Question

Why has there been a resurgence of interest in fiscal policy councils (FPCs) since the onset of the global financial crisis? Can FPCs be seen as a substitute for fiscal rules?

Answer 1

Fiscal policy councils are set up by the government to look into the matter of fiscal policy and fiscal deficit. Such councils can be seen in most of the developed countries.

These councils work independently. Their objectives are also diverse. Some focus only on the fiscal policy while other conduct studies on employments and output as well. After the financial crisis, the role of government fiscal policy increased significantly. thus it was felt that there must be an independent agency to look into the complexities of fiscal policy. Thus, these councils were created to conduct fiscal policy in most prudent and productive manners.

Fiscal policy rules are relatively rigid and these rules must be changed frequently. it is a fiscal policy council that keeps watching on these rules and keeps informing the government about the potential changes to be introduced in these rules. Thus, here fiscal council acts as complementary to fiscal rule. Thus, the fiscal council should not be seen as a substitute for fiscal rules but fiscal rules must be made more relevant with the help of the fiscal council.