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The Swedish Fiscal Policy Council (FPC) set up in 2007 is one example of the recent international trend to create independent fiscal watchdogs. The FPC has established itself as an important participant in the Swedish economic policy discussion. The FPC has small resources and a broad remit including employment, growth, income distribution and monitoring of how well the government explains its policies in addition to evaluation of fiscal policy. The reason why it can work is that the FPC acts as a complement to other institutions. The interaction between fiscal policy and other policy areas as well as the possibility to exploit the council's expertise in several areas are arguments in favour of the broad mandate, but at the same time there could be a risk that interest is diverted away from fiscal issues. The FPC's experiences illustrate the time inconsistency issues involved in establishing a fiscal council: a government has an incentive to create such a body as a signal that it will pursue responsible and rational policies, but it also has an incentive to constrain the council's activities once government policies are criticised

Major economic reforms have been carried through in Sweden during the last two decades. Most of the reforms have been made in response to long-standing rather than to acute problems. There has usually been a strong perception among economists, policy makers and the general public of the problems that the reforms have sought to address. Reforms in other countries have sometimes provided inspiration. Most of the reforms were based on a broad political consensus. A heavy input from economic research has often been used as a basis for change.

Pattern bargaining with the tradables (manufacturing) sector as wage leader is a common form of wage bargaining in Europe. We question the conventional wisdom that such bargaining produces wage restraint. In our model all forms of pattern bargaining give the same outcomes as uncoordinated bargaining under inflation targeting. Under monetary union wage leadership for the non-tradables sector is conducive to wage restraint, whereas wage leadership for the tradables sector is not. Comparison thinking may lead the follower to set the same wage as the leader. Such equilibria can arise when the leader sector is the smaller sector and promote high employment.

The paper analyses theoretically what role fiscal councils could play and surveys empirically the activities of existing councils. Case studies of the Swedish Fiscal Policy Council and the UK Office for Budget Responsibility are done. It is concluded that fiscal councils should be advisory, rather than decision-making, and work as complements, rather than substitutes, to fiscal rules. A key issue is the political fragility of fiscal councils and how their long-run viability should be secured. Three ways of guaranteeing their independence are suggested: (1) reputation-building; (2)formal national rules; and (3) international monitoring.

The paper analyses how independent fiscal watchdogs (fiscal policy councils) can strengthen the incentives for fiscal discipline. By increasing fiscal transparency they can raise the awareness of the long-run costs of current deficits and increase the reputational costs for governments of violating their fiscal rules. Councils that make also normative judgements, where fiscal policy is evaluated against the government's own pre-set objectives, are likely to be more influential than councils that do only positive analysis. To fulfil their role adequately, fiscal watchdogs should be granted independence in much the same way as central banks

EU-level fiscal rules have not been able to prevent the large-scale accumulation of government debt in many eurozone countries. One explanation was major flaws in the rules. Some of these flaws have now been corrected. But the failure of the rules depended also on fundamental problems of time inconsistency. The same time-inconsistency problems that the rules were designed to address also apply to the rules themselves. Fiscal councils may be subject to less of such problems than rules. Still it is unlikely that a monetary union where bail-outs of governments are part of the system is viable in the long run. The sustainability of the euro may require a restoration of the no-bail-out clause and a strengthening of the banking union in ways that would allow it to cope with the financial repercussions that could arise from allowing government bankruptcies.

The Swedish Fiscal Policy Council (FPC) set up in 2007 is one example of the recent international trend to create independent fiscal watchdogs. The FPC has established itself as an important participant in the Swedish economic policy discussion. The FPC has small resources and a broad remit including employment, growth, income distribution and monitoring of how well the government explains its policies in addition to evaluation of fiscal policy. The reason why it can work is that the FPC acts as a complement to other institutions. The interaction between fiscal policy and other policy areas as well as the possibility to exploit the council's expertise in several areas are arguments in favour of the broad mandate, but at the same time there could be a risk that interest is diverted away from fiscal issues. The FPC's experiences illustrate the time inconsistency issues involved in establishing a fiscal council: a government has an incentive to create such a body as a signal that it will pursue responsible and rational policies, but it also has an incentive to constrain the council's activities once government policies are criticised.