Independent fiscal institutions have no formal powers to act and have to rely on soft power to influence the budgetary process. This blog post investigates how they exercise this soft power by enhancing public scrutiny of fiscal policies. By: Grégory Claeys Date: April 3, 2019 Topic: European Macroeconomics & Governance In the aftermath of the crisis, new EU legislation was introduced requiring member states to put in place independent bodies in charge of monitoring compliance with fiscal rules at the member-state level (to increase ownership). These bodies should also assess government forecasts used in budgetary plans in order to improve their quality (or at least to avoid overly optimistic forecasts), with the ultimate
Grégory Claeys considers the following as important: European Macroeconomics & Governance, fiscal policy, independent fiscal institutions (IFIs), media, MEDIA ANALYSIS
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Independent fiscal institutions have no formal powers to act and have to rely on soft power to influence the budgetary process. This blog post investigates how they exercise this soft power by enhancing public scrutiny of fiscal policies.
By: Grégory Claeys Date: April 3, 2019 Topic: European Macroeconomics & Governance
In the aftermath of the crisis, new EU legislation was introduced requiring member states to put in place independent bodies in charge of monitoring compliance with fiscal rules at the member-state level (to increase ownership). These bodies should also assess government forecasts used in budgetary plans in order to improve their quality (or at least to avoid overly optimistic forecasts), with the ultimate goal to improve fiscal policies in Europe.
However, most of these institutions have, in practice, no formal powers to act if they consider national fiscal policies inappropriate. That’s why they can only rely on soft power to influence the budgetary process. This blog post investigates how independent fiscal institutions (IFIs) exercise this soft power by enhancing public scrutiny of fiscal policies.
Soft power rests on two main pillars: credibility and communication. Credibility of such institutions can be established through recognised expertise, quality of analysis, independence from governments and political neutrality. But, in the end, high credibility does not matter much without effective communication to increase the political costs for governments not complying with their recommendations. This communication can take a variety of forms: press conferences, publication of reports, hearings with members of parliaments, and interaction with the press – all of which will be reported in the media.
That is why an admittedly crude way to assess their influence on the fiscal debate is to check how IFIs are covered in their national media. Actually, ‘media coverage’ is already considered in the IFI databases of the IMF and of the European Commission, but only in a binary form in the former and in the form of a 1-3 scale in the latter (based on a survey).
The idea here is to dig deeper and to build a comprehensive database of media mentions of the IFIs of EU member states, in order to quantify more precisely their influence in the national public debate and track the evolution of this coverage since 2012 (when many of them were created after legislation was introduced at the EU level). To do this, the number of mentions of each independent fiscal institution in the most influential national media of their country is counted from January 2012 to February 2019 using the Factiva news database.
The data gathered confirms wide disparities between European IFIs, in that regard. First, as Figure 1 shows, the average number of quotes per year (from 2012-2018) is very scattered: it goes from three for Malta’s Fiscal Advisory Council, to 6,142 for the UK’s Office for Budget Responsibility (OBR). Overall, in our 18 country-sample, the median average number of quotes over that period is 162 per year. The highest average in the euro area during that period goes to Spain’s Autoridad Independiente de Responsabilidad Fiscal (AIREF) which, despite its youth, reached 3,459 mentions per year, while the Netherlands’ Centraal Planbureau (CPB), created in 1945, was mentioned 1,694 times per year on average during the same period.
Second, trends also differ significantly across countries. As can be seen in Figure 2, the media coverage of Spain’s AIREF has quickly increased since its creation in 2012, and now outperforms the older CPB and OBR. To a lesser extent, an increasing trend in mentions is also visible for Italy’s Ufficio Parlamentare di Bilancio (UPB). On the contrary, the media coverage of, for instance, France’s Haut Conseil des Finances Publiques (HCFP) is not only at a relatively low level compared to countries of similar size, but has also been declining in recent years.
Third, when looking at monthly mentions, media coverage for some IFIs exhibits some seasonal patterns or significant peaks. The examples of Spain’s and Italy’s IFIs (which were created at approximately the same time) are particularly interesting in that regard, as they seem to have adopted two different strategies: while the UPB seems to be more reactive to government decision-making, AIREF seems more proactive.
As can be seen in Figure 3, the Italian UPB’s mentions tend to peak between September and November every year, when draft budgets are discussed in the Italian parliament. This was particularly prevalent in 2018, when the Italian government and the European Commission argued about the compliance of the budget with the rules and about the quality of the government’s forecasts used in the budget.
The Spanish AIREF’s number of mentions also exhibits significant volatility. However, the peaks are not related to draft budgets but to the sporadic publication of reports by AIREF on specific issues that could matter for the sustainability of the public debt in Spain in the long run, such as the budgets of autonomous regions or of the social security system.
Despite these noteworthy observations, I would urge caution about drawing quick conclusions on the relative merits of European IFIs based on these numbers. First, a low number of media mentions might not mean necessarily that IFI are ineffective or incompetent; it could also mean that a particular IFI did not need to raise the alarm bell yet, because the fiscal situation is in better shape than in other countries.
Second, an effective communication strategy for IFIs might not be as simple as maximising the number of quotes in the media. As noted also by Xavier Debrun, independent fiscal institutions should not necessarily talk all the time and on every topic. Such a cacophonic communication could decrease the signal-to-noise ratio, which could reduce the effectiveness of the IFI’s communication and, in the end, their influence on fiscal policies.
Looking again at the different strategies followed by the UPB and AIREF, it is difficult at this stage to judge which strategy is more effective. AIREF appears to have been quite successful at making a name for itself in the media as the independent watchdog scrutinising public finances in Spain. However, being too present in the media or very alarmist about debt sustainability all the time could also backfire at some point, if a government tries to pass a budget that really endangers public finances and if the media or the general public cannot distinguish this particular call from the usual warnings of the IFI.
To conclude, I believe that, given their lack of a direct policy lever, IFIs absolutely need to be present in the public debate to be relevant – but they also need to be timely and pertinent (as was the Italian UPB at the end of 2018, when it rightly highlighted the over-optimism of the government’s forecasts and the discrepancy with other international institutions’ forecasts that were revised negatively at the time). The European Fiscal Advisory Board and other initiatives such as the network of EU independent fiscal institutions should thus play an important role, by encouraging the sharing of best practices between European IFIs in terms of communication strategies to help them maximise their impact in the public debate, with a view to improving fiscal policies at the national level.
The author would like to thank Akira Soto and Jan Mazza for their help in constructing the media coverage database.
 There have been some early attempts (for instance by Beetsma et al., 2018) to measure the impact of independent fiscal institutions on forecast quality and on rule compliance using econometric methods. However, as the authors themselves acknowledge, their results must be interpreted with caution for the moment, given the relative novelty of these bodies and their institutional heterogeneity across countries.
 Because of the insufficient coverage of national media in the Factiva database, the following countries are not included in the database: Bulgaria, Croatia, Cyprus, Czechia, Estonia, Greece, Latvia, Lithuania, Romania and Slovenia.