Should there be any Limits to Fiscal Transparency?

This article is published in association with IMF.

Richard Allen

Of course there should be, but they are usually ignored. Obvious examples are the potential liability of government in legal cases, or the maximum tolerable wage increase in negotiations with labor unions. There is also a question of potential information overload.  The Open Data Charter for example lists over 30 data sources for corruption alone. Who can process such huge amounts of data, or select what is relevant? An infinite (or at least a very large) number of fiscal issues (and let’s limit the story to fiscal issues) combined with an even larger number of citizens makes for a huge number of potential fiscal beneficiaries. This creates demands for fiscal information that in practice are impossible to satisfy.

The story on transparency can also conflict with our ideas of representative democracy. We have parliaments to represent citizens and parliamentary committees to deal with just these sorts of issues. But parliaments are no longer relied on or trusted to do this job. Can citizens or the groups that represent them be trusted more? Twenty or thirty years ago, the World Bank poured money into parliaments to help support their oversight functions. Why are parliaments now largely ignored?

Ministers of finance are overwhelmed with calls from development agencies and the international community to support financial causes with global appeal. These include green finance, environmentally friendly infrastructure, gender related budgeting, tagging (particularly in relation to green budgets) and others. At the same time, they are besieged by requests – supported at least passively by the IMF and the World Bank – for more transparent fiscal information. This does not only include budget issues but other fiscal areas such as public sector balance sheets, revenue targets and public debt statistics.

What should be the response to these pressures? A cynic might say that historically there were two main replies:

1.  Ignore the requests for information. Pay lip service to the demands. Make token concessions under the rubric “of course I’m a busy person, but I do what I can”.

2.  Drown the public in fiscal information until they turn away in sheer frustration. This was the attitude of the finance minister (Chancellor of the Exchequer) of the UK when I was his Press Secretary in the late 1980s. If people replied: “But what does this information – these hundreds of pages of figures that you sent me – actually mean?” the answer was “Well that’s another question, why don’t you work that out for yourself?” Response 2 is therefore much the same in practice as Response 1.

We now live in the 2020s, of course, and finance ministers are expected to be more helpful, at least on the face of it! But some of the excesses of transparency should be put to rest.

A primary target is public participation in fiscal issues. A lot of decisions on budgetary matters and wider issues involving debt, taxes and borrowing take place behind closed doors, in the confines of the finance minister’s office. This is where such discussions should remain. Civil servants cannot be and should not be expected to provide impartial advice under the spotlight of public scrutiny. A review of current arrangements should be carried out, and recommendations made on what areas are on- or off-limits for the purposes of public scrutiny.

Second, a serious study is long overdue on the limits of participatory budgeting. Does its main value lie in local decisions about where to locate a new school, a health clinic, or a water desalination plant? Does it add any real value to macro decisions taken by the finance minister or the cabinet on fiscal rules or expenditure ceilings set for line ministries? To what extent should such decisions be regarded as confidential to the Executive? To what extent should they be regarded as the prerogative of parliament? These are difficult but important questions, answers to which may vary according to a country’s constitution and its administrative rules and culture.

Third, what has been the impact of the fiscal councils set up by many advanced countries and some emerging markets? The best of these institutions (the UK’s OBR for example) supply real value to the fiscal debate, and some have removed important functions (such as macro forecasting) from the finance ministry. But has this resulted in tangible economic benefit, for example, significant improvement in fiscal sustainability? Some of the most fiscally responsible countries – with forms of government we might not particularly like – do not have fiscal councils. Strong fiscal policy by itself is not enough to ensure sustainability. Is there therefore a role for these institutions in less developed countries, given that the required skills and capacities are considerable and may deplete those in the finance ministry and the central bank?

Fourth, can work be refocused on the fiscal and budgetary work of parliaments, to see whether these functions can be revived? For example, should a Public Accounts Committee or a Parliamentary Commission be established to evaluate the costs and benefits of a disputed climate-related infrastructure project or a high-speed train?

Underlying this debate appears to be a deep distrust of core fiscal institutions in developing countries. But why should we have faith in the unrepresentative institutions set up to replace them? Would a better approach not start with rebuilding the fiscal institutions of government, commencing with the finance ministry?