Why are fiscal councils needed? The executive power (Government) is empirically proven to be biased toward politically desirable decisions, which may lead to the creation of budget deficits. Since the legislative power (the Parliament) also consists of representatives of the political parties it is useful for the institutional framework of economic policy to include an institution which provides independent views on the directions of fiscal policy, checks the compliance with fiscal rules and analyses medium- and longer-term consequences of their non-compliance. The same motives have led to granting the independence of central banks in leading the monetary policy over 300 years ago.
How can fiscal councils impact the fiscal policy? Fiscal councils do not exert a direct impact on fiscal policy. However, considering the opinions of fiscal council may serve as a support to the government when politically undesirable decisions need to be adopted, while a disregard of the opinions heightens their (political) responsibility for the deviations from ensuring sustainable public finances. Fiscal councils achieve their goals mainly by informing and raising awareness of the general public, public opinion makers and other stakeholders about the need to ensure long-term sustainability of public finances.
Why the fiscal councils do not participate in the governing of fiscal policy? The decisions on the various parameters which define the fiscal policy always reflect political orientation of current governments. The inclusion of fiscal councils into these decisions would inevitably reduce a trust of public about their independence by which a cornerstone of their existence would vanish. Thus, fiscal councils in the EU do not propose single measures of economic policies, but rather provide general views on the impact of measures within budgetary documents on compliance with fiscal rules and on the long-term public finance sustainability.
How is the work of Fiscal Council related to the National Assembly and the Government? Fiscal Council’s views on budgetary documents and public finance developments are addressed to the Government as well as the National Assembly. The non-partisan analysis of economic and public finance developments, performed by the Fiscal Council, can indirectly offer support to the MP’s decisions on budgetary guidelines and public finance topics. The Fiscal Council also takes part in sessions of the Parliamentary Committee on Finance and Monetary Policy, where its opinions are faced with the Government’s views. When the Fiscal Council provides an opinion on compliance of budgetary documents with fiscal rules, the Government has to explain how the opinions are to be taken into account or why it will not be taken on board (so called »comply-or-explain« principle). As an independent institution, the Fiscal Council is also invited to certain sessions of the Parliamentary Commission on Public Finance Supervision, where it presents opinions related to current topics from its field of expertise.
What are the fiscal councils in other countries like? Fiscal councils exist in all EU countries and also in many other, predominantly developed, countries. The solutions regarding the institutional framework of fiscal council operations differ to a large extent. Fiscal councils in the EU mostly operate as independent institutions, although in some cases they operate as part of the Parliament (Italy, Croatia) or within the Courts of Audit (Finland, Lithuania). Independent fiscal institutions within the parliament are typical of countries outside EU (Canada, USA, Australia, South Korea,…) and are usually older and larger bodies compared to fiscal councils within the EU. They also differ regarding the tasks performed: while within the EU the fiscal councils are mostly tasked with assessing the compliance with fiscal rules, the independent institutions operation within parliaments usually provide non-partisan views about public finance impacts of legislation in the legislative process.
Why do we need fiscal rules? The result of multi-year cummulation of budget deficits is higher general government debt, which is not problematic in normal circumstances at low debt level. However, the persistence of such behaviour may lead to unsustainable developments, when debt can not be financed, and the government is faced with high costs of remedying such position. Fiscal rules thus take care of guiding economic policy towards stability and medium- to longer-term sustainability of public finances.
Are fiscal rules the same in all countries? There are different kinds of fiscal rules. They include rules on structural budget balance, debt and maximum expenditure. Countries follow different rules according to their institutional framework and national specifics.
What is the budget balance and what is the primary budget balance? The budget balance is calculated as the difference between total budget revenues and expenditures in a certain year. The positive difference is shown as a surplus and the negative as a deficit. Within the budgetary surveillance framework of EU, data on general government is used (ESA2010 methodology). Primary budget balance excludes interest paid on debt financing.
What is the structural budget balance? The budget balance, excluding impacts of economic cycle (cyclical part of the budget balance) and one-off measures. Structural budget balance thus reflects the position of public finances more appropriately than the headline budget balance, while a balanced structural budget forms a basis for an environment where no debt cumulation is present in the longer run.
What are one-off and temporary measures? Measures and transactions, which impact the budget only temporary and do not contribute to its permanent change.
What is public debt? Consolidated gross debt of the general government. It includes total nominal value of debt of all institutions of general government, with the exception of the debt for which these institutions are liable to public institutions in the country itself.
What is included in the general government sector?
This sector includes the government sector, local government, social security funds and public institutions, funds and agencies. The general government sector excludes corporates owned by the state. This definition of general government is used by EU in the budgetary surveillance within The Stability and Growth Pact. More at:
What is the maximum expenditure benchmark? The highest general government expenditure and expenditure of budgets of government, health insurance and pension insurance funds and of local government which is allowed within the Framework for drawing up budgets. This benchmark depends on the cyclical position of economy. The formula for its calculation is defined in Article 3 of the Fiscal Rule Act.
What are the Maastricht Treaty values for the debt and budget balance of general government?
General government debt: 60 % of GDP
General government deficit: 3 % of GDP
Both reference values were determined by The Treaty on European Union (Maastricht Treaty), which established the European Union (1992).
What is the significant deviation regarding the compliance with fiscal rules? Following EU legislation, significant deviations with regard to budget developments are those, where the deviation in the convergence of structural balance toward medium term objective amounts to at least 0.5 ppt of GDP in one year or 0.25 ppt of GDP on average in two years. The same is valid in case of deviation from the expenditure rule. The detection of significant deviation may ex post lead to the excessive deviation procedure, which may result in financial penalty against the country.
What is the Excessive Deficit Procedure? In this procedure, the European Commission surveys changes in general government budget and debt with a goal of estimating and/or eliminating the risk of excessive deficit in member countries.
What is counter-cyclical fiscal policy? Fiscal policy orientation, which improves structural primary balance when economy grows fast, or which seeks to increase economic growth in adverse economic situation by worsening the structural primary balance. The opposite is a pro-cyclical fiscal policy. It additionally supports economic growth in favourable economic times by worsening the structural primary balance or improves structural balance, when economic growth is low. Since excessive volatility of economic cycle is not desirable, fiscal policy is supposed to act counter-cyclically.
What is a Draft Budgetary Plan? Presentation of the main orientation and elements of targets and measures at the general government level and of its subsectors for the forthcoming year before being passed in the national assembly. Draft Budgetary Plan has to be delivered by member states for the assessment by the European Commission and Eurogroup by 15 October each year.
What is the Stability and Growth Pact (SGP)? It represents a group of rules oriented toward ensuring an adequate fiscal policy in the EU countries. The SGP transposes the requirements of Maastricht Treaty, referring to the surveillance of fiscal policies in the euro area members, into EU legislation. European Commission publishes the guidelines on implementing the SGP provisions in the handbook »Vade Mecum on the Stability and Growth Pact«. The SGP was adopted in 1997 and updated in 2005 and 2011.
What is the Stability Programme? This is a medium-term budget strategy, submitted to the European Commission by the euro area member states annually. The Stability Programme needs to be prepared in line with the provisions of the SGP. Fiscal Rule Act defines the Stability Programme as a key medium-term budgetary document in Slovenia. The Government is required to send it to the European Commission by the end of April.
What is the Medium-Term Objective? In line with the reformed SGP, the EU countries present their MTOs in stability programmes or convergence programmes. The medium-term budgetary objective is defined in structural terms and is country-specific. It takes into account the cyclical position of the economy, general government debt as well as fiscal risks to the long-term sustainability of public finances.
What is the medium-term budgetary framework? This is an institutional device letting the fiscal policy makers extend the usual one-year-ahead horizon of budgetary planning to 3 to 5 years. Targets can be adjusted under Medium-Term Budgetary Frameworks (MTBF) either on an annual basis (flexible frameworks) or at the end of the MTBF horizon (fixed frameworks).