ABSTRACT
This chapter argues that institutional reform of the fiscal decision-making process can overcome the problems. It explains the creation of an independent national fiscal council (NFC) to carry out this task in individual countries. Decisions about the total size of the public sector and the distribution of spending and taxes would remain under the government's authority. The NFC's role would be to improve the quality of the fiscal policy decisions of congress and the executive branch. Proposal is an extension of recent literature showing that certain budgetary procedures—those that invest in agenda-setting, monitoring and enforcement powers with the finance minister, for example—yield superior fiscal policy outcomes. Empirical evidence for both European countries and Latin America strongly supports this argument. There is evidence suggesting that fiscal policy in Latin America suffers from procyclicality. Rigid fiscal rules are insufficiently flexible for shock-prone Latin American economies. In Latin America, procedural reforms, effectively applied by a national fiscal council, would have the same effect.
