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Need for a fiscal council | Reasons after the pandemic

Fiscal councils

fiscal council

They  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.

OECD Journal defines a fiscal council as, “…a publicly funded entity staffed by non-elected professionals mandated to provide nonpartisan oversight of fiscal performance and/or advice and guidance — from either a positive or normative perspective — on key aspects of fiscal policy

Rationale for the creation of this office :

1. Reasons before the pandemic

  • There is a discontentment over the manner in which the centre is distributing money to the states under central sector schemes and centrally sponsored schemes.

    • The Centre had abolished the distinction between the Planned and Non-Planned Expenditure. The last plan i.e. 12th Plan (2012-17) has ended. So, now India does not have any plan or non-plan scheme but 300 central sectoral schemes and 30 centrally sponsored schemes.
  • As of now, the Expenditure Finance Committee (under the Ministry of Finance), is deciding about which states will get funds and in what manner. The states are not satisfied with the approach of allocation

Reasons after the pandemic :

  • The fiscal situation in India has been under severe stress even before COVID-19 and the novel coronavirus pandemic has only worsened it.
  • The fiscal deficit of the Centre in 2019-20 as estimated by the Controller General of Accounts (CGA) was 4.6%, 0.8 percentage point higher than the revised estimate.
  • For the current year, even without any additional fiscal stimulus, the deficit is estimated at about 7% of GDP as against 3.5% estimated in the Budget due to a sharp decline in revenues.
  • The consolidated deficit of the Union and States could be as high as 12% of GDP and the overall debt could go up to 85%. When off Budget liabilities are considered, the situation looks even more alarming.

    Therefore While the prevailing exceptional circumstance warrants public spending, it is necessary that the government must return to a credible fiscal consolidation path once the crisis gets over. For this, a fiscal council is the ideal way forward.

Other reasons include :

1. Besides large deficits and debt, there are questions in the Budgets regarding :

  • comprehensiveness, 
  • transparency 
  • Accountability.
  1. The practice of repeated postponement of targets, timely non-settlement of bill payments and off Budget financing to show lower deficits has been common.

    3. The report of the Comptroller and Auditor General (CAG) of India in 2018 on the compliance of the Fiscal Responsibility and Budget Management Act for 2016-17, highlights various obfuscations done to keep the liabilities hidden.

What should be the mandate of the fiscal council?

  • First, an unbiased report to Parliament helps to raise the level of debate and brings in greater transparency and accountability.
  • Second, costing of various policies and programmes can help to promote transparency over the political cycle to discourage populist shifts in fiscal policy and improve accountability.
  • Third, scientific estimates of the cost of programmes and assessment of forecasts could help in raising public awareness about their fiscal implications and make people understand the nature of budgetary constraint.
  • Finally, the Council will work as a conscience keeper in monitoring rule-based policies, and in raising awareness and the level of debate within and outside Parliament.
  • The important tasks of these IFIs include: independent analysis, review and monitoring and evaluating of government’s fiscal policies and programmes; developing or reviewing macroeconomic and/or budgetary projections; costing of budget and policy proposals and programmes; and presenting policy makers with alternative policy options.
  • Over the years, monitoring compliance with fiscal rules and costing policies and programmes have become major tasks of these councils.

Way ahead :

  • When the markets fail, governments have to intervene. What do we do when the governments fail?
  • It is here that we need systems and institutions to ensure checks and balances.
  • In that respect, a Fiscal Council is an important institution needed to complement the rule-based fiscal policy.
  • Of course, it is not a ‘silver bullet’; if there is no political will, the institution would be less effective, and if there is political will, there is no need for such an institution.
  • That is also true of the FRBM Act. While we cannot state that the FRBM Act has been an unqualified success, it has also not been an abject failure either.
  • The counterfactual will show that things would have been much worse without it, and it has helped to raise the awareness of government, legislators and the public at large.
  • Similarly, the Fiscal Council will help in improving comprehensiveness, transparency and accountability.