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.
- 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.
Image Source: National Interest