the-case-for-creating-a-fiscal-council

Context: The government can signal its virtue by establishing some new institutional mechanism for enforcing fiscal discipline, for example, a fiscal council.

Recovering from COVID-19

  • The government needs to bor­row more and spend more due to the unprecedented threat of COVID-19 in order to support vulnerable households and engineer economic recovery. 
  • However, this will mean a steep rise in debt which may jeopardize medium ­term growth prospects, an issue prominently flagged by all the rating agencies in their recent evaluations. 
    • It is possibly the fear of market penalties that is holding the government back from opening the money spigots.
  • Finding a balance:
    • Many economic experts argue that the government should spend more to stimulate the economy by borrowing as may be necessary.
    • But at the same time, it should come with a credible plan for fiscal consolidation post­-COVID-­19 in order to retain market confidence.

Non Efficient working of current system of fiscal responsibility

  • FRBM act,2003
    • The FRBM enjoins the government to conform to pre-set fiscal targets, and in the event of failure to do so, to explain the reasons for deviation.
    • However, the system is not working efficiently according to the requirement.
  • Fiscal Policy Strategy Statement’ (FPSS)
    • The government is also required to submit to Parliament a ‘Fiscal Policy Strategy Statement’ (FPSS) to demonstrate the credibility of its fiscal stance.
    • However, we have rarely heard an in depth discussion in Parliament on the government’s fiscal stance.
    • Ultimately, the submission of the FPSS often passes off without even much notice.

The idea of creating a fiscal council:

  • The suggestion of a fiscal council actually predates the current COVID-19 crisis
  • The idea was first recommended by the Thirteenth Finance Commission and was subsequently endorsed by the Fourteenth Finance Commission.
  • It was also endorsed by the FRBM (Fiscal Responsibility and Budget Management) Review Committee headed by N.K. Singh.

 

About Fiscal Council

  • At its core, it is a permanent agency with a mandate to independently assess the government’s fiscal plans and projections against parameters of macroeconomic sustainability.
    • It also puts out its findings in the public domain. 
  • The expectation is that such an open scrutiny will keep the government on the straight and narrow path of fiscal virtue and hold it to account for any default.
  • According to the International Monetary Fund (IMF), about 50 countries worldwide have established fiscal councils with varying degrees of success.
  • The fiscal council is said to be a solution to fiscal inefficiency because it will give an independent and expert assessment of the government’s fiscal stance, and thereby aid an informed debate in Parliament.
 

Mandate of fiscal council

  • As per the model suggested by the FRBM Review Committee the fiscal council’s mandate will include, but not be restricted to, 
    • Making multi year fiscal projections
    • Preparing fiscal sustainability analysis
    • Providing an independent assessment of the Central government’s fiscal performance and compliance with fiscal rules,
    • Recommending suitable changes to fiscal strategy to ensure consistency of the annual financial statement and taking steps to improve the quality of fiscal data, 
    • Producing an annual fiscal strategy report which will be released publicly.

 

Arguments against creating a fiscal council

  • Diluting credibility of the Finance Ministry and other institutions
    • The fiscal council will give macroeconomic forecasts which the Finance Ministry is expected to use for the budget.
    • Currently, both the Central Statistics Office (CSO) and the Reserve Bank of India (RBI) give forecasts of growth and other macroeconomic variables, along with a host of public, private, and international agencies.
    • Forcing the Finance Ministry to use someone else’s estimates will dilute its accountability. If the estimates go awry, it will simply shift the blame to the fiscal council.
  • Duplication of auditing work
    • There is already an institutional mechanism in the form of the Comptroller and Auditor General (CAG) audit to prevent the government from gaming the fiscal rules through creative accounting.
    • If the CAG mechanism has lost its teeth, then there is a need to fix that rather than creating another costly bureaucratic structure.

Way ahead

  • Starting in a small scale
    • If started on a small scale and it proves to be a positive experience then it can be implemented on a large scale basis.
  • Other innovative solutions by involving CAG
    • A week before the scheduled budget presentation the CAG could appoint a three ­member committee for a five week duration.
    • It could have a limited mandate of scrutinizing the budget after it is presented to Parliament for its fiscal stance and the integrity of the numbers, and give out a public report.
    • The Finance Ministry, the RBI, the CSO and the Niti Aayog can also each depute an officer to serve in the secretariat.
    • The CAG’s office will also provide the secretarial and logistic support to the committee from within its resources.

Bureaucratic expansion is a one-way street. It is wise to cross the river by feeling the stones.  

Source: TH

Image Source: National Interest