Back to Basics – Good Indicators for Good Fiscal Institutions!

A proper fiscal framework should ensure fiscal sustainability while avoiding procyclicality of fiscal policy. As a prerequisite, fiscal rules should be based on numerical indicators that are conducive to both of these basic objectives. In this paper, we discuss problems that the existing European fiscal architecture fails to address, even as it becomes increasingly more complex and rule-based. We argue that a lack of robust, simple indicators makes the enforcement of rules and/or the prevention of procyclicality of fiscal policy very challenging. In our view, a decentralised framework would be better suited to fight against the deficitbias in Europe. Accordingly, we propose that the first line of defence against irresponsible fiscal policy be provided by national, country-specific rules, with active monitoring of local fiscal councils. In this model, the community level would be responsible for checking compliance with minimum standards defined for local fiscal frameworks and for EU-wide coordination of policies instead of yearly fine-tuning of national budgets