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Do we need Fiscal Council

Why In news?

The economic disruption caused by the pandemic brought the economy to a standstill. What is needed is government spending. But fear of the market has been holding the government back. It is against this backdrop the idea of Fiscal Council.

What is holding back government from spending

  • The government needs to borrow and spend to engineer economic recovery.
  • But that will mean exponential rise in debt and debt will harm medium-term growth prospects.
  • This is 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 more borrowing and spending.

Argument against government stance

  • Many argue that this is no time for restraint.
  • The government should spend more to stimulate the economy by borrowing as may be necessary.
  • At the same time come out with a credible plan for fiscal consolidation post-COVID-19 to retain market confidence.
  • So, here comes the suggestion of establishing some new institutional mechanism for enforcing fiscal discipline, and that institution is fiscal council.

The ideal of establishing Fiscal Council

  • The suggestion of a fiscal council actually predates the current crisis. It was first recommended by the Thirteenth Finance Commission.
  • The idea was subsequently endorsed by the Fourteenth Finance Commission and then by the FRBM Review Committee headed by N.K. Singh.
  • According to the International Monetary Fund (IMF), about 50 countries around the world have established fiscal councils with varying degrees of success.
  • Fiscal Council in these countries is permanent agency with a mandate to independently assess the government’s fiscal plans.
  • It also gives projections against parameters of macroeconomic sustainability and put out its findings in the public domain.

Councils Mandate

  • As per 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.
    • Taking steps to improve quality of fiscal data, producing an annual fiscal strategy report which will be released publicly.

Argument against Fiscal Council

1) Lack of demand for accountability

  • The government is required to submit to Parliament a ‘Fiscal Policy Strategy Statement’ (FPSS) to demonstrate the credibility of its fiscal stance.
  • The problem clearly is the lack of demand for accountability.
  • So, another instrumentality such as a fiscal council for the supply of accountability cannot be a solution.

2) Adding more to noise than signal

  • The fiscal council will give macroeconomic forecasts for the budget, and if the Ministry decides to differ it is required to explain why it has differed.
  • Both the Central Statistics Office (CSO) and the RBI give forecasts of growth and other macroeconomic variables, as do a host of public, private and international agencies.

Why should there be a presumption that the fiscal council’s forecasts are any more credible or robust than others?

  • It should be better to leave it to the Finance Ministry to defend its numbers rather than forcing it to privilege the estimates of one specific agency.
  • Besides, 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.

3) Issues with the role as watchdog

  • Another argument made in support of a fiscal council is that in its role as a watchdog.
  • It is said that it will prevent the government from gaming the fiscal rules through creative accounting.
  • But there is already an institutional mechanism by way of the Comptroller and Auditor General (CAG) audit to check that.

Way forward

  • The way forward could be to start small and scale it up if it proves to be a positive experience.
  • A week before the scheduled budget presentation, let the CAG, appoint a three-member committee for a five-week duration.
  • The committee should have the 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 committee will be wound up after submitting its report leaving no scope for any mission creep.

Conclusion

Adding one more bureaucratic institution to ensure fiscal would not help. Following the existing framework could ensure the same.

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September 2022
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