Need for independent fiscal authority

ACCORDING TO press reports, it is certain that the Government will introduce the Fiscal Responsibility Bill in the current monsoon session of Parliament. The provocation for this is the long-felt need for fiscal discipline, which has acquired urgency in the last five years due to enormous growth in expenditures, increasing budget deficits, rising market borrowings and mounting stock of public debt. Notwithstanding the fact that fiscal consolidation is an important element of economic reforms adopted in 1991, large fiscal deficits persist, debt build up continues and interest burden accelerates revenue deficits. In the result, serious doubts are cast on fiscal sustainability and macro- stability.

This situation is compounded by some qualitative factors. There is lack of integrity in budgeting, which is reflected in wide variations as between budget estimates and revised estimates and as between revised estimates and actuals. There is also lack of transparency in accounting procedures. More importantly, scrutiny and control of the budget by Parliament are not effective and this makes the Government less accountable to Parliament. The most recent example of Parliament's indifference is the manner in which the Budget for 2000-2001 was passed without discussion and debate.

Objectives

The official text of the proposed Fiscal Responsibility Bill (FRB) not being available, important features of the bill presented here are based on press reports that emanated in recent months. The objectives of the bill are: to cap Government expenditure, Government borrowing and fiscal deficits; to bring about fiscal discipline through legislation; to keep the fiscal deficit at a reasonable level every year so that fiscal consolidation is achieved over the long-term; and to provide institutional mechanism to ensure that fiscal deficits do not go beyond the budgeted limits.

The operational aspects of the bill are equally important and these are listed here to the extent available. A budget law needs to be put in place to cover budgetary as well as extra budgetary activities. The latter should be subjected to strict scrutiny. Taxation should be under the authority of law and administration of tax laws should be subject to procedural safeguards. Priority setting should be part of the budgetary process to ensure fiscal transparency. Revenue deficits should be brought down within a time-frame. Revenue and expenditure should be projected over a three year time frame. Most important is the requirement to report to Parliament so that the responsibility is fixed on the Government for the commitments made in the budget.

Institutional mechanism

No details are available regarding the kind of institution that will be put in place to implement the provisions and achieve the objectives of the bill. The requirement in the bill that fiscal developments have to be reported regularly to Parliament - implies that the core of the mechanism would be Parliament.

Choosing the appropriate institutional mechanism is crucial to the successful implementation of the Fiscal Responsibility Act (FRA). The FRA is concerned not merely with deficits and debt; it goes well beyond these and covers many other aspects of fiscal policy. If one goes by the experience of New Zealand, which has pioneered this path-breaking legislation, the FRA seeks to entrench sound fiscal principles into a law and makes it difficult for governments of the day to deviate from them. The FRA is a unique legal document that puts in place a framework for fiscal objectives and prudence, fiscal transparency by providing information and policy documents, preparedness to deal with conflict of interests and obstacles in implementation, monitoring government actions in relation to the objectives, establishing credibility about government finances; statutory accountability and above all, penalty for non-compliance.

The crucial question is whether all these objectives can be met by the existing institutions concerned with government finances, namely, Parliament or its committees, Comptroller and Auditor General and the Ministry of Finance. Parliament being supreme, it is legitimate and justified if a special committee is appointed by the set-up to implement the FRA. However, it would be odd and illogical to ask the legislative authority (or its committee) to implement its own Act.

Parliament, by its very nature and the timing of its sittings, is least suited to attend to the day to day developments in fiscal administration under the FRA. It is well-known that it takes ages to get Parliament's approval for changes and modifications when required. This would add to lags in implementation and thus reduce the flexibility and effectiveness expected of the FRA. More important, Parliament is a political institution and it would be very difficult to insulate it from political pressures to achieve short term gains, which would create distortions.

The office of the Comptroller and Auditor-General of India (CAG), though a constitutional body, is much less suited to perform the tasks envisaged under the FRA. The CAG is designed specially to audit the finances of the governments - Union and State. Its functions are essentially in the nature of post-mortem analysis, though it can claim considerable experience in accounting standards. However, the CAG does not have the expertise required for achieving the objectives of the FRA, particularly, in such areas as evolving fiscal policy rules, making projections of receipts and expenditure over the medium term, evolving parameters for fiscal corrections, that is, adjustments in taxes and expenditures and establishing rules for resolving conflicts of interest.

As for the role of the Government, specially the Ministry of Finance, the purposes of the FRA would be better served if the Finance Ministry is not in the picture. The reasons are obvious. The widening gap between promise and performance of the Government over the years, in almost all areas of fiscal policy and operations has lowered considerably the credibility of the Government. In this situation, to entrust the task of implementing the FRA would only cast doubts on the intentions and sincerity of the Government.

Fiscal fudging is one of the well-known `virtues' of the Government and this would not go well with the objectives of the FRA. Instances are not wanting to show that often the Government attempts to cover up or to escape public scrutiny of its performance or to meet political opposition by circumventing the laws or its own rules. To cap it all is the attitude of the bureaucracy which believes in opaqueness, in retaining greater discretionary powers for itself and in maintaining status quo as far as possible. In these circumstances, merely having the FRA without enforcing strict discipline on fiscal administration would be pointless.

Implementing such a vital legislation as the FRA calls for a high level of commitment, fresh and unbiased approach, openness and public accountability. This would require a new institutional mechanism that would be outside the purview of political and bureaucratic influences. The new institutional mechanism suggested here may be called Independent Fiscal Authority (IFA). It would be a quasi-autonomous body like the monetary authority of a country, that is, the central bank. It is not a super- legislature or super executive. On the contrary, the IFA would be free to function and take decisions without political or bureaucratic interference, once the broad parameters of fiscal policy are laid down by Parliament in terms of the FRA.

Independence of the authority

Parliament would determine the long-term goals for size of the welfare state, structure of tax revenues, pattern of expenditures, size of national debt and long-term levels for budget deficits. The IFA would formulate medium term policy for implementation. It would make adjustments in taxes and expenditures to correct deviations (course corrections) or in response to developments in the economy, without the need for parliamentary approval. This arrangement would reduce the lags in fiscal policy, make the policy flexible and effective, without eroding the supremacy of Parliament.

The IFA would have the powers to: provide reliable information on the whole range of fiscal matters; make available policy documents; call for data and information from the ministries; establish accounting principles and practices; prepare forecasts; publish performance audits and report to Parliament any non- compliance with fiscal responsibility.

The independent character of the IFA would be a reality if some provisions are built into the FRA. The IFA should be headed by an eminent public personality who would be appointed by the President on the recommen dation of Parliament. He should hold office at the pleasure of the President and should complete his term of five years without any threat of political pressures and influences.

The head of the IFA would be assisted by a committee of five full-time members, who would also be appointed by the President for a period of five years; and this team would consist of an eminent economist, a statistician/econometrician, a Chartered Accountant of eminence, a financial expert and a specialist in management to evolve internal procedures and to build an efficient management information system to facilitate quicker flow of data on essentials. The IFA would have a modest and compact secretariat, not the typical unwieldy and slow-moving Government department.

An important feature of the independence of the IFA would be its privilege to have direct access to Parliament. Apart from making quarterly reports (based on its monitoring) to Parliament, the IFA would make a personal presentation of its actions explaining what it has done and why. This would be analogous to the periodic presentations made by the Chairman of the U.S. Federal Reserve before the House Banking Committee of the Congress. The IFA would also publish its quarterly reports and its presentations to Parliament, to create public awareness of its role as an organisation with qualities of sincerity, commitment and integrity.

Any institutional mechanism short of the one outlined here would not achieve the objectives envisaged under the FRA. Otherwise, the FRA would remain one more legislation on paper, given the propensity among Indian politicians and bureaucrats to honour the laws more in their breach than in their observance.

T. K. Velayudham

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