Measuring the impact of independent fiscal councils and fiscal rules on GDP growth forecasts

The 2008 global financial crisis revealed the existence of high fiscal risks and weaknesses in the public finance management process. In order to overcome these weaknesses, allocate resources efficiently, and strengthen the credibility of fiscal policy and fiscal sustainability, especially developed economies have established independent fiscal councils and started to implement fiscal rules to increase the reliability of the forecasts that form the basis of medium-term programs. In this study, the effects of independent fiscal councils and fiscal rules on GDP growth forecasts are aimed to be determined. The institutional forms of the financial councils of the countries involved in the empirical research are mentioned. For this purpose, firstly, the conceptual framework for the public financial management reform and the medium-term expenditure system (MTEF) has been put forward. Fiscal rules and independent fiscal councils playing a role in reinforcing MTEFs have been introduced. In the study, the effects of independent fiscal councils and fiscal rules on GDP growth forecast error are investigated with nine different models using the system Generalized Method of Moments (GMM) for 23 economies over the period 2009-2019. The result shows that it was concluded that all of the fiscal rules were effective in reducing the GDP estimation error, and among these rules, the borrowing rule, the expenditure rule, and the budget balance rule were the most effective in reducing the GDP growth forecast error, respectively. In addition, the effect of the financial councils, which have forecasting authority or evaluating of ex-ante forecasts, on the forecast error has been examined and it has been concluded that the financial councils are effective in increasing the accuracy of the forecasts. The study ends with recommendations for the improvement of the public financial management system in Turkey.