It is an axiom of democratic systems of government that public authority should always be subject to oversight so that those entrusted with authority do not abuse or overstep their power. Thus, legislatures establish committees of their members to watch over the executive departments of government, and judiciaries stand ready to review acts of both the executive and legislative branches.
This traditional kind of model still provides the backbone of democratic oversight. However, a newer and different kind of review process has become established to watch over key functions of government. Regulatory review has become established to watch over the regulatory functions of government (see blog of dec 1 2021) and budget review processes have been established to watch over the fiscal functions of government. What regulatory review and fiscal review share in common is the need for specialised knowledge and expertise to carry out the review.
This blog looks briefly at fiscal review. It asks whether it offers more general lessons for review functions.
Models of fiscal review
The fiscal review function has grown mainly in the last 20 years. OECD notes the first office in Belgium in 1936. However, the main impulse has come from the example of the US Congressional Office of Budget Review set up in 1974 and from a requirement, effective in 2013, for independent fiscal authorities in the EU, in relation to the implementation of EU rules for fiscal discipline and in reaction to the global and Euro area crises of 2009. There are now around 30 budget review offices in OECD countries. They are referred to generically as Independent Fiscal Institutions (IFIs) and most have been established since 2000. About 10 are set within parliaments and the majority come under Fiscal Councils. Although Fiscal Councils may be headed by a Finance Minister (as in Germany), EU guidelines require IFIs to be free of political interference, able to produce their own assessments, staffed to do so, and with their own direct communication with the public.
OECD distinguishes between four main functions of IFIs. First, they make budget forecasts or review those of their government. Secondly, they assess the sustainability of fiscal policies, including the plausibility of underlying assumptions and the risks attached if they were to turn out to be wrong. Thirdly, they monitor compliance with relevant fiscal rules, such as EU rules (currently in abeyance) that public debt should be held below 60% of GDP and public deficits below 3% of GDP. Fourthly, they are involved in the costing of government policies.
Expertise and dualism
Regardless of the location of an IFI, in government or parliamentary structures, the key principle reflected in the 2014 OECD Principles for IFIs is that they should be independent in what they do and non-partisan. In addition, their leadership should be based on technical competence and the IFI should have its own hiring and firing authority to underpin both its independence and technical competence. (OECD Principle 2). Economic forecasting is a specialised area of expertise where small variations in one or two key assumptions can make a huge difference to the projections and where all assessments are subject to margins of error, both on the upside and downside.
IFIs thus continue the trend towards ever-greater use of expertise and specialised knowledge in systems of government. Contemporary democratic forms of government fit what is called a ‘dual processing’ structure of decision taking and problem solving. One part consists of an elected branch that mobilises ‘associative’ information and knowledge (what we learn from our relations and discussions with others and through the give and take of social and political persuasion). The other part mobilises epistemic knowledge and information. From an epistemic perspective, politics is alarmingly content lite. Each however contributes a different kind of rationality to decision making and problem-solving.
We tend to assume that the elected branches supervise the experts. In the case of IFIs the experts supervise the elected branch. Experts in theoretical and applied economic analysis are intended to provide an independent check on the claims of elected governments about the health and prospects of the country’s finances. They provide a firewall against the biased claims and the slanted analysis of partisan politicians. There are highly qualified economic analysts located within government departments, but they serve political masters, and their forecasts may be shaded to fit with political messaging.
The structure of review
When we look at the growth of IFIs alongside the growth of regulatory review the general question that arises is whether there is any underlying and coherent logic to review structures in contemporary government. What we see appears to reflect a purely ad hoc development of review relationships. However, in practice, structures reflect three important distinctions.
Subject specific and cross sector tools of government
One distinction is between review that is subject specific, for example, to look at policies towards public education or health, as compared with review that takes a cross cutting look at the different instruments of government. Parliamentary committees usually conduct subject oriented reviews, including reviews of agencies with responsibilities for particular areas, such as public health. IFIs and Regulatory Review bodies look at the tools of government – the powers of government to regulate or to tax and spend - across different sectors of public policy.
Parliamentary committees have an advantage in carrying out subject specific or agency-wide reviews since their selection of topics can be sensitive to and respond to what is currently important in the eye of public opinion. They are likely to choose topics that are currently salient to the electorate. Experts have an advantage in being removed from such direct electoral pressures. IFI assessment of future prospects may focus on issues that do not yet engage public opinion. The work of regulatory review starts with ex post evaluation and an assessment of the evidence about the effectiveness, or not, of past policies even if public attention is engaged elsewhere.
Micro vigilance v macro vigilance
A second important distinction is between review that is micro focussed and review that is macro-focussed. The distinction is most familiar from the world of financial market supervision where some market regulators will have responsibility for the performance of a particular part of the market while a different body, typically a central bank, will perform a macro-prudential role in overseeing the health and stability of the financial sector as a whole. The work of an IFI addresses micro level concerns when it assesses particular spending programs and sources of revenue. However, its main focus is macro-economic – the relationship between the economy as a whole and a country’s finances as a whole and its underlying capacity to tax and spend. By contrast, regulatory review tends to focus on an assessment of individual regulatory proposals and has been notably less successful in monitoring and controlling regulatory burdens in their entirety. Past regulations disappear into the underworld of ‘sunk costs’. Judicial review is almost entirely micro-focussed and triggered by individual cases.
Content and conduct
A third important distinction is between oversight and review that centre on content, and oversight that centres on conduct.
IFI scrutiny focuses on the content of tax and spending proposals. IFIs will be deeply concerned with questions such as the income elasticity or income regressivity of different revenue sources. However, IFIs are not primarily concerned with procedural questions such as how the tax authorities go about collecting revenue or how those who are taxed go about avoiding payments.
By contrast, regulators in the financial sector will have a major focus on conduct. Regulatory review of the instruments of regulation will also have a major focus on behavioural aspects such as how the subjects of regulation respond to different regulatory instruments and incentives.
In the case of the judicial review of government and regulatory decisions, leaving aside human rights law, the review is mainly about conduct with the focus on procedural missteps and material omissions. The judiciary is not usually equipped with the specialised knowledge enabling it to take an informed view on substance.
What this quick overview of the place of IFIs in the firmament of review bodies suggests is that the piecemeal development of review functions seems to add up to a coherent whole. Oversight, taken as a whole, covers the subject areas of government, the instruments of government, the micro and the macro dimension of policy, content and conduct. Moreover, the allocation of responsibilities seems broadly fitting. Elected politicians have an advantage in some areas; experts in others, the judiciary in another.
Nevertheless, there remains one highly important omission where dual rationality does not seem to have reached – oversight over the system of government as a whole. Democratic systems of government have evolved in response to external pressures, to judicial interpretation of powers, to the manipulative powers of incumbents and occasionally to the voice of the people in the form of referendums. There is a need for a body to watch over the resulting evolution. Few democratic systems are functioning well and many badly. Oversight is needed. It needs to reflect the same dual logic. Expertise, independent of the incumbents in positions of power, is needed to assess what is happening. The electorate is needed to pass judgement.