Fiscal councils, independent forecasts and the budgetary process: lessons from the Belgian case [ Working paper 04-06 - 15/06/2006]

One of the conclusions of the revised Stability and Growth Pact (SGP) emphasized the need to strengthen fiscal governance in the EU Member States through the development of national budgetary rules that should complement the EU framework. The Council acknowledged the important role national institutions could play in that respect. The Council also called for reliable budgetary statistics and realistic, even cautious, macroeconomic forecasts (Buti, 2006).

These conclusions draw on the now generally accepted view, both by academics and policy makers, that the national institutional framework affects budgetary outcomes: some institutional characteristics lead to tighter budgetary discipline than others. As was shown in a report prepared for the Dutch Ministry of Finance (Hallenberg et al., 2001), budgetary practices vary extensively across Member States: some governments produce their economic forecasts in-house and leave the decision on what adjustments to make to the Finance Minister, while others use forecasts from independent organizations and establish strict rules on how changes in forecasts lead to changes in annual targets.

Over the last twenty years specific circumstances constrained Belgium to put in place institutions providing independent inputs, analyses and recommendations in the area of fiscal policy. Firstly, the regionalization of the Belgian state at the end of the eighties, in a context of very high budget deficits and a soaring public debt (respectively 7% and 125% of GDP in 1988), forced the government to take action in order to avoid overspending arising from independent regional governments. Consequently, the High Council of Finance (HCF) was reformed in 1989 and one of its new tasks was to monitor the fiscal policy of regional governments and to formulate medium-term financial objectives for the federated entities. The HCF also received a mandate to assess the convergence programmes. Secondly, as the Maastricht criteria for entry into the European Monetary Union were set in national accounts concepts, the National Accounts Institute (NAI) was created in 1994 in order to ensure the quality and the independency of the main economic statistics and macroeconomic forecasts upon which the budget was based. Following various reports on population ageing and its impact on public finances, a Study Committee on Ageing was created in 2001 within the HCF.

The role of the Federal Planning Bureau (FPB) in the budgetary process is manifold but limited to positive economics, as it does not make policy recommendations. The FPB produces, on behalf of the NAI, the macroeconomic forecasts used by the Belgian federal government for drawing up its budget and prepares, jointly with the National Bank of Belgium, the general government account within the national accounts. Each spring, the FPB also publishes a mediumterm economic outlook for the Belgian economy. This report is updated in autumn and serves as a starting point for the elaboration of the stability programme. The FPB also holds the secretariat of the Study Committee on Ageing and produces its long-term projections of age-related budgetary expenditures.

The purpose of this paper is to describe the role of fiscal councils in the budgetary planning process in Belgium and to emphasize the part taken by the Federal Planning Bureau in producing independent macroeconomic forecasts. The importance of independent forecasts in the budgetary process should not be underestimated, as illustrated in Jonung and Larch (2006). These authors show evidence that for several large European countries, official growth forecasts are biased towards optimism and that this forecasting bias, coupled with inertia in the budgetary process, has hampered fiscal consolidation.

The paper is organized as follows. In section 2 we introduce the concept of fiscal councils and describe the two main institutions that have to be considered in the Belgian budgetary process. The importance of independent institutions to produce the official forecasts is stressed in section 3 and illustrated with an assessment of the quality of the Belgian forecasts. The last section concludes the paper by drawing some lessons from the Belgian experience.