Do we need a fiscal council?

Do we need a fiscal council?

Fiscal means related to government expenditures and receipts

Council means an advisory, deliberative, or administrative body 

Issues with the present system

• We have a chronic problem of fiscal irresponsibility (Government overstates revenue projections and understate expenditures). 
• There is always a concern with the credibility of the budget numbers. The finance ministry’s overall record in forecasting projections has been consistently poor under successive finance ministers. Generally, they will overestimate GDP and growth figures to disguise that everything is good in the economy.
• The over-ambitious revenue targets combined with the lack of transparency in tax administration lead overzealous taxmen to resort to unwarranted methods to meet unrealistic targets.
• Manipulation of the budget figures by use of ‘off-budget’ entries and deferring payments of FCI (and other bodies) to manage the government’s books.

A 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 and put out its findings in the public domain. The expectation is that such open scrutiny will keep the government on the straight and narrow path of fiscal virtue and hold it to account for any default. The fiscal council would provide forecasts and advise the government on whether conditions exist for deviation from the mandated fiscal rules. The council will also provide an independent assessment of budget proposals.

The following are various points against and favor of an independent fiscal council.

• Against: The 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.
• As of now, both the NSO 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? Why not leave it to the Finance Ministry to do its homework and 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.
• Favor: Countries with independent fiscal councils tend to produce relatively more accurate budget forecasts and stick better to fiscal rules, research suggests.
• While most of the fiscal council projections are not biding but can discipline lawmakers through ‘comply or explain’ obligations—which entail governments to at least explain why they diverge from the fiscal council’s views.
• Against: The FRBM Act 2003 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 for the coming year. Yet, seldom have we heard an in-depth discussion in Parliament on the government’s fiscal stance; in fact, the submission of the FPSS often passes off without even much notice. If the problem clearly is a lack of demand for accountability, how will another instrumentality such as a fiscal council for the supply of accountability be a solution? 
• Favor: But it can be argued that a fiscal council will in fact be a solution because it will give an independent and expert assessment of the government’s fiscal stance, and thereby aid an informed debate in Parliament.
• Against: In its role as a watchdog, it will prevent the government from gaming the fiscal rules through creative accounting (manipulation). But there is already an institutional mechanism by way of the Comptroller and Auditor General (CAG) audit to check that. If that mechanism has lost its teeth, then fix that rather than creating another costly bureaucratic structure. 
• Favor: But it is also true that CAG audits the accounts once the government has done with the expenditures and it has no role in forecasting and verifying the sustainability of the budget numbers.

According to the International Monetary Fund (IMF), about 50 countries around the world have established fiscal councils with varying degrees of success.