EU institutions were roundly criticised over their handling of the recent economic crisis, so the European Commission’s decision to stop dithering and appoint a panel of experts to scrutinise budgetary performance is both timely and welcome, writes Michal Horvath.
Michal Horvath is a lecturer in economics at the University of York and a former member of the Slovak Council for Budget Responsibility.
The members of this panel, formally known as the European Fiscal Board (EFB), have just been announced by the Commission. In addition to casting a critical eye on the Commission’s verdicts and making recommendations on budgetary policies in EU countries, they are mandated to work closely with national fiscal watchdogs. This role of the EFB has received few headlines in the European press, but could well be its best contribution to efforts aimed at reducing the vulnerability of EU economies to crises.
Budgetary watchdogs or fiscal councils, formally referred to as independent fiscal institutions, provide an impartial assessment of governments’ macroeconomic and budgetary projections and outcomes.
The existence of such institutions, especially in a symbiosis with well-designed frameworks for setting numerical targets for budgets over time, has been linked to improved budgetary performance and lower public finance deficit and debt levels. By increasing the transparency of public accounts, they are thought to deter the kinds of behaviour by government officials that would result in recurrent failures to meet budgetary targets, which may eventually develop into an economic crisis.
Different streams of EU legislation adopted in the wake of the crisis mandated the creation of independent monitoring bodies to promote accountability for budgetary performance at the national level. Once embedded into the national hierarchy of institutions, such bodies should have the democratic legitimacy as well as the access to information they need to provide effective scrutiny.
In reality, despite legal backing from the EU level and endorsements by international bodies such as the IMF and the OECD, many EU fiscal watchdogs desperately lack resources to carry out their mission. Despite their similar mandates, the financial, human and data resources the watchdogs enjoy vary considerably across EU member states.
Data from surveys of EU fiscal councils suggest that – in no particular order – the Dutch CPB, the UK OBR (to which EU legislation does not apply), the Spanish AIReF, the Portuguese CFP and the Slovak CBR are best-positioned to hold the executive to account in the budget process. At the other extreme, the position of the Luxembourgish, German, Estonian and Cypriot councils needs strengthening. The fiscal council in Cyprus, for example, is mandated to cover the same set of tasks as the Portuguese fiscal council with one tenth of the financial and human resources.
Where the system works well, fiscal councils enjoy widespread political and public support, and act as respected independent arbiters in the discourse on the state of public finances. Most often, though, such councils were created as a sign of the local elite’s recognition of the need to maintain the solvency of the state, even in spite of EU legislation.
Promoting good practices in public policy with instructions “from Brussels” is thus proving difficult in many places. But given where we are, more action from the EU level seems warranted to ensure fiscal watchdogs establish firm roots in the national institutional architecture.
By acting as a vocal high-profile advocate for national watchdogs, the EFB could put pressure on both EU and national authorities to ensure that the resource and information needs of fiscal councils are met. It is also in the EFB’s interest to do so. Given the limited resources the EFB itself possesses, it might want to tap into the expertise of national oversight bodies in matters relevant for its oversight and advisory role at EU level.
“The dog that barks, does not bite,” people say. It is usually the teeth, though, that add credibility to the barking, rendering invasive action unnecessary. In the case of government watchdogs, the analytical capacity is the teeth. By design, fiscal watchdogs are not meant to bite; they cannot and should not directly change budgets or budgetary targets. However, it is in the best interest of our economies and democracies to make sure they are strong enough to bark and show their teeth when needed. As the new European watchdog marks its territory in the EU policy-makers’ courtyard, it should remember to raise its voice for its neglected companions.