Arslanalp, S., and D. Botman (2015) “Portfolio Rebalancing in Japan: Constraints and Implications for Quantitative Easing” IMF Working Paper WP/15/186, August.
Bos, F., and C. Teulings (2013) “Netherlands: Fostering Consensus on Fiscal Policy” in G. Kopits, ed., Restoring Public Debt Sustainability: The Role of Independent Fiscal Institutions, Oxford University Press.
Budd, A. (2013) “Preface” in G. Kopits, ed., Restoring Public Debt Sustainability: The Role of Independent Fiscal Institutions, Oxford University Press.
Cecchetti, S. G., M. S. Mohanty, and F. Zampoli (2011) “Achieving Growth Amid Fiscal Imbalances: The Real Effects of Debt” in Achieving Maximum Long-Run Growth, Symposium sponsored by the Federal Reserve Bank of Kansas City.
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The author is a senior scholar at the Woodrow Wilson Center and member of the Portuguese Public Finance Council. This paper was prepared while he was an IMF visiting scholar. A preliminary version was presented at an ADBI Distinguished Speaker Seminar, in Tokyo, December 11, 2015. Comments by T. Kitamura, H. Tanaka, H. Ueno, M. Ueno, N. Yoshino and other seminar participants are gratefully acknowledged. The paper has benefited from useful inputs from E. Arbatli, Luc Everaert, and I. Saito.
The system of government can determine the institution’s independence. While in a Westminster-style parliamentary system the institution should be independent from both the executive and the legislature, in a presidential system it is usually sufficient if the institution is independent from the executive.
A negative feature is the potential conflict of interest between the two tasks in that the same institution evaluates the budget bill that audits it. On the other hand, the IFI can benefit from the well-established reputation of impartiality of the Cour des Comptes in France.
For a comparison of the delegation of authority in the fiscal and monetary areas in the UK, see Wren Lewis (2013).
See OECD (2013).
See the analysis underlying this point in Leeper (2010).
Puviani (1907) observed and documented the tendency of governments to overestimate the benefits and underestimate the budgetary costs of any proposed expenditure program or tax relief measure.
See the empirical analysis based on wide country coverage in Frankel (2011).
See Debrun and Kumar (2007), IMF (2013) and Beetsma and Debrun (2016) on estimates of the effectiveness of IFIs on fiscal performance with cross-country data.
See for example the description of the experience of the US Congressional Budget Office by Joyce (2011).
See detailed country studies in Kopits (2013a).
The very existence of an IFI is under threat by a government that cannot tolerate critical assessments by independent institutions. The first institution to succumb was Venezuela’s Congressional Budget Office, following three years of operation, terminated by President Hugo Chávez in 2000. Similarly, after two years of successful operation, Hungary’s former Fiscal Council lost all funding, its remit was significantly narrowed and its technical staff abolished under Prime Minister Viktor Orbán at the end of 2010.
The US Congressional Budget Office earned a reputation for impartiality well into the Carter administration, following the Nixon and Ford administrations, only after it was able to display the same critical demeanour toward both governments.
See, for example, contributions to the debate by Krugman (1998), Walker (2002), and Werner (2004).
To be sure, the search for yield through carry-trade investments abroad, including short-term bank lending prior to the Asian crisis, did not dent the home bias.
See Ihori (2014) for an analysis of the dilemma from a political economy perspective.
This is a salient example of the tug of war between politicians and civil servants described by Tanaka (2014b) that was exposed during the DPJ administration. Increasingly, the politicians seem to have been gaining the upper hand under the current LDP administration. As reported by Harding (2016), [Prime Minister] “Abe has neutered the Ministry of Finance…. [He] no longer trusts the ministry or its projections, after it told him a 2014 consumption tax rise would have only a modest and transient effect on the economy. Instead, it caused a recession.”
Over the last 15 years, the revenue outturn exceeded forecast every year except during output decline in 2001-02 and 2007-09. The MoF has argued that the recent positive forecast errors reflect corporate tax revenue which were also underestimated by corporate taxpayers—the basis of MoF forecasts.
The forecast errors for all countries are based on official government forecasts of fiscal and macroeconomic aggregates for the current and one and two years ahead.
In Denmark, public debt declined steadily from over 70 percent of GDP in 1995 to 26 percent in 2007, and was projected to keep falling significantly in subsequent years. Instead, in the wake of the financial crisis, the adoption of a fiscal stimulus and recapitalization of some financial institutions, along with contracting activity, led to an unanticipated rise in the debt ratio to well over 40 percent in the following years, significantly larger than forecast.
The widely-advocated fiscal stimulus is compared by Tanzi (2013) to prescribing steroids, for symptomatic relief, to a patient suffering from a serious illness. Although used in the context of the Euro debt crisis, the analogy may be equally relevant for Japan.
Wright (2002) characterizes as “smoke and mirrors” the manipulation of the General Account Budget, the Fixed Investment and Loan Program, and multiple Special Accounts, including reliance on creative accounting. Although laced in diplomatic language, in a fiscal transparency ROSC, the IMF (2001) identified some of these practices as well.
See the in-depth analysis in Tanaka (2014a).
See the most recent annual edition of the International Budget Partnership (2015).
Arslanalp and Botman (2015) present scenarios on the limits to quantitative easing, given the likely portfolio rebalancing by Japanese banks and institutional investors.
See Reinhart and Rogoff (2009) and Cecchetti and others (2011) on evidence of the growth-constraining effect of high public indebtedness.
In pondering over persistent US budget deficits, Schultze (1989) queried whether it is a big problem to be solved immediately, like in the case of a wolf at the door, or no problem at all as with a cuddly, harmless pussycat, or a languishing problem of termites in the basement, which over time can bring the house down. The implication was that the latter best describes the US case. For Japan, the metaphor is even more appropriate.
IFIs of OECD countries that do not meet minimum standards under the Principles are excluded the international comparison in this section. See, for example, Kopits (2013b) for an assessment of the Germany’s Advisory Council. For the Netherlands and Belgium, the IFIs were legally established in 1945 and 1936, respectively, but without a specific remit in fiscal policy until the effective dates shown in the comparative tables below.
Although formally not part of the judiciary, the court of audit is a quasi-judicial body whose decisions, including sanctions, can be appealed in principle all the way to the highest level of the judiciary branch.
In Belgium and Spain, the need to contain the autonomy of subnational governments seems to have been a major reason for creating the IFI.
In Portugal, the law prescribes that two out of five council members be non-Portuguese European nationals.
In Sweden, the National Institute of Economic Research and the National Financial Management Authority are responsible for preparing short- and medium-term macro-fiscal forecasts; see Calmfors (2013).
Under the US Budget Enforcement Act of 1990, each legislative bill involving a mandatory expenditure or tax measure was subject to the pay-go rule. This required that the estimated cost of the proposed measure be compensated by equivalent savings from a specified compensatory expenditure cut or tax increase. On the successful experience of compliance with the rule, monitored by CBO, see Reischauer (1993).
On the Dutch experience, see Bos and Teulings (2013).
Partly for this reason, in Australia, policy costings by the Parliamentary Budget Office are provided to legislators on a confidential basis.
The political role and influence of the Council on Economic and Fiscal Policy depends largely on the Prime Minister who chairs it ex officio.
See the roadmap for a comprehensive risk-adjusted fiscal sustainability analysis provided by Kopits, Ferrarini, and Ramayandi (2016).