OECD recommends shielding appointments to the Public Finance Council from “political influence”

Scherie Nicol is responsible for monitoring Independent Fiscal Institutions at the Organisation for Economic Co-operation and Development (OECD). In an interview with ECO, she defends the role of these entities in pursuing the sustainability of public finances and points out that the Portuguese Public Finance Council (CFP) is among the five institutions with the highest scores, due to its “high level of independence”, “high-quality work” and “strong communication team”.

However, the economist – who was in Lisbon this week to attend a CFP conference on budget transparency in times of misinformation – warns that “there are certain critical moments when the independence” of budgetary institutions can be put at risk.

“In the case of Portugal, given the upcoming change in leadership, this includes the appointment of new leaders. It is important that there are robust procedures in place to protect this process from political influence”, she recommends.

There has been a major evolution in independent budgetary institutions. What explains their stronger presence?

These institutions are, in fact, the offspring of the global financial crisis, and we saw their proliferation around 2012-2014, when countries sought to strengthen their budgetary frameworks after that crisis. This involved a new set of budgetary rules and a new set of budgetary ‘guardians’ to ensure compliance with those rules.

And what makes a good independent fiscal institution?

We have a measure that gauges the success of these institutions. At the OECD, we have the Fiscal Advocacy Index (FAI), which measures the extent to which these institutions are able to make an impact with their work. First, it measures the degree of independence; second, the extent to which they are doing the right work — for example, analysing fiscal risks and assessing the impact of fiscal decisions on the long-term sustainability of public finances; third, we analyse whether they have effective communication tools to disseminate their work. Are they really having an impact? Does the media cover their work? Are people listening to what they say? Because the power of an oversight institution lies in its ability to make itself heard. If these institutions do not have an impact with their work, they cannot be effective.

There are many institutions in OECD that are more symbolic than effective?

What we tend to find is that, as a rule, institutions score very highly on the criterion of independence. Many also do the right kind of work. Where they tend to fall short is in communicating their work. We have some institutions that do excellent work but do not communicate it effectively. And in that case, they are not as effective as they should be in ensuring the long-term sustainability of public finances.

Where does Portugal fit in? How do you evaluate the portuguese case?

The Portuguese institution ranks fifth in our index. Therefore, it has a relatively high score. The reason for this ranking is largely due to its high level of independence and the fact that it does high-quality work in important areas. It is analysing issues such as pensions, contingent liabilities and other aspects that are very relevant to the long-term sustainability of public finances in Portugal. It also has a strong communications team. I am sure you would say that it is a small team — and it is — but, compared to similar institutions, they have a communications specialist.

And how has it evolved in recent years? Has there been any progress?

There have been no significant changes in the Portuguese Public Finance Council’s position in this OECD index in recent years.

Where can it improve?

Where it can still improve is in the impact of its work, particularly in terms of media coverage and references to its work in the media and in parliamentary debates. I believe this is a challenge that cuts across all the institutions assessed by the OECD, especially given the recent changes in the communications landscape, with the transition from traditional media to social networks, podcasts and other formats.

The independence of these institutions is a key factor. What are the main risks to their true independence?

There are certain critical moments when the independence of these institutions can be put at risk. In the case of Portugal, given the upcoming change in leadership, this includes the appointment of new leaders. It is important that there are robust procedures in place to protect this process from political influence.

Do you think that the mandates of the Public Finance Council and other institutions should include the assessment of structural public policies, particularly ex ante?

We believe that these institutions play an important role both in assessing the financial implications and, more broadly, the policies to be introduced. This helps to inform policymakers and the general public about the expected impacts and trade-offs that may be necessary. We see this work, especially in large-scale reforms, such as in the area of pensions. It is very important that these institutions analyse the implications of reforms in both the short and long term. This also applies to other areas, such as so-called “green” budgetary reforms, with the introduction of carbon taxes, for example. These institutions play a very important role in analysing the impact, effectiveness and distributional effects of these measures. It is essential that they carry out this type of analysis when large-scale budgetary reforms are involved.

Is there any evidence of causality between the existence of a strong independent budgetary institution, in its supervisory role, and the credibility of sovereign debt?

It is difficult to establish a direct causal relationship between these institutions and sovereign debt levels, because there are many other factors to consider. What we observe is that countries particularly affected by financial crises in the past tend to have stronger institutions. This reflects the recognition that this was a missing piece before these crises. There is evidence that these institutions are already reducing, for example, the bias of optimism in government forecasts. In other words, they are making governments more rigorous and transparent in presenting budgets to Parliament. In this sense, they already play a very important role.

In a country with high public debt such as Portugal, is the role of the FPC even more critical?

Independent budgetary institutions are particularly important in countries with high debt and growing budgetary pressures. They help to strengthen political and public understanding of the need to restore public finances, creating the conditions for necessary budgetary reforms. They also draw attention to budgetary choices that exacerbate budgetary challenges and are not necessarily in the best interests of citizens.

Can a strong fiscal institution save a country from a bad policy decision?

We have several examples where these institutions have improved the debate on major budgetary reforms. One example is Ireland, where the work of the Fiscal Council on long-term fiscal sustainability and the impact of different pension policies has been very useful in parliamentary and public debate. Also in Ireland, it has played an important role in the debate on what to do with high corporate tax revenues. The government created a sovereign wealth fund so that these revenues would not simply be spent, but partially channelled into a fund for the country’s future.

These are concrete examples of how a fiscal institution can help guide crucial fiscal decisions in the interest of citizens, both in the short and long term.

And how should these institutions deal with situations where governments publicly challenge their projections?

Independent fiscal institutions will be subject to challenge, and there will often be differences between the methods and results of different entities. They must, however, be transparent about their assumptions and be ready to correct any errors in a timely manner. It is preferable for the debate to focus on budgetary choices rather than on the accuracy of the figures.

If you had to identify two risks and recommendations for the future, in order to build stronger and more effective institutions, what would they be?

Honestly, the biggest risk is that your work is not being read. No one questions the quality of your work. What you need to improve is dissemination: ensuring that your work is heard, read and understood by a wider audience. The current risk is that your work is only being consumed by specialists, creating a kind of echo chamber. And so, it does not have the desired impact.

Currently, debt is projected to grow in most OECD countries. We have rising defence spending and enormous demographic challenges. There is a clear need to restore public finances. But it is not possible to implement fiscal reforms without political and public support. That support only exists if people understand why reforms are necessary.

Is this also the greatest opportunity?

Exactly. The greatest opportunity for these institutions is to build public understanding of the need to make budgetary decisions that serve the country’s interests not only in the short term, but also in the long term. This is crucial.