the 1990s, legal restraints on government fiscal behaviour became something
of an international fashion. As in much else in the world at the moment,
this fashion was set by the United States, where in the mid-1980s the
Balanced Budget and Emerging Deficit Control Act (Gramm-Rudman-Hollings
Act) required a steady decline in the federal government's deficit
to zero within a stipulated and fairly short time frame.
a provision is of course extreme by any standards (although some countries
have pursued balanced budget policies without legal stipulation) and
few other countries have opted for such an extreme measure. In any case,
the special circumstances of the United States, which have allowed its
economy to expand despite the more conservative fiscal stance, on the
basis of large private investment-savings deficits financed by the rest
of the world's savings, could not be replicated elsewhere. This
meant that governments putting such firm constraints on fiscal policy
would have to reckon with the possibility of deep and severe recession/deflation
as a corollary to such fiscal conservatism.
other such legislation as has taken place elsewhere has generally been
more circumspect, allowing a little more flexibility to governments
and emphasising that deficits can change over the course of the cycle
in any case. Even the IMF, long one of the most vociferous opponents
of large government deficits, increasingly recognises that fixed and
rigid limits are neither feasible nor desirable and has recently allowed
quite large deficits in some countries under its supervision.
in some countries, most strikingly in the European Union, there have
been similar, and self-imposed, restrictive constraints on fiscal policy
in the 1990s. The Stability and Growth Pact, which was part of the Maastricht
Treaty, declared that there should be a limit of 3 per cent for the
total fiscal deficit to GDP ratio and a limit of 60 per cent for the
public debt to GDP ratio. This was also made a condition for joining
the European Monetary Union in January 1999. Just before that, it was
interesting to see how suddenly a number of countries that had been
showing much higher levels of the government deficit to GDP ratio (such
as Italy, France and Germany) managed to get to the required level.
There is more than a suspicion of widespread "creative accounting"
that allowed this sudden decline in these countries.
urge to have legal limits on government deficits and public debt is
one that has stemmed from the greater political clout of finance in
all these countries, as the financial groups that benefited from government
borrowing also sought safeguards to make sure that these debts were
sustainable and would be repaid. It is still very much the fear of adverse
investor reaction, which would be most severely expressed by open capital
flight, which dominantly drives the obsession to contain fiscal deficits
across the world.
the fashion for regulating the extent of government deficit and public
debt by law is one that is already rather passť. Suddenly, even in the
centres of the developed world, and certainly among the countries of
Europe, the virtues of government deficits in spurring growth and employment,
creating important infrastructure and smoothing business cycles, are
being rediscovered. And more and more developing countries are recognising
that, while finance capital may desire and welcome such legally determined
restraint, it is something that goes very much against the material
interests of the majority of citizens.
trouble is that our own economists and policy makers in India have tended
to retain some of the more simplistic and actually wrong ideas even
when much of the rest of the world has already discovered how problematic
they are. What else can explain this government's urge to table
a Parliamentary bill on "fiscal responsibility" that would
incorporate some of the more restrictive features of such laws in other
countries, and even go beyond them in setting conditions with highly
is true that financial interests in India and abroad have been proposing
such legislation for some time, although even they may have been surprised
at the alacrity and zealousness with which their cause has been taken
up by the government. The background to the present proposed bill, and
its theoretical justification, come from the Report of the Committee
on Fiscal Responsibility Legislation, set up with the then Expenditure
Secretary as its Chairman, which was submitted in July 2000.