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The political economy of fiscal transparency and independent fiscal councils

Roel Beetsma, Xavier Debrun and Randolph Sloof

European Economic Review, 2022, vol. 145, issue C

Abstract: This paper develops a theory of fiscal transparency aimed at highlighting the potential contribution of independent fiscal councils to fiscal responsibility. In a political economy model with electoral competition, voters care about the candidates’ competence to supply valuable public goods and about their congruence (subjective sense of proximity). Voters observe candidates’ congruence but must form views about their competence based on the expected amount of public goods they could provide, and on other random signs about competence, public debt and the state of the economy. More transparency reduces noise around these relevant considerations. The model exhibits a bias towards excessive public debt for both “partisan” (myopia) and “opportunistic” (signaling competence through additional spending) motives so that institutional arrangements mitigating the debt bias carry welfare gains. While transparency about public debt itself is irrelevant, clearer signals about competence raise public debt if the incumbent enjoys a sufficiently large electoral advantage but reduce debt otherwise. Increased transparency about the state of the economy raises debt and is less valued by voters and the incumbent than greater transparency about competence. The latter is preferred by all players if the incumbent does not hold too large an electoral advantage. Otherwise, the incumbent and the public may have diverging preferences regarding greater transparency. Our analysis reveals the ambiguity about the potential contribution of independent fiscal councils (IFCs) to fiscal responsibility through increased transparency, and points to the inherent fragility of the political backing for such institutions.

Keywords: Fiscal transparency; Public debt; Partisan bias; Opportunistic bias; Competence; Congruence; Independent fiscal councils (search for similar items in EconPapers)
JEL-codes: E62 H6 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: The political economy of fiscal transparency and independent fiscal councils (2017) Downloads
Working Paper: The political economy of fiscal transparency and independent fiscal councils (2017) Downloads
Working Paper: The Political Economy of Fiscal Transparency and Independent Fiscal Councils (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:145:y:2022:i:c:s0014292122000587

DOI: 10.1016/j.euroecorev.2022.104118

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