STU 01-06 : Special Topic - Fiscal Councils, independent forecasts and the budgetary process [ Short Term Update 01-06 - 27/03/2006]

HEADLINES BELGIAN ECONOMY - MARCH 2006

In the wake of the economic recovery in Europe, Belgian GDP growth rose gradually from 0.1% in the first quarter to 0.6% in the last quarter of 2005. Quarterly growth should stabilise at 0.6% during the first half of 2006 and remain higher than 0.5% during the second half of the year. On a yearly basis, GDP growth should strengthen from 1.5% last year to 2.2% in 2006.

This year, net exports as well as domestic demand should contribute positively to economic growth. Due to the European recovery, Belgian export growth will strengthen to 4.7%. The current account surplus, however, will increase very little as a result of the high oil prices, which will lead to a negative evolution in the terms of trade. Domestic demand will grow at a slower pace as business investment will weaken somewhat after a significant catch-up and some exceptional purchases in 2005. This slow-down will be partially compensated for by stronger public expenditure – in consumption and investment – as well as stronger private consumption. Consumer expenditure should accelerate to 1.6% as household disposable income is underpinned by employment growth and personal income tax cuts.

After a net gain of 38,600 persons last year, employment is expected to record an average annual rise of 41,100 persons in 2006. The number of jobs is growing faster than the labour force, which should slightly reduce the unemployment rate (broad administrative statistics) from 14.3% last year to 14.1% in 2006. The ‘harmonised’ unemployment rate (Eurostat definition) should decline from 8.4% last year to 8.3% in 2006.

Inflation should fall markedly in 2006 compared to 2005 due to a limited rise in unit wage costs and the fading of the effects of higher oil prices. The inflation picture is somewhat blurred by the persistent deterioration in the terms of trade and by the introduction of a new price index. The private consump-tion deflator should increase by 2.3%, the GDP deflator by 1.9% and the national index of consumer prices by 1.8%.

Fiscal Councils, independent forecasts and the budgetary process

On 1 February 2006, the Belgian Federal Planning Bureau (FPB) and CPB Netherlands Bureau for Economic Policy Analysis jointly organised a seminar entitled “Economic and fiscal forecasts and the budgetary process within the framework of the Stability and Growth Pact (SGP)”. The joint seminar brought together speakers from European and international organisations as well as representatives of the FPB and CPB. During these presentations the emphasis was put on countries’ ownership of the SGP and the responsibility of the Member States for their fiscal framework. Several principles of good governance were evoked and the function that national institutions could have in these regards was highlighted. In this special study we describe the role of Fiscal Councils in the budgetary planning process in Belgium and underline the part taken by the FPB in producing independent macroeconomic forecasts.

The role of Fiscal Councils

Based on the model of independent central banks, a number of economists have recently suggested that fiscal policy should be entrusted to a new Independent Fiscal Authority (IFA) to avoid the injudicious use of discretion by politicians. A less drastic and more realistic option lies in the setup of Fiscal Councils (FC), defined by the IMF as institutions which “would not receive any specific authority over fiscal policy but would undertake analysis and assessment of fiscal developments and policies”1 . In particular they would provide:

• independent macroeconomic forecasts for evaluating tax revenues and expenditure;
• public finance forecasts and especially fiscal balances;
• impact analyses of shocks or policies;
• policy recommendations such as rules, targets and strategies;
• an assessment of fiscal performance in comparison with the targets or rules adopted by the government or Parliament.

The first three items are in the domain of what has been called ‘positive economics’. It requires sound statistical and econometric expertise. It also entails large investment in methods, data collection and computer programs. The last two items are in the domain of ‘normative economics’. It requires other types of resources: especially, experts in economics and public finances, who also have a very good knowledge of politics. They have to take into account not only the political options and preferences but also what is feasible as first best or second best solutions. This is a complicated and subtle task, which includes the capacity to convince the government and public opinion. Positive and normative economics are closely related, with normative economics requesting information and analysis from positive economics, but they have very different roles.

The complex institutional framework of the Belgian state and the dramatic deterioration of the fiscal stance in the seventies and eighties forced the country to put in place FC-type institutions.

A progressive build up of Belgian Fiscal Councils

There are two main institutions which have to be considered in the Belgian budgetary process: the High Council of Finance (HCF) and the National Accounts Institute (NAI). They are the result of a progressive and maturing process. The starting point was the regionalisation of the Belgian State at the end of the eighties, when the country became a federal state with three Regions and three Communities. Most of Belgium’s sources of revenue are nevertheless still collected at the federal level, and part of these tax receipts is then transferred to the regional level. With a very high public debt, Belgium could not afford to run the risk of further government overspending arising from independent regional governments. In 1989, the HCF was reformed in depth. One of its new tasks was to follow the fiscal policy of the regional governments and to recommend, each year, a coordinated fiscal plan for each government.

At the beginning of the nineties, the entry into the European Monetary Union was another challenge: in 1993 Belgium had a deficit at 7.5% of GDP and a debt ratio at 137%. As the Maastricht targets were set in national accounts concepts, the NAI was created in order to improve the quality of these statistics and of the macroeconomic forecasts upon which the budget was based. The issue of the long-term sustainability of public finances emerged in the public debate in the nineties which followed various reports on the impacts of the ageing population. In 2001, a Study Committee on Ageing was created within the HCF in order to analyse the budgetary and social consequences of ageing. [More in the publication ...]

STU 1-06 was finalised on 13 March 2006