Transcript | 7. lecture: Budgetary Responsibility Act (Ľudovít Ódor) - University for modern Slovakia

Welcome. A week has passed since we have put the net worth and requests on transparency to “cool down in the fridge”. Today we will add budgetary rules, Council for Budgetary Responsibility  and our dish will be ready.

What rules do we need? Let’s split them in two categories: safety brakes and rules for everyday use.

Safety brakes

Safety brakes are important because even when we try our best, one cannot think of and politically obey such rules for everyday use which could be adhered. Therefore a different defense line has to exist and this should be deterrent enough for the politicians not to get even close to it. We think with Michal Horváth that the constitutional top limit for debt could meet this goal. To put it in numbers, this could go somewhere between 50% to 60% GDP. A constitutional act would govern the consequences if the real debt value went close to or even exceeded this limit. Sanctions should vary from the least painful (open letter of the Finance Minister with a proposal on measures to be taken) to the serious ones (balanced budget or fall of the government in the last resort).   It is important to set the system in such way that if possible, these would never have to be used.

Rules for everyday use

It is necessary to distinguish two levels at which the rules for everyday use are to be implemented: government and self-governing regions. It is quite common around the world and also logical, that there are various rules for those two levels, whereas they represent different levels of responsibilities and competences.

Let us begin with the government. Some could say that we should request balanced economy for every year. However, it is not as simple as that. If the economy is not doing well, less tax income goes to the budget and on the other hand we have to spend more on the unemployed and so the deficit deepens. If we tabled the request of balanced economy, the government would need to bring up austerities which could push the economy further into recession. That is why we should save in good times – in order to have the financial means so as to be able to settle what needs to paid for in bad times. Everyone knows this.  Such procedures can be achieved by e.g. expenditure limits. In good times these restrain from using extra money from taxes and in bad times do not cut down on necessary expenditures. 

However, it does matter how the expenditure limits are determined. One always has to build upon the idea of sustainability. Some countries determine these limits by the request of 1% surplus annually. Other countries restrict the increase in expenditures to 2% per annum. It is important that they secure that living standards of future generations are not threatened.

What rules are there for the self-governing regions? The so called golden rule is used worldwide; it claims that it is only to be created in order to secure investment funding, but not for common operation. In Slovakia there are furthermore restrictions imposed on the self-governing region debt and on the installments of loans. However, sanction mechanisms for the non-obedience of rules, definition of debt (PPP projects and supplier credits including) or e.g. the process of restructuralization of self-governing regions in case of defaults are the areas that could be improved.

Well, we have defined three rules: debt brake, expenditure limits and rules for self-governing regions. Why do we further need some independent institution? Is it not enough to incorporate all this in a constitutional act? It would be, however, no politician would ever adopt such act. Every year brings various surprises, unexpected events that need to be addressed. Strict rules for common functioning could impose hurdles when trying to react even in reasonable instances. In a deep recession for instance, it is sometimes better to bring up stimulation measures. On the other hand with the occurrence of positive surprises, it is often suitable to consolidate more or to have a surplus higher than planned. The flexibility could be secured precisely by independent fiscal institutions.

What should their duties be? First of all it should control whether the government reached the set goals or not. With the non-existence of independent institutions, this usually means only a fight between the coalition and opposition on who is misleading and lying.  Apart from that, they should inform the public on the development in public finance in a transparent way; they should make statements on extraordinary situations, calculate the impact of greater structure changes or e.g. carry out different analyses that would be enriching for public discussion. Personally I am not a supporter of granting such institutions with decision-making powers. I think that for such a purpose the representatives of people, hence politicians are being elected. Independent fiscal institutions should rather hold the mirror up to the government and parliamentary assistants while tabling proposals or represent some kind of “well” of information for the public.

There are many such institutions in the world. The Congressional Budget Office (CBO) in the United States mainly deals with analyses and prognoses. Swedish Fiscal Policy Council, however, has its say also within the policies in relation with achieving employment and higher economic growth. Even stronger powers has Hungary’s fiscal council which disposes of the right of the veto power throughout the adoption of state budget. Independent fiscal institutions and councils function successfully also in Denmark, Belgium, Great Britain or for example in Austria.

Our proposal counts with a Council for Budgetary Responsibility consisting of three members; it should have a certain analytical group at its disposal (approximately. 15 analysts). It would assess the state of play within the fulfillment of fiscal objectives and it would serve foremost the public by providing an independent view of the budgetary development. We would also not consider for unrealistic if its members consisted of respected foreign economists for unrealistic.

To sum it up, we propose adopting Budgetary Responsibility Act (a constitutional act if possible). The Act would be based on the concept of net worth and contain, apart from requests on transparency, also the debt brake, expenditure limits, rules for self-governing regions and the establishment of Council for Budgetary Responsibility. We think that the benefits would exceed the costs. Our minimum objective is to restrict the space for hazing and accountancy ruse and tricks. We do not claim that after passing such a law the irresponsible acting would disappear, however, drawing on international experience, we do think it can be significantly reduced.

The upcoming, final lecture will be a summary of what we have learnt by now.