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Fiscal Council

  Jul 30, 2020

Fiscal Council

Q. What is a fiscal council?

A. Fiscal councils 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.

Fiscal councils are now part of the institutional fiscal apparatus of over 50 countries, including several emerging and developing economies.

Q. What is its composition and how should they function? (Recommendations by 14th FC)

A. The 14th Finance Commission recommended that an independent Fiscal Council should be established through an amendment to the FRBM Act, by inserting a new Section mandating the establishment of an independent Fiscal Council to undertake ex ante assessment of budget proposals and to ensure their consistency with fiscal policy and Rules.

Q. To whom would council report?

A. The council is supposed to be appointed by, and report to, Parliament and should have its own budget.

The functions of the council include ex ante evaluation of the fiscal implications of the budget proposals which includes evaluation of how real the forecasts are and their consistency with the fiscal rules and estimating the cost of various proposals made in the budget.

The ex post evaluation and monitoring of the budget was left to the CAG.

Q. Why India needs a fiscal council?

A .Various cesses and surcharges are becoming disproportionate proportion of overall divisible revenue. There should be some mechanism to ensure that the basic spirit of the devolution process should not be undercut by clever financial engineering or taking recourse to traditions.

There is a need for coordination between the finance commission as well as the GST Council. GST Council has no clue of what the Finance Commission is doing and Finance Commission has even lesser clue of what the GST Council is doing.

Also, for state government liabilities, Article 293 (3) provides a constitutional check over borrowings. But there is no such restriction on the Centre.

Therefore, it is time to have an alternative institutional mechanism like Fiscal Council to enforce fiscal rules and keep a check on Centre’s fiscal consolidation.

Q. How COVID 19 pandemic has made it more relevant?

A. The government needs to borrow and spend more now in order to support vulnerable households and engineer economic recovery.

But that will mean a steep rise in debt which will jeopardise medium-term growth prospects, an issue prominently flagged by all the rating agencies in the recent evaluations.

Q. What are expert committee recommendations on fiscal council?

A. In India, two expert committees have advocated the institution of such a council in recent years.

In 2017, the N.K. Singh committee on the review of fiscal rules set up by the finance ministry suggested the creation of an independent fiscal council that would provide forecasts and advise the government on whether conditions exist for deviation from the mandated fiscal rules.

In 2018, the D.K. Srivastava committee on fiscal statistics-established by the National Statistical Commission (NSC) also suggested the establishment of a fiscal council that could co-ordinate with all levels of government to provide harmonised fiscal statistics across governmental levels and provide an annual assessment of overall public sector borrowing requirements.

These recommendations follow similar recommendations from the 13th and 14th finance commissions, which also advocated the establishment of independent fiscal agencies to review the government’s adherence to fiscal rules, and to provide independent assessments of budget proposals.