Do we need a fiscal council?

Present Economic priority for the government: 

It Needs to borrow and spend more now in order – To support vulnerable households, Engineer economic recovery

Limitations with respect to increasing borrowings 

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

Balancing between increased borrowing and market confidence:  

  • Government has to come out with a credible plan for fiscal consolidation post-COVID-19 in order to retain market confidence. 
  • Creating a new institutional mechanism for enforcing fiscal discipline can help.

New Institution- 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 is a permanent body with an objective of independently studying the government’s fiscal plans and projections against parameters of macroeconomic sustainability 
  • This will be followed up with public scrutiny and discussions.
  • 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.

As per model suggested by the FRBM Review Committee the fiscal council’s mandate will include, but not be restricted to,

  1. Making multi-year fiscal projections.
  2. Preparing fiscal sustainability analysis.
  3. Providing an independent assessment of the Central government’s fiscal performance and compliance with fiscal rules.
  4. Recommending suitable changes to fiscal strategy to ensure consistency of the annual financial statement.
  5. 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.
  • Yet, seldom have we heard an in-depth discussion in Parliament on the government’s 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.