The Conundrum of the Council

FULL TITLE: The Conundrum of the Council: Who is to Tailor the Fiscal Straitjacket?

With the necessity of fiscal discipline comes the need for austerity measures. Whether to leave such technical decisions to an elected politician or an appointed fiscal council, is not only a matter of accountability. This paper examines the importance of information for the institutional organization of fiscal responsibility. Specifically, I show that a more than advisory role for fiscal councils is often desirable, just because not only the information level of the institutions with respect to the optimal action matters. Specifically, a limited informedness of voters about the optimal fiscal policy results in politicians pandering to the public opinion. Consequently, if delegates have superior information, an appointed fiscal council is preferred. Only when voters are well-informed and delegates have weak office-holding motives, a representative democracy is preferred to set fiscal policy. Moreover, as the superior information of the delegates becomes more costly (i.e. the policy issue becomes more technical) pandering occurs more often, thereby making a fiscal council preferable more often. Finally, if only an advisory council is feasible, the funds attributed to such councils are found to be below the welfare optimizing level. Yet, an advisory council would increase welfare, either via better informed politicians or as a result of increased fiscal transparency.