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News: Recently, the Union Minister of State for Finance in a written reply to the Parliament ruled out setting up of a fiscal council, which was recommended by the FRBM Review Committee.
It was reasoned that, there are institutions that already perform some or all of the proposed functions of the Fiscal Council. For example, the Comptroller and Auditor General (CAG), National Statistical Commission and the Finance Commission.
However, this article argues the need for institutionalising Fiscal council and its consequent benefits.
What are the functions of the fiscal council?
The 15th Finance Commission has listed a number of functions for the Fiscal Council, which are
One, providing multi-year macro-economic and fiscal forecasts.
Two, evaluating fiscal performances vis-à-vis targets across all levels of government.
Three, assessing the appropriateness and consistency of fiscal targets in the states.
Four, undertake an independent assessment of long-term fiscal sustainability.
Five, assessing fiscal policy statements by governments under fiscal responsibility legislations.
Six, advising on the conditions for using escape clauses under fiscal responsibility legislations.
Seven, policy costing of new measures with significant fiscal implications.
Eight, providing analytical support to the Finance Commissions and publishing all their reports and underlying methodologies. FRBM mechanism hasn’t delivered.
Why Setting up of the fiscal council is important?
International Experience: 30 developed and emerging market economies have found it necessary to have such an institution. For example, Congressional Budget Office in the US, Office of Budget Responsibility in the UK, Parliamentary Budget Office in Australia.
Recommended by the 15th Finance Commission: it has argued that setting up a Fiscal Council is an essential part of the 21st century fiscal architecture.
Further, it has stated that the absence of an independent fiscal institution to assess and evaluate the fiscal plan as well as performance and forecasts published by the governments has further diminished the capacity to monitor compliance.
Case studies by the IMF and OECD: It has confirmed that independent fiscal institutions effectively complements fiscal rules in monitoring their effective implementation and have contributed to improved fiscal performances.
Work of Fiscal council is different from the work of other institutions: For example, institutions like CAG or the Statistical Commission or the Finance Commission does ex-post analysis. Whereas the Fiscal council does Budgetary forecasts to evaluate the realism of the budget estimates, and monitor progress and conformity to fiscal rules.
Fiscal Council will enhance the effectiveness of the FRBM process. The FRBM process as it exists now has several shortcomings.
For example, failure to achieve the fiscal targets, lack of credibility on budgets due to shifting goal posts, creative accounting, creating new concepts such as effective revenue deficit, off-budget financing of expenditures etc.,
Other advantages
It will safeguard against government failure.
It helps to bring in an additional layer of legislative scrutiny, raise public awareness and makes the system more comprehensive and transparent.
Source: This post is based on the article “Why India Needs A Fiscal Council” published in ToI on 10th Jan 2022.
