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    The vitality of fiscal rule

    Fatih Özatay, PhD08 March 2010 - Okunma Sayısı: 905


    We know that politicians can pursue practices that distort economic stability in order to stay on power. There are a number of institutional and applied studies verifying this. What is more, there are many findings that such practices are used even in advanced democracies. For Turkey's case we know practices that distort stability are put in force especially in the eve of elections.

    Economists are seeking a solution to minimize such practices. The solution implemented for the case of monetary policy is in effects since early 1990s: independent central banks. But it does not seem possible to implement this solution for fiscal policy. An independent fiscal policy authority setting budget figures and carrying out fiscal policy in line with those figures does not fit in democracy. There is no such practice throughout the world.

    I discussed the issue so far in more detail last Thursday; but one question was not answered: How can we prevent the fiscal policy practices that distort economic stability? Many countries' answer to this question is two 'pillar'. First, they introduced medium term fiscal rule. They also made legal amendments to secure that the fiscal rule will be fulfilled. Turkey also declared that this practice will be pursued and said that legal amendments are 'on the way.'

    Countries that introduced fiscal rules also established 'fiscal advisory committees' which is what I called the second pillar and what Turkey does not discuss. So, where does the need for such a committee arises from? I discussed this before; it should be made sure that the announced budget realization figures are correct; and there also is a need for expert opinion on the reliability of future estimations on important macroeconomic variables such as growth, inflation, income gain etc.

    Otherwise, the risk that fiscal rule is reduced only into a 'formula' arises. However, the reason for establishing a fiscal rule implies that there exists a need to reduce the ambiguities about the future of the fiscal policy. We wish to secure that people see the future and become more willing to invest. Therefore, we need to make the fiscal rule arrangement credible.

    There are different implementations of fiscal advisory committees, but the committees in general are independent and composed of academics and bureaucrats expertise in economic policy. Independent central banks have accountability obligation; but there is no such obligation defined for advisory boards. Nonetheless, it is maintained that accountability maintained upon high quality publications will improve the prestige of the committees.

    Of course these are the technical details pertaining to the institutional regulation. There also are other details. However, at this point, what matters for us is the core of the structure. This 'core' can be discussed with due consideration; and if it is deemed necessary, then the structure can be opened to discussion. At that point, it will be useful to examine county experiences to see the failures and decide the most suitable structure for Turkey. But currently, we have to discuss the core: first, the declared budget figures must be scrutinized and the public  must be informed of the credibility of these figures. Second, the estimations of public authorities on important macroeconomic variables which can affect the future values of budget expenditures and revenues should be evaluated and the pubic must be informed of the results. Third, the implemented economic policy should be compared with the policy that should be implemented.

    Fiscal advisory committees are trying to fulfill at least the first two of these core duties. The third duty is fulfilled by some committees and skipped by some others. Some examples for this body are:  US Congressional Budget Office, Japan Fiscal System Advisory Committee, German Tax Estimates Working Group, Korean National Parliament Budget Office, Mexican Public Finance Studies Center.
    For further details, please see 'Independent Fiscal Agencies', Journal of Economic Surveys, 2009, Volume 23(1), page 44-81.


    This commentary was published in Radikal daily on 08.03.2010