DP12181 The political economy of fiscal transparency and independent fiscal councils
This paper demonstrates that an increase in fiscal transparency is frequently, but not always, beneficial to society. To this end, we build a model in which voters care about both competence and congruence (e.g. ideology) of policymakers. They obtain imperfect information about the competence of the candidates, the state of the economy and the level of public debt chosen by the incumbent. More transparency makes the signals about these three variables more precise. Public debt is excessive because policymakers are both “partisan”, i.e. they spend more now because they may lose office, and “opportunistic”, i.e. they spend more now to appear more competent vis-à-vis the electorate. We formally show that more transparency about public debt is irrelevant for the debt choice and thus welfare, while more transparency about the economic state is always less preferred by voters and the incumbent than more transparency about competence is. The latter is always supported by voters and the incumbent when the incumbent does not hold too large an electoral advantage. For the case in which he does have a substantial electoral advantage, no unequivocal formal results are obtained and we resort to numerical analysis. These reveal that the incumbent is then frequently against raising transparency about competence, while the voter may or may not be in favor, but is always more so than the incumbent is. Our analysis arguably yields some implications for independent fiscal councils (IFCs), nowadays a popular instrument for raising fiscal transparency: (i) establishing an IFC can only lower the debt bias if voters care sufficiently about policymakers’ competence; (ii) not all political environments are conducive to the emergence of IFCs; and (iii) IFCs are vulnerable to shifts in political conditions.