Do we need a fiscal council?

BUDGET/ ECONOMY/ GOVERNANCE

Topic: General Studies 2 and 3:

Statutory, regulatory and various quasi-judicial bodies

Government Budgeting

Context: Former RBI Governor D. Subbarao gives his opinion on whether Fiscal Council is needed or not

The government needs to borrow and spend more now in order

Challenges with respect to increasing borrowings

A steep rise in debt will jeopardise medium-term growth prospects
Loss of inter-generational equity: Increased borrowing increases interest burden on future generation and reduces their capability to borrow
Possible downgrading of Sovereign ratings which may lead to slowdown of foreign investments in country
Inflation in near term
Loss of market confidence due to government’s fiscal irresponsibility

How to increase borrowing while still retaining market confidence?

Government has to come out with a credible plan for fiscal consolidation post-COVID-19 in order to retain market confidence. 
The government can signal its virtue by establishing some new institutional mechanism for enforcing fiscal discipline, such as for example a fiscal council

About Fiscal Council

It was first recommended by the 13th Finance Commission and was subsequently endorsed by the 14th Finance Commission and then by FRBM (Fiscal Responsibility and Budget Management) Review Committee headed by N.K. Singh.
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
It will then put out its findings in the public domain. 
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.

It will give an independent and expert assessment of the government’s fiscal stance, and thereby aid an informed debate in Parliament.

What will be the mandate/functions of Fiscal Council?

The fiscal council’s mandate will include

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.

Challenges w.r.t to Fiscal Council

Back in 2003 when FRBM was enshrined into law, it was thought of as the magic cure for fiscal ills.
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
The government is also required to submit to Parliament a ‘Fiscal Policy Strategy Statement’ (FPSS) to demonstrate the credibility of its fiscal stance

However, there is lack of in-depth discussion in Parliament on fiscal stance and the submission of the FPSS often passes off without even much notice.

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.
Besides, forcing the Finance Ministry to use someone else’s estimates will dilute its accountability.

If the estimates go wrong, Finance Ministry will simply shift the blame to the fiscal council.

As of now, both the Central Statistics Office (CSO) and RBI give forecasts of growth and other macroeconomic variables, questions will be raised about need for Fiscal Council’s projections
Another argument made in support of a fiscal council is that it will act as watchdog & prevent the government from gaming the fiscal rules through creative accounting.

However, there is already an institutional mechanism in form of CAG to do the job of auditing & fiscal watchdog of government spending

Way Ahead- Starting with small steps

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
The committee will scrutinise government’s 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

Connecting the dots