Budget process needs greater credibility

ECONOMIC SURVEY 2004-05/ FISCAL TARGETS

The increasing share of the revenue deficit in the fiscal deficit distinctly reveals the deterioration in the quality of expenditure.

Describing the performance of central finances during the first nine months of the current year as "not very encouraging", the Economic Survey for 2004-05 today said the increasing share of the revenue deficit in the fiscal deficit distinctly revealed a deterioration in the quality of expenditure.

"Fiscal consolidation has remained intractable despite initiatives of successive Budgets at reducing deficits, primarily because of lack of accountability in fiscal marksmanship. The outlook on the fiscal front very much depends on how the credibility of the budgetary process is enhanced," the survey said.

It noted that the share of the revenue deficit in the fiscal deficit had risen from 49.4 per cent in 1990-91 to 78 per cent in 2003-04, which was sought to be reversed in 2004-05 by targeting a lower revenue deficit of 2.5 per cent of the GDP in the Budget estimate. The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, has become effective year.

As proportions of the Budget estimates, the fiscal and revenue deficits at 65.7 and 82.7 per cent, respectively, during the first nine months of the current year, were higher than the 60.2 per cent and 65 per cent observed in the corresponding period last year, the survey said.

"Sustaining the reforms process in tax and expenditure regimes is a sine quo non for achieving the targets set under the FRBM Act. The tax base needs to be widened through an increase in the share of services in tax revenues, removal of exemptions that do not conform to the established principles to tax policy and an enforcement mechanism that is non-discretionary, transparent and effective," the survey said.

It also suggested that higher tax revenues had to be realised not through increasing tax rates, but through innovative changes in policies, procedures, laws and dispute settlement mechanisms that would help overcome problems associated with the present complex system.

"Given the near-stagnant tax-GDP ratio in the last few years because of tax restructuring, the task appears daunting, but not impossible," the survey said, adding that medium-term adherence to FRBM targets, given the limitations of expenditure compression, critically hinged on the success in raising the ratio.

The government has targeted front-loading the fiscal reforms programme by aiming to reduce fiscal deficit by 0.4 percentage points to 4.4 per cent during the current fiscal year against the FRBM target of 0.3 percentage point annual reduction.

Similarly, the government is targeting to reduce revenue deficit to 2.5 per cent in 2004-05 compared with 3.6 per cent last year when it is mandated to reduce it by 0.5 percentage points.