FISCAL WATCHDOGS

Proposal on

“Fiscal Policy: Independent Fiscal Watchdogs"

Abstract

This report assesses the fiscal watchdogs in UK, particularly Office for budget responsibility (OBR). The main focus of this paper is to analyze that how they operate by gauging the role of fiscal watchdogs in detail. This paper also discusses the effects of independent fiscal councils.

Fiscal council is an independent institution that provides advice on economic and monetary issues, to take corrective actions. This paper also studies UK based fisal council or watchdog firm, namely, Office for Budget Responsibility (OBR).

CHAPTER 1: INTRODUCTION

Outline of the Study

This study will be based on the topic Fiscal Policy and Independent 'Fiscal Watchdogs' in the United Kingdom”. The first chapter of will gives an introduction to the topic including the background and purpose of the study. The second chapter will provide a review of significant literature, carried out in this field. The third chapter will present the study methodology.

Background of the Research

Fiscal council is an institution that is funded but acts as an independent body that provides advice on economic and monetary issues. For this paper, the fiscal council definition is limited to those institutions that provide advice on macroeconomic issues in context to the national budget deficits. On the other hand, this institution also facilitates in providing advice on the budgetary costing of macroeconomics, predominantly projects or proposals (Alesina, & Tabellini, 2007).

In some countries, the fiscal watchdogs existed from long time. For instance, in Netherland the central planning bureau, in US the congressional budget office, in Belgium High Council of Finance, acts as fiscal watchdogs. On the other hand, in UK, Canada, Hungary, and Sweden these institutions are known as fiscal councils.

In most of the countries, the trend of government debt is increased immensely. The reason to believe that deficit bias is unwanted is that governments formulate the rules of fiscal to prevent it. As well as, the deficit bias is not aligned with optimal debt policy. Hence, the idea of bias debt policy was failed as well open doors for fiscal councils to play their role in identifying potential reasons of fiscal policy failure (Bertelsmann, et.al, 2008).

The potential reason of fiscal policy failure is illustrated by European Commission, in 2006 and OECD, 2007; that are the deficit of government must not be more than three percent of GDP, and combined gross government debt must not be more than 60 percent of GDP. In case of larger debt ratio, at satisfactorily level it should approach debt limit.

Wyplosz (2005), Kirsanova et al., (2007), and Debrun et al., (2009) argued that it is difficult to monitor the rules of fiscal policy because of a contingent nature. Hence, fiscal councils can assist in monitoring the rules of fiscal policy. The fiscal policy rules can be a balance by the fiscal councils. The proposed strategies of the fiscal council are dependent on the reason of deficit bias.

Problem Statement

In most of the European countries, it was observed that the violation of fiscal rules at national as well as EU ...