From UPSC perspective, the following things are important :
Prelims level : Idea of fiscal council
Mains level : Paper 2- Fiscal Council
The newscard highlights the need of bipartisan, independent Fiscal Council to report and analyse FRBM discrepancies by the Government.
Try this question for mains:
Q.Fiscal Council is an important institution needed to complement the rule-based fiscal policy. Discuss.
What is a Fiscal Council?
- A Fiscal Council is an independent fiscal institution (IFI) with a mandate to promote stable and sustainable public finances.
- They aim 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.
- These institutions assist in calibrating sustainable fiscal policy by making an objective and scientific analysis.
Voices for a Fiscal Council
- The 13th Finance Commission recommended that a committee be appointed by the Ministry of Finance which should eventually transform itself into a Fiscal Council.
- The FC expected it to conduct an annual independent public review of FRBM compliance, including a review of the fiscal impact of policy decisions.
- The FRBM Review Committee too made a similar recommendation underlining the need for an independent review by the Finance Ministry appointing the Council.
Why need a fiscal council?
- 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%.
- Thus it is necessary that the government must return to a credible fiscal consolidation path once the crisis gets over.
- Besides large deficits and debt, there are questions of comprehensiveness, transparency and accountability in the Budgets.
- The practice of repeated postponement of targets, timely non-settlement of bill payments and off Budget financing to show lower deficits has been common.
- The report of the CAG of India in 2018 has highlighted various advances done to keep the liabilities hidden.
Fiscal Council can be a game changer. How?
- First, an unbiased report to Parliament helps to raise the level of debate and brings in greater transparency and accountability.
- Secondly, 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.
Issues meddling between
- The problem is that a Council created by the Finance Ministry and reporting to it can hardly be expected to be independent.
Diverse role to play ahead
- According to the IMF, there were 36 countries with IFIs in 2014 and more have been established since.
- While most of the IFIs are in advanced countries, emerging economies too have also shown growing interest in them.
- Although their common agenda has been to function as watchdogs, there is considerable diversity in their structure and functions.
- Over the years, monitoring compliance with fiscal rules and costing policies and programmes have become major tasks of these councils.
- When the markets fail, governments have to intervene.
- Whenever governments seem obstructed, 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.