## 1. Advanced Economies: Statutes and Structure of Independent Fiscal Institutions

## Source details

**Canonical URL:** [1. Advanced Economies: Statutes and Structure of Independent Fiscal Institutions](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp16156.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp16156.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp16156.pdf.json)

---

### I. What are Independent Fiscal Institutions (IFIs)? Definition, mandate, and good practice
- IFIs: entrusted with vigilance over public finances mainly by evaluating fiscal policy usually before and during the decision-making process; real-time forward-looking surveillance with focus on macro-fiscal effects short- to medium-run and on public debt sustainability long-run.
- Principal role: analysis and assessment of the budget bill or other legislative fiscal proposals prior to enactment; mandate in some countries extends beyond central government to decentralized agencies, subnational governments, and public enterprises.
- Contrast with public audit institutions:
  - Audit institutions: detailed ex post inspection of physical, financial and legal integrity; staffed largely by lawyers, auditors, accountants; backward-looking.
  - IFIs: forward-looking diagnostic task; generally staffed with a small group of mostly economists.
- Independence requirements and features:
  - De facto independence from all branches of government in work program and control over human and financial resources.
  - May be formally attached to legislature, executive, or judiciary; serves primarily the legislature and the public; must be non-partisan (technical analysis alone).
  - No policy-making authority and cannot have legally binding enforcement power.
- OECD good practice: codified in 22 internationally accepted principles grouped under nine headings: local ownership; independence and non-partisanship; relationship with the legislature; access to information; transparency; communication; external evaluation.

### I.B. Origins and rationale for IFIs
- Origins: local political conditions (partisan concessions, US), aftermath of crisis (UK), Fund-supported programs (Ireland), EU membership requirements.
- Rationale: transparency to improve policymaking and correct three interrelated fiscal management deficiencies:
  - Deficit bias and procyclicality (observed in many advanced and emerging market economies).
  - Optimistic bias in macro-fiscal projections (“fiscal illusion”) from optimistic macro assumptions or tax elasticities/take-up rates.
  - Fiscal sustainability problem for highly indebted governments lacking realistic medium- and long-term projections incorporating productivity, demographic assumptions, and contingent liabilities.

### I.C. Effectiveness of IFIs
- Measurement challenges:
  - Ideal: impact on fiscal performance relative to counterfactual (unobservable).
  - Practical proxies: transparency, public perception (surveys/press), market perception (sovereign risk premiums, ratings) — all limited.
- Channels of influence:
  - Direct influence on policy (rarely observable).
  - Indirect influence frequently through legislative debate, think-tank dialogue, media reporting, and preemptive technical influence within executive/legislature.
- Empirical evidence: positive impact on fiscal transparency; effect on fiscal performance mixed (case studies).
- Preserved quotes:
  - Sir Alan Budd (2013): IFIs “can be a powerful force for good.”
  - Alice Rivlin (2013): IFIs “can play an important role in ensuring realistic and well-informed debate based on honest numbers, focusing attention on the consequences of action (or inaction), and identifying more or less sustainable solutions to budget dilemmas. They cannot instill political courage to make unpopular decisions. Political leaders have to do that for themselves.”
- Preconditions for success:
  - Home-grown and home-owned with broad consensus.
  - Adequate financial and human resources and proven quantitative competence.
  - Communication skills to gain media and public support.
  - Demonstrated non-partisanship and technical competence early on.
  - Operate at least over two electoral cycles with major parties alternating to claim success.

### II. Fiscal policy in Japan — trends and policy process
- Context and trends:
  - More than two decades since early 1990s financial crisis: prolonged stagnation, periodic fiscal and monetary stimulus, risk of deflation, shocks (global financial crisis, Fukushima).
  - Multiple rounds of “revitalization” largely via public investment and public works with limited return, contributing to a sharp rise in public indebtedness.
  - Fiscal impulse since the crisis helped alleviate 2008–09 financial crisis and 2011 disaster effects but increased public debt ratio.
  - No evidence of significantly procyclical policy stance over the last decade compared with other advanced economies that were expansionary during the Great Moderation.
- Academic debate on fiscal efficacy:
  - Ricardian view: households increased savings anticipating future retrenchment; monetary expansion needed given liquidity trap at zero-lower-bound.
  - Keynesian view: further fiscal expansion justified; low fiscal multipliers may be transient; no evidence of crowding out due to low interest rates and monetary accommodation.
  - Divergent views on rising public debt: some expect growth and structural reforms to correct it; others warn of irreversible sustainability problems. Home bias in domestic holdings expected to continue mitigating sudden stop risk.

### II.B. Fitful policymaking and budget process features
- Political economy: interactions within government, Diet role, vested interests, and public perceptions shape fiscal expectations; dilemma between boosting activity and preserving debt sustainability sharper in Japan.
- Budget choreography:
  - MoF interacts with Cabinet Office (CO) in top-down iterative process setting envelope and primary expenditure allocation.
  - CO prepares macro forecasts; MoF prepares revenue forecasts.
  - Each summer MoF formulates soft expenditure ceilings for line ministries with a margin up to 10 percent as increment over prior year; CO sets macro-fiscal goals and medium-term scenarios.
- Tensions and biases:
  - Tension: MoF (fiscal discipline) vs CO (political pressures for stimulus and benefits to interest groups).
  - MoF has tended to underestimate revenues—except during downturns—apparently to balance CO’s optimistic macro assumptions.
  - Optimistic bias evident mainly in medium-term projections, framed as scenarios (especially high-growth “revitalization” projection) rather than credible projections; absence of a no-policy-change baseline projection.
- Supplementary budgets and unpredictability:
  - Over past twenty years there have been more than 40 supplementary budgets, averaging about two per year, estimated to total 8 percent increase in primary expenditures over initial appropriations; the increase was 6 percent excluding 2008–09 and 2011.
  - Routine supplementary budgets introduce unpredictability and prevent automatic stabilizers from being the first line of defense; both forecast revenue and expenditure tend to be understated relative to outturn, with understatement of expenditure usually exceeding understating of revenue, leading to an understatement of the budget deficit on average.

### Forecast errors, optimistic bias, and fiscal outturns
- Revenue outturns:
  - Over the last 15 years, the revenue outturn exceeded forecast every year except during output decline in 2001-02 and 2007-09.
  - MoF contends recent positive forecast errors reflect corporate tax revenue which were also underestimated by corporate taxpayers—the basis of MoF forecasts.
- Forecast error dynamics for government debt (period 2000–13):
  - Forecast error rose from 3 percent in the first year to 9 percent in the “prudent” projection.
  - Forecast error rose to 11.5 percent in the “revitalization” projection.
  - Japan exhibits an optimistic bias in three-year forecast errors (2000–13) that exceeds that of most other advanced European economies for both the government balance and debt.
  - Japan’s debt ratio bias is particularly pronounced, surpassing the ratio of all other countries except Denmark.
  - Omitting forecasts for 2009 reduces the compounding effect of the Great Recession on forecast errors for Japan.
- Mentioned numeric snippet: 0.5 percent of GDP in the “prudent” projection and by nearly one full percentage point in [text fragment preserved from source].

### Opacity, uncertainty, and macroeconomic implications
- Budgetary practice failures:
  - First announcing and then postponing the VAT rate increase exemplifies failure to balance macro stabilization and debt sustainability.
  - Lack of medium-term commitment, frequent mid-year supplementary budgets, and unclear priorities contribute to policy uncertainty.
  - A 2009 multi-pronged reform effort (medium-term budgetary planning, program reviews, clear accounting standards, tax expenditure estimates) fell short and was subsequently reversed.
  - Japan is the only major advanced economy missing in a widely known survey of openness in budgetary practices covering more than one hundred countries worldwide.
- Consequences:
  - Inflation expectations and fiscal expectations are unanchored.
  - Households and enterprises display reluctance to consume and invest, contributing to stagnation.
  - Fiscal opacity can, at an extreme, contribute to sovereign debt crises.
- Demographic and financial pressures:
  - Labor force predicted to decline by one half between now and the 2080s.
  - Decline in saving from a rapidly aging population and increasing share of non-Ricardian households.
  - Pressure on institutional investors to search for higher yield securities.
  - Eventual tapering of monetary expansion and continued rise in public debt ratio.
  - Long-run risk: Japan’s massive public debt may need to be financed increasingly from international markets, increasing exposure to a sudden stop and a debt crisis of extraordinary proportions.

### International experience with IFIs: statutes, structure, and remit
- Statutory basis:
  - Most IFIs established by law; some by decree; a few by constitutional provision.
  - Higher-grade law or constitutional status provides greater permanence and protection.
- Institutional affiliation:
  - IFIs are distributed between legislative and executive branches, with exceptions (e.g., France: court of audit).
  - In federal systems, IFI mandates may extend to subnational government finances.
- Leadership and staff:
  - Approximately one half of IFIs have monocratic leadership; the other half operate under collective councils.
  - Typical staff size in the overwhelming majority does not exceed 50 professionals and support personnel.
  - Staff composition: economists, budget specialists, lawyers, accountants.
- Remit and functions:
  - Common IFI functions: prepare estimates and forecasts of fiscal and macroeconomic consequences of the budget bill; prepare short- and medium-term no-policy-change projections as baselines; prepare long-term quantitative scenarios and sensitivity analyses; monitor compliance with fiscal rules; assess debt sustainability and fiscal risks.
  - IFIs disclose publicly all underlying data and methodology to assess government estimates and assumptions.
  - In some countries (Netherlands, UK), IFIs prepare official macro-fiscal projections for the forthcoming budget.
  - IFIs avoid normative/advisory roles to limit accusations of partisanship; governments and legislatures can ignore IFI evaluations.

### Design options for an IFI in Japan
- Rationale:
  - Prime Minister’s Council on Economic and Fiscal Policy and the Finance Ministry’s Fiscal System Council do not meet OECD Principles attributes; they perform advisory/analytical roles within the executive.
  - A dedicated IFI could address transparency, predictability, and credibility problems and help anchor expectations.
- Suggested functions and sequencing:
  - Immediate:
    - Prepare a medium-term macro-fiscal baseline (no policy change) to evaluate realism of government projections and the annual budget bill.
    - Provide output gap estimates to derive real-time estimates of the structural (cyclically adjusted) budget balance and assess fiscal stance.
    - Periodically prepare long-term quantitative baseline scenarios to assess public debt sustainability.
    - Complement baseline with risk assessment using sophisticated techniques over time.
  - Later stage:
    - Shift responsibility for official medium-term macro-fiscal projections from the government to the IFI to guarantee impartiality and time consistency.
    - Consider costing each proposed mandatory expenditure or tax measure only after sufficient manpower is available; alternative is require government costing and have IFI evaluate it.
    - Electoral platform evaluations, if solicited by parties, should be considered later due to resource demands.
- Statute, affiliation, and independence:
  - Create the IFI through informed debate and legislation with broad political consensus; avoid establishment by decree or along party lines.
  - Formal affiliation to the Diet or no affiliation at all is preferable to affiliation to the government to reduce risk of capture.
  - Enabling law should ensure de facto independence and jurisdiction over subnational governments and the rest of the public sector.
- Leadership and staffing:
  - Leadership can be individual or collective; aim for assessments based on impartial expert opinion.
  - A lean initial staff of some 50 professionals (mainly economists and budget specialists) could perform envisaged functions; staff would need to expand if coverage is extended and policy costing is undertaken.
- Functions to exclude:
  - Normative functions and advisory functions should be permanently excluded to preserve nonpartisanship and avoid the IFI being regarded as a political ally or decision-maker.

### Key conclusions and policy recommendations
- Core findings:
  - Japan exhibits persistent optimistic bias and opacity in fiscal policymaking, undermining credibility and anchoring of expectations.
  - Continuation of current practices risks further rise in the public debt-to-GDP ratio amid demographic decline and potential erosion of home bias in sovereign holdings.
  - An IFI, embedded in a broader reform of the fiscal framework with a medium-term perspective, could materially improve transparency, forecast credibility, and debt sustainability analysis.
- Recommended design principles for a Japanese IFI:
  - Enshrine the IFI in legislation backed by broad political consensus; ensure de facto independence.
  - Base the IFI’s remit on transparency, impartial macro-fiscal forecasting, debt sustainability analysis, monitoring compliance with medium-term goals, and evaluation of the government’s fiscal stance.
  - Avoid normative/advisory policymaking roles to safeguard nonpartisanship.
  - Ensure adequate technical staffing (initially around 50 professionals) and eventual coverage of the entire public sector, including subnational governments.
- Strategic importance:
  - Establishing an IFI would signal a regime shift toward improved fiscal governance, help anchor expectations, and support efforts to restore fiscal sustainability and reinvigorate economic growth.
  - Given Japan’s projected demographic and fiscal challenges—including a labor force predicted to decline by one half between now and the 2080s—failure to improve fiscal governance may doom efforts to restart sustained growth.

*Excerpted from the supplied content of the IMF working paper PDF unit.*

### 1. Advanced Economies: Statutes and Structure of Independent Fiscal Institutions ...............16

### 1. Advanced Economies: Statutes and Structure of Independent Fiscal Institutions

### Sections listed
- 1. Advanced Economies: Statutes and Structure of Independent Fiscal Institutions ...............16
- 2. Advanced Economies: Functions of Independent Fiscal Institutions ..................................18

### Figures referenced
- Figure 1. General Government Balance and Output Gap, 2000–15 .....................................................9
- Figure 2. Selected Advanced Economies: Average Forecast Errors for General Government Balance, 2000–13....................................................................................................................................13
- Figure 3. Selected Advanced Economies: Average Forecast Errors for General Government Debt, 2000–13....................................................................................................................................13

*Source: _wp16156 - 1. Advanced Economies: Statutes and Structure of Independent Fiscal Institutions ...............16*

### References .............................................................................................................

### _wp16156 - References ...............................................................................................................................24

### I. What are Independent Fiscal Institutions (IFIs)? Definition, mandate, and good practice
- IFIs: entrusted with vigilance over public finances mainly by evaluating fiscal policy usually before and during the decision-making process; real-time forward-looking surveillance with focus on macro-fiscal effects short- to medium-run and on public debt sustainability long-run.
- Principal role: analysis and assessment of the budget bill or other legislative fiscal proposals prior to enactment; mandate in some countries extends beyond central government to decentralized agencies, subnational governments, and public enterprises.
- Contrast with public audit institutions:
  - Audit institutions: detailed ex post inspection of physical, financial and legal integrity; staffed largely by lawyers, auditors, accountants; backward-looking.
  - IFIs: forward-looking diagnostic task; generally staffed with a small group of mostly economists.
- In some countries IFIs evaluate consistency of budget or medium-term plans with fiscal rules/targets, but IFIs were first fully operational in discretionary environments (Belgium, Netherlands, US).
- Independence requirements: de facto independence from all branches of government in work program and control over human and financial resources; may be formally attached to legislature, executive, or judiciary; serves primarily the legislature and the public; must be non-partisan (technical analysis alone).
- Attempts to entrust IFI functions to other bodies have often failed (UK national audit office; Peru central bank; EU peer review). Recent innovation: grafting a fiscal council onto the court of audit (France) — success depends on effective separation of ex ante and ex post oversight.
- IFIs have no policy-making authority and cannot have legally binding enforcement power; fiscal policy cannot be outsourced because:
  - fiscal policy serves multiple objectives (stabilization, allocative, distributional);
  - democratic legitimacy precludes entrusting fiscal policy to an unelected authority absent a well-defined principal-agent relationship.
- OECD codified good practice in 22 internationally accepted principles grouped under nine headings: local ownership; independence and non-partisanship; relationship with the legislature; access to information; transparency; communication; external evaluation.

### I.B. Origins and rationale for IFIs
- IFIs arise from diverse origins: local political conditions (e.g., partisan concessions, US), aftermath of crisis to restore credibility (e.g., UK), Fund-supported programs (e.g., Ireland), or EU membership requirements.
- Rationale centers on transparency in public finances to improve policymaking and correct three interrelated fiscal management deficiencies:
  - Deficit bias and procyclicality (observed in many advanced and emerging market economies); Japan’s high debt and remaining high deficits suggest such biases may exist in its budgeting process.
  - Optimistic bias in macro-fiscal projections (fiscal illusion), arising from optimistic macro assumptions or optimistic tax elasticities/take-up rates; reflects dynamic inconsistency in commitment to medium-term consolidation.
  - Fiscal sustainability problem for highly indebted governments lacking realistic medium- and long-term projections incorporating productivity, demographic assumptions, and contingent liabilities.

### I.C. Effectiveness of IFIs
- Measuring effectiveness is complex; ideal measure: impact on fiscal performance relative to counterfactual (unobservable). Practical proxies: transparency, public perception (surveys/press), market perception (sovereign risk premiums, ratings) — all limited.
- Influence on policy can be direct (rarely observable) or indirect (frequent): legislative debate, think-tank dialogue, media reporting, preemptive technical influence within executive/legislature.
- Indirect influence often preemptive: technical arm alerts political decision-makers to potential adverse IFI assessments, producing unobservable but material effects.
- Empirical evidence: IFIs have had positive impact on fiscal transparency; effect on fiscal performance mixed (case studies). Quotes preserved:
  - Sir Alan Budd (2013): IFIs “can be a powerful force for good.”
  - Alice Rivlin (2013): IFIs “can play an important role in ensuring realistic and well-informed debate based on honest numbers, focusing attention on the consequences of action (or inaction), and identifying more or less sustainable solutions to budget dilemmas. They cannot instill political courage to make unpopular decisions. Political leaders have to do that for themselves.”
- Preconditions for IFI success:
  - Home-grown and home-owned with broad consensus.
  - Adequate financial and human resources and proven quantitative competence.
  - Communication skills to gain media and public support.
  - Demonstrated non-partisanship and technical competence early on.
  - Fragility: exposed to elected officials’ will; require extended tenure (operate at least over two electoral cycles with major parties alternating) to claim success.
- Ultimate success depends on public demand for transparency and accountability.

### II. Fiscal policy in Japan — trends and policy process
- Context: Over more than two decades since the early 1990s financial crisis, Japan experienced prolonged stagnation, periodic fiscal and monetary stimulus, risk of deflation, and shocks (global financial crisis, Fukushima).
- Fiscal expansions: multiple rounds of “revitalization” largely via public investment and public works with limited return, contributing to a sharp rise in public indebtedness.
- Despite stimulus withdrawal 2003–onward until the crisis, the output gap remained close to zero (Figure 1 reported as in the source).
- Fiscal impulse since the crisis helped alleviate 2008–09 financial crisis and 2011 disaster effects but increased public debt ratio.
- No evidence of significantly procyclical policy stance over the last decade compared with other advanced economies that were expansionary during the Great Moderation.
- Academic debate on fiscal efficacy in Japan:
  - Ricardian view: households increased savings anticipating future retrenchment; monetary expansion needed given liquidity trap at zero-lower-bound.
  - Keynesian view: further fiscal expansion justified; low fiscal multipliers may be transient; no evidence of crowding out due to low interest rates and monetary accommodation.
- Views diverged on rising public debt: some expected growth and structural reforms to correct it; others warned of irreversible sustainability problems. Home bias in domestic holdings of sovereign bonds expected to continue mitigating sudden stop risk.

### II.B. Fitful policymaking and budget process features
- Political economy approach: interactions within government, Diet role, vested interests, and public perceptions shape fiscal expectations.
- Since early 1990s, fiscal policy faced dilemma between boosting activity and preserving debt sustainability — sharper in Japan than elsewhere and likely to intensify absent a regime shift.
- Budget choreography:
  - MoF interacts with Cabinet Office (CO) in top-down iterative process setting envelope and primary expenditure allocation.
  - CO prepares macro forecasts; MoF prepares revenue forecasts.
  - Each summer MoF formulates soft expenditure ceilings for line ministries with a margin up to 10 percent as increment over prior year; CO sets macro-fiscal goals and medium-term scenarios.
- Tension: MoF (fiscal discipline) vs CO (political pressures for stimulus and benefits to interest groups). CO aims expansionary stance; MoF aims debt sustainability; common pool problem influences CO behavior.
- Forecasting biases and projections:
  - MoF has tended to underestimate revenues—except during downturns—apparently to balance CO’s optimistic macro assumptions.
  - Optimistic bias evident mainly in medium-term projections, framed as scenarios (especially high-growth “revitalization” projection) rather than credible projections; absence of a no-policy-change baseline projection.
- Supplementary budgets and unpredictability:
  - Over past twenty years there have been more than 40 supplementary budgets, averaging about two per year, estimated to total 8 percent increase in primary expenditures over initial appropriations; the increase was 6 percent excluding 2008–09 and 2011.
  - Routine supplementary budgets introduce unpredictability and prevent automatic stabilizers from being the first line of defense; both forecast revenue and expenditure tend to be understated relative to outturn, with understatement of expenditure usually exceeding understating of revenue, leading to an understatement of the budget deficit on average.

*Source: IMF staff analysis as presented in the supplied content unit.*

### 0.5 percent of GDP in the “prudent” projection and by nearly one full percentage point in

### _wp16156 - 0.5 percent of GDP in the “prudent” projection and by nearly one full percentage point in

### Forecast errors, optimistic bias, and fiscal outturns
- Over the last 15 years, the revenue outturn exceeded forecast every year except during output decline in 2001-02 and 2007-09.
- The Ministry of Finance (MoF) contends recent positive forecast errors reflect corporate tax revenue which were also underestimated by corporate taxpayers—the basis of MoF forecasts.
- Forecast error dynamics for government debt (period 2000–13):
  - Forecast error rose from 3 percent in the first year to 9 percent in the “prudent” projection.
  - Forecast error rose to 11.5 percent in the “revitalization” projection.
- Japan exhibits an optimistic bias in three-year forecast errors (2000–13) that exceeds that of most other advanced European economies for both the government balance and debt.
- Japan’s debt ratio bias is particularly pronounced, surpassing the ratio of all other countries except Denmark.
- Omitting forecasts for 2009 reduces the compounding effect of the Great Recession on forecast errors for Japan.

### Opacity, uncertainty, and macroeconomic implications
- Current budgetary practice fails to balance macro stabilization and debt sustainability; example: first announcing and then postponing the VAT rate increase.
- Lack of medium-term commitment, frequent mid-year supplementary budgets, and unclear priorities contribute to policy uncertainty.
- A 2009 multi-pronged reform effort (medium-term budgetary planning, program reviews, clear accounting standards, tax expenditure estimates) fell short and was subsequently reversed, failing to reduce Japan’s reputation for opacity.
- Japan is the only major advanced economy missing in a widely known survey of openness in budgetary practices covering more than one hundred countries worldwide.
- Consequences of fiscal opacity and weak credibility of monetary policy:
  - Inflation expectations and fiscal expectations are unanchored.
  - Households and enterprises display reluctance to consume and invest, contributing to stagnation.
  - Fiscal opacity can, at an extreme, contribute to sovereign debt crises.
- Demographic and financial pressures that threaten the current “life-support system”:
  - Labor force predicted to decline by one half between now and the 2080s.
  - Decline in saving from a rapidly aging population and increasing share of non-Ricardian households.
  - Pressure on institutional investors to search for higher yield securities.
  - Eventual tapering of monetary expansion and continued rise in public debt ratio.
- Long-run risk: Japan’s massive public debt may need to be financed increasingly from international markets, increasing exposure to a sudden stop and a debt crisis of extraordinary proportions.

### International experience with Independent Fiscal Institutions (IFI): statutes, structure, and remit
- IFIs are heterogeneous in statute, structure, and functions but cluster around a few types in advanced economies.
- Statutory basis:
  - Most IFIs established by law; some by decree; a few by constitutional provision.
  - A higher-grade law or constitutional status provides greater permanence and protection.
- Institutional affiliation:
  - IFIs are distributed between legislative and executive branches, with exceptions (e.g., France: court of audit).
  - In federal systems, IFI mandates may extend to subnational government finances.
- Leadership and staff:
  - Approximately one half of IFIs have monocratic leadership; the other half operate under collective councils.
  - Typical staff size in the overwhelming majority does not exceed 50 professionals and support personnel.
  - Staff composition: economists, budget specialists, lawyers, accountants.
- Remit and functions:
  - Common IFI functions: prepare estimates and forecasts of fiscal and macroeconomic consequences of the budget bill; prepare short- and medium-term no-policy-change projections as baselines; prepare long-term quantitative scenarios and sensitivity analyses; monitor compliance with fiscal rules; assess debt sustainability and fiscal risks.
  - IFIs disclose publicly all underlying data and methodology to assess government estimates and assumptions.
  - In some countries (Netherlands, UK), IFIs prepare official macro-fiscal projections for the forthcoming budget.
  - IFIs do not possess policymaking authority or legally binding enforcement power; governments and legislatures can ignore IFI evaluations.
  - Normative/advisory roles are exceptional and risk accusations of partisanship; thus, IFIs typically avoid prescriptive policy advice.

### Design options for an IFI in Japan
- Rationale:
  - Japan’s Prime Minister’s Council on Economic and Fiscal Policy and the Finance Ministry’s Fiscal System Council do not meet OECD Principles attributes; they perform advisory/analytical roles within the executive.
  - A dedicated IFI could address transparency, predictability, and credibility problems and help anchor expectations.
- Suggested functions and sequencing:
  - Immediate: prepare a medium-term macro-fiscal baseline (no policy change) to evaluate the realism of government projections and the annual budget bill.
  - Provide output gap estimates to derive real-time estimates of the structural (cyclically adjusted) budget balance and assess fiscal stance.
  - Periodically prepare long-term quantitative baseline scenarios to assess public debt sustainability, given large long-horizon adjustment needs with a rapidly aging population.
  - Complement baseline with risk assessment using sophisticated techniques over time.
  - At a later stage, shift responsibility for official medium-term macro-fiscal projections from the government to the IFI to guarantee impartiality and time consistency.
  - Consider costing each proposed mandatory expenditure or tax measure only after sufficient manpower is available; an alternative is to require government costing and have the IFI evaluate it.
  - Electoral platform evaluations, if solicited by parties, should be considered later due to resource demands.
- Statute, affiliation, and independence:
  - Create the IFI through informed debate and legislation with broad political consensus; avoid establishment by decree or along party lines.
  - Formal affiliation to the Diet or no affiliation at all is preferable to affiliation to the government to reduce risk of capture.
  - Enabling law should ensure de facto independence and jurisdiction over subnational governments and the rest of the public sector.
- Leadership and staffing:
  - Leadership can be individual or collective; aim for assessments based on impartial expert opinion.
  - A lean initial staff of some 50 professionals (mainly economists and budget specialists) could perform envisaged functions; staff would need to expand if coverage is extended and policy costing is undertaken.
- Functions to exclude:
  - Normative functions and advisory functions should be permanently excluded to preserve nonpartisanship and avoid the IFI being regarded as a political ally or decision-maker.

### Key conclusions and policy recommendations
- Core findings:
  - Japan exhibits persistent optimistic bias and opacity in fiscal policymaking, undermining credibility and anchoring of expectations.
  - Continuation of current practices risks further rise in the public debt-to-GDP ratio amid demographic decline and potential erosion of home bias in sovereign holdings.
  - An IFI, embedded in a broader reform of the fiscal framework with a medium-term perspective, could materially improve transparency, forecast credibility, and debt sustainability analysis.
- Recommended design principles for a Japanese IFI:
  - Enshrine the IFI in legislation backed by broad political consensus; ensure de facto independence.
  - Base the IFI’s remit on transparency, impartial macro-fiscal forecasting, debt sustainability analysis, monitoring compliance with medium-term goals, and evaluation of the government’s fiscal stance.
  - Avoid normative/advisory policymaking roles to safeguard nonpartisanship.
  - Ensure adequate technical staffing (initially around 50 professionals) and eventual coverage of the entire public sector, including subnational governments.
- Strategic importance:
  - Establishing an IFI would signal a regime shift toward improved fiscal governance, help anchor expectations, and support efforts to restore fiscal sustainability and reinvigorate economic growth.
  - Given Japan’s projected demographic and fiscal challenges—including a labor force predicted to decline by one half between now and the 2080s—failure to improve fiscal governance may doom efforts to restart sustained growth.

*Italicized source attribution: Excerpted from the supplied content of the IMF working paper PDF unit.*

### References

### _wp16156 - References

### Works on Fiscal Councils and Independent Fiscal Institutions
- Beetsma, R., and X. Debrun (2016) “Fiscal Councils: Rationale and Effectiveness” IMF Working Paper WP/16/86, April.
- Debrun, X. and M.S. Kumar (2007) “Fiscal Rules, Fiscal Councils and All That: Commitment Devices, Signalling Tools or Smokescreens?” in Fiscal Policy: Current Issues and Challenges, Banca d’Italia.
- International Monetary Fund (2013) “The Functions and Impact of Fiscal Councils,” July 16.
- Kopits, G., ed. (2013a) Restoring Public Debt Sustainability: The Role of Independent Fiscal Institutions, Oxford University Press.
- Kopits, G. (2013b) “A Minimalist Approach to Fiscal Oversight,” VoxEU, December 24.
- OECD (2013) Principles for Independent Fiscal Institutions, Paris, February 12. http://www.pbo-dpb.gc.ca/web/default/files/files/files/Revised%20IFI%20Principles_EN%20-%2013-Feb-13.pdf
- Rivlin, A. (2013) “Politics and Independent Analysis” in G. Kopits, ed., Restoring Public Debt Sustainability: The Role of Independent Fiscal Institutions, Oxford University Press.
- Wren-Lewis, S. (2013) “Comparing the Delegation of Monetary and Fiscal Policy” in G. Kopits, ed., Restoring Public Debt Sustainability: The Role of Independent Fiscal Institutions, Oxford University Press.
- Bos, F., and C. Teulings (2013) “Netherlands: Fostering Consensus on Fiscal Policy” in G. Kopits, ed., Restoring Public Debt Sustainability: The Role of Independent Fiscal Institutions, Oxford University Press.
- Budd, A. (2013) “Preface” in G. Kopits, ed., Restoring Public Debt Sustainability: The Role of Independent Fiscal Institutions, Oxford University Press.

### Japan: Fiscal Policy, Abenomics, and Political Economy
- Arslanalp, S., and D. Botman (2015) “Portfolio Rebalancing in Japan: Constraints and Implications for Quantitative Easing” IMF Working Paper WP/15/186, August.
- Ihori, T. (2014) “Fiscal Consolidation in the Political Economy in Japan” in T. Ihori and K. Terai, eds., Political Economy of Fiscal Consolidation in Japan, Springer Verlag.
- Harding, R. (2016) “Abenomics Opponents Pounce on Expected Sales Tax Delay,” Financial Times, May 31, p. 2.
- Tanaka, H. (2014a) “Economic and Financial Management under the Democratic Party of Japan (DPJ) Administration,” OECD Journal on Budgeting, Vol. 14, No. 1.
- Tanaka, H. (2014b) “Policy-Making Process and Relationships between Politicians and Bureaucrats in Japan,” Meiji Journal of Governance Studies, Vol. 2.
- Walker, W.C. (2002) “Ricardian Equivalence and Fiscal Policy Effectiveness in Japan” Asian Economic Journal, Vol. 16, No. 3.
- Werner, R.A. (2004) “Why has Fiscal Policy Disappointed in Japan? Revisiting the Pre-Keynesian View on the Ineffectiveness of Fiscal Policy” Sophia University, Tokyo, unpublished, January.
- Wright, M. (2002) Japan’s Fiscal Crisis: The Ministry of Finance and the Politics of Public Spending, 1975–2000, Oxford University Press.
- Krugman, P. (1998) “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap” Brookings Papers on Economic Activity, No. 2.

### Fiscal Transparency, Budget Agencies, and Forecasting
- International Budget Partnership (2015) Open Budget Survey 2015, Washington, DC.
- International Monetary Fund (2001) “Japan: Report on the Observance of Standards and Codes—Fiscal Transparency Module” IMF Country report No. 01/156, August.
- Joyce, P. (2011) The Congressional Budget Office: Honest Numbers, Power, and Policymaking, Georgetown University Press.
- Frankel, J.A. (2011) “Over-optimism in Forecasts by Official Budget Agencies and Its Implications,” Oxford Review of Economic Policy, vol. 27, no. 4.
- Reischauer, R.D. (1993) “CBO Testimony: Statement before the Subcommittee on Legislation and National Security, Committee on Government Operations, U.S. House of Representatives” Congressional Budget Office, May 13.

### Debt, Fiscal Sustainability, and Historical Perspectives
- Cecchetti, S. G., M. S. Mohanty, and F. Zampoli (2011) “Achieving Growth Amid Fiscal Imbalances: The Real Effects of Debt” in Achieving Maximum Long-Run Growth, Symposium sponsored by the Federal Reserve Bank of Kansas City.
- Kopits, G., B. Ferrarini, and A. Ramayandi (2016) “Exploring Risk-Adjusted Fiscal Sustainability Analysis for Asian Economies,” ADB Working Paper Series No. 483, May.
- Reinhart, C., and K. Rogoff (2009) This Time is Different: Eight Centuries of Financial Folly, Princeton University Press.
- Tanzi, V. (2013) Dollar, Euros and Debt: How We Got into the Fiscal Crisis and How We Get Out of It, Palgrave Macmillan.
- Puviani, A. (1903) Teoria della Illusione Finanziaria. Palermo, Laterza.

### Monetary-Fiscal Interactions and Macroeconomic Theory
- Leeper, E.M. (2010). “Monetary Science, Fiscal Alchemy” in Macroeconomic Challenges in the Decade Ahead, A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 26–28.
- Krugman, P. (1998) “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap” Brookings Papers on Economic Activity, No. 2.
- Schultze, C. (1989) “Of Wolves, Termites, and Pussycats” The Brookings Review, Summer.

### Other relevant works
- Kopits, G. (2013b) “A Minimalist Approach to Fiscal Oversight,” VoxEU, December 24.
- Joyces entry repeated? (Note: source lists Joyce, P. (2011) The Congressional Budget Office: Honest Numbers, Power, and Policymaking, Georgetown University Press — included above.)
- Repeated or thematic chapters within G. Kopits, ed., Restoring Public Debt Sustainability: The Role of Independent Fiscal Institutions, Oxford University Press (multiple entries listed above).

*References as listed in the source document.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp16156.pdf_