Richard Hemming’s research while affiliated with International Monetary Fund and other places

This chapter describes and discusses the justification for and experience with independent fiscal agencies.1 It focuses mainly on fiscal councils, which are typically permanent executive or legislative agencies with responsibilities that mainly involve the impartial scrutiny of fiscal policies, plans and performance. While the precise mandate of fiscal councils — that is, which of these responsibilities or others they have or do not have — differs from country to country, no council has the power to set fiscal targets or adjust taxes. However, this is a role envisaged by those who have advocated setting up fiscal authorities as the fiscal counterparts to independent central banks. Nor are fiscal councils to be confused with national audit offices, parliamentary budget and accounts committees and various other public review committees that meet periodically on fiscal matters. These and similar entities play well-established and quite specific roles related to budget and broader fiscal policy matters and would be expected to coexist alongside fiscal councils. While this chapter contains a brief discussion of fiscal authorities, it mentions these other entities only in passing. Most of the discussion concerns fiscal councils and the nature of the independent scrutiny they provide.

The first public sector ombudsman office was set up in Sweden in 1890.A second country, Finland, did not follow for more than a hundred years. By 1962, all four Scandinavian countries had an ombudsman office, and by 1983 so did 23 mainly Commonwealth and European countries. However, the number of countries with ombudsman offices has increased from 27 to 110 in the last 20 years. This uneven pattern illustrates the way good ideas often spread, at first slowly, and mainly by following the examples of peers, and then more rapidly, as a response to some challenge. In the case of ombudsman offices, the recent trigger has been the transition to democracy in many parts of the world, and the recognition

Fedelino and Hemming analyse different choices of fiscal indicators and targets that are better suited to promoting and safeguarding public investment. After having documented the decline in public investment as a share of GDP in many countries over the last two decades, they note that the empirical evidence on the links between public investment and growth has so far been inconclusive and, furthermore, there is no guarantee that public investment is especially meritorious or productive. The Authors thus propose several “public investment-friendly” approaches to fiscal policy without abandoning the traditional framework based on overall balance and gross debt: broadening the usual set of fiscal indicators and targets, by paying more attention to the current balance; introducing more budgetary flexibility; strengthening the institutional framework for public investment; promoting private sector involvement. They conclude that the best solution to protecting public investment is to implement fiscal policy in a flexible, sustainable and transparent way.

Finding money to invest in infrastructure and other public projects without jeopardizing fiscal stability has become a hot topic in many countries seeking to boost economic growth. At a recent United Nations conference on hunger and development, Brazil's President Lula da Silva called on the IMF to allow infrastructure investments to be excluded from the fiscal targets countries must meet in order to qualify for financial assistance. President Vicente Fox of Mexico made a similar proposal last year at a Group of Eight summit in Evian, France. While looking for innovative ways to boost the private sector's role in providing infrastructure and other services (see box), countries in Latin America and other parts of the world are also focusing on how to make more room for public spending. In this connection, critics of the accounting methods used by the IMF-who are mainly in Latin America but can also be found in Europe, where fiscal constraints are pretty severe-question its traditional reliance on the overall fiscal balance and gross public debt as key fiscal indicators. Latin American countries also claim that the IMF treats them unfairly compared with the rest of the world when it comes to deciding what should be counted as public spending. In this article, we try to shed some light on the fiscal accounting debate and offer thoughts on possible new approaches to making room for more public investment spending on critical infrastructure needs.

Cangiano, Hemming and Ter-Minassian evaluate the implications for public finances of public-private partnerships (PPPs). An increasing number of countries have introduced schemes where the private sector supplies infrastructure assets and services. While these schemes can increase the supply of infrastructure and reduce costs, government guarantees can be a source of fiscal risks. The paper examines the main features of PPP schemes, the underlying economic rationale, and the conditions that can make the recourse to PPPs efficient. The authors also examine the institutional features of PPPs: the legal framework, risk transfer, fiscal accounting and reporting. The paper concludes by pointing to the need to assess carefully the budgetary risks associated with PPPs, to ensure appropriate accounting and reporting standards, and to strengthen disclosure requirements concerning the underlying risks and contingent liabilities.

Fiscal problems have long been considered a central feature of financial (i.e., currency, debt, and banking) crises. However, fiscal problems received less attention at the time of the Asian crisis, because financial and corporate sector vulnerabilities were seen to be more important than fiscal vulnerability. But the recent crises in Argentina and Turkey illustrate the continuing importance of fiscal problems in precipitating crises. Moreover, whatever their cause, financial crises always have important fiscal dimensions. This paper focuses on the fiscal aspects of financial crises in emerging market economies. As such, it is intended to complement other IMF work in progress on vulnerability and crises. In particular, the paper seeks to provide answers to the following four questions: • What are the fiscal causes of crises? • Which fiscal vulnerability indicators help to predict crises? • Can fiscal variables explain the severity of crises? • What are the fiscal consequences of crises? Two empirical approaches are followed. First, a large set of fiscal variables for 29 emerging market economies over the period 1970-2000 is used to examine whether: there are systematic patterns in fiscal variables in the periods before and after crises; fiscal variables can improve the performance of existing early warning system (EWS) models in predicting crises; and fiscal variables help to explain the severity of currency crises. Second, detailed case studies of 11 recent crises in emerging market economies focus on some of the structural and institutional dimensions of fiscal vulnerability.

This paper reviews the theoretical and empirical literature on the effectiveness of fiscal policy. The focus is on the size of fiscal multipliers, and on the possibility that multipliers can turn negative (i.e., that fiscal contractions can be expansionary). The paper concludes that fiscal multipliers are overwhelmingly positive but small. However, there is some evidence of negative fiscal multipliers.

Paying careful attention to public debt dynamics can provide advance warning of potential solvency and liquidity problems. The IMF's new debt sustainability framework can make an effective contribution to crisis prediction. Fiscal tightening will usually be required to help resolve a crisis, and will be unavoidable when financing dries up. While no clear evidence was found that fiscal tightening has contributed significantly to the depth of recessions during crises, the quality of fiscal adjustment should receive more attention. In particular, adjustment measures should be consistent with medium-term objectives for tax reform and expenditure restructuring, and effective social safety nets need to be established. Institutional reforms to strengthen fiscal management will also help to resolve crises and prevent future crises. However, prudent fiscal policies aimed at achieving fiscal surpluses and low levels of debt in good times are the key to crisis prevention. Establishing a sound fiscal position will also permit a more flexible fiscal policy response should a crisis hit.

Using data for advanced economies, this paper investigates whether factors identified in the theoretical and empirical literature explain the effectiveness of fiscal policy in responding to recessions. The results are informative about the fiscal response to recessions but provide only a partial explanation of the impact of fiscal policy on economic activity. Overall, it would appear that fiscal multipliers are very small.