Why does India need a fiscal council?
What is a Fiscal council?
- Fiscal councils are independent public institutions aimed at strengthening commitments to sustainable public finances through various functions, including public assessments of fiscal plans and performance, and the evaluation or provision of macroeconomic and budgetary forecasts.
Mandate of fiscal council:
- As per FRBM Review Committee model, the fiscal council’s mandate will include,
- 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 quality of fiscal data, producing an annual fiscal strategy report which will be released publicly.
- A fiscal council, at its core, is a permanent agency with a mandate to independently assess the government’s fiscal plans and projections against parameters of macroeconomic sustainability, and put 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 around the world have established fiscal councils with varying degrees of success.
Why do we need a fiscal council now?
- We do have a chronic problem of fiscal irresponsibility.
- An IMF working paper published last year showed that the presence of an independent fiscal council tends to boost accuracy of fiscal projections even as it helps countries stick to fiscal rules better.
- The government should spend more to stimulate the COVID-19 induced falling economy by borrowing without jeopardising medium term growth prospects for which an institution like fiscal council is necessary.
Expert Committee recommendations on fiscal council
- In 2017, the N.K. Singh committee on the review of fiscal rules set up by the finance ministry suggested the creation of an independent fiscal council that would provide forecasts and advise the government on whether conditions exist for deviation from the mandated fiscal rules.
- In 2018, the D.K. Srivastava committee on fiscal statistics established by the National Statistical Commission (NSC) also suggested the establishment of a fiscal council that could co-ordinate with all levels of government to provide harmonized fiscal statistics across governmental levels and provide an annual assessment of overall public sector borrowing requirements.
- These recommendations follow similar recommendations from the 13th and 14th finance commissions, which also advocated the establishment of independent fiscal agencies to review the government’s adherence to fiscal rules, and to provide independent assessments of budget proposals.
Arguments against fiscal council:
Lack of demand for accountability
- The FRBM which was enshrined into law in 2003 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.
- The government is also required to submit to Parliament a ‘Fiscal Policy Strategy Statement’ (FPSS) to demonstrate the credibility of its fiscal stance.
- Yet, an in-depth discussion in Parliament on the government’s fiscal stance and submission of FPSS rarely occurred.
- The problem clearly is lack of demand for accountability, for which we need an elaborate permanent body with an extensive mandate for supply of accountability remains questionable.
Adds more noise than to signal
- The fiscal council will give macroeconomic forecasts which the Finance Ministry is expected to use for the budget, and if the Ministry decides to differ from those estimates, it is required to explain why it has differed.
- Forcing the Finance Ministry to use someone else’s estimates will dilute its accountability.
Undermined role of CAG
- An institutional mechanism by way of the Comptroller and Auditor General (CAG) audit can help check government from gaming the fiscal rules through creative accounting.
- This means that there lies no need to create a separate institution to carry out this function.
- Despite arguments against creation of a fiscal council, a fiscal council will indeed add value definitely. Then the way forward is to start small and scale it up if it proves to be a positive experience. The author suggests the following low cost and reversible start-up.
- A week before the scheduled budget presentation, let the CAG, a constitutional authority, appoint a three-member committee for a five-week duration with a limited mandate of scrutinising 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 CAG’s office will provide the secretarial and logistic support to the committee from within its resources.
- The Finance Ministry, the RBI, the CSO and the Niti Aayog will each depute an officer to serve in the secretariat.
- The committee will be wound up after submitting its report leaving no scope for any mission creep.
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