal Law Gazette I, p. 2398).

Topics: Europe's nations and regions
Tags: banking regulation, fiscal regulation, Germany

Senior scholar, Woodrow Wilson International Center for Scholars

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