Context: The economic slowdown due to the COVID-19 has made it the dire need of the hour to have a fiscal council for a healthy, future foreseeing economic revival.
After effects of COVID-19 pandemic on the economy. The government need to borrow and spend more in order-

• To support vulnerable household
• To engineer economic recovery
• More borrowing mean a steep rise in debt which will jeopardize medium term growth prospects.

Issues with the previous institutional mechanisms

• The practice of repeated postponement of targets by government.
• Timely non-settlement of bill payments and off budget financing to show deficit.

About Fiscal Council

A. Recommendation-It was first recommended by the Thirteenth Finance Commission and was subsequently endorsed by the Fourteenth Finance Commission and then by the FRBM (Fiscal Responsibility and Budget Management) Review Committee headed by N.K. Singh.

B. Working of  Fiscal council

• Open Scrutiny: It provides an open scrutiny of government’s fiscal measures which keeps the government on the straight and narrow path of fiscal virtue and holds it to account for any default.
• Independent analysis: A fiscal council will give an independent and expert assessment of the government’s fiscal stance.
• Transparency and accountability: An unbiased report to Parliament will help to raise the level of debate. 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.
• Public awareness: 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.
• 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.

Current Global scenario

• According to the International Monetary Fund (IMF), about 50 countries around the world have established independent fiscal institution [IFIs]with varying degrees of success.

Role of IFIs: Independent analysis, review and monitoring and evaluating of government’s fiscal policies and programmes; developing or reviewing macroeconomic and/or budgetary projections; costing of budget and policy proposals and programmes; and presenting policy makers with alternative policy options.

• Macroeconomic sustainability: Countries with IFIs tend to have more accurate macroeconomic and budgetary forecasts.
• Example -In Belgium, the government is legally required to adopt the macroeconomic forecasts of the Federal Planning Bureau and this has significantly helped to reduce bias in these estimates.
• IFIs principles: The Organization for Economic Co-operation and Development [OECD] has recommended important principles needed for successful fiscal councils under following broad heads which are – independence, non-partisanship, transparency, and accountability.

Road Ahead

• Fiscal Council is an important institution needed to complement the rule-based fiscal policy and in its role as a watchdog, it will prevent the government from playing the fiscal rule through creative accounting. Fiscal Council will also help in improving comprehensiveness, transparency and accountability.