- One of the most sought after details in any Union Budget is the level of fiscal deficit. As such, it is keenly watched by rating agencies — both inside and outside the country. That is why most governments want to restrict their fiscal deficit to a respectable number.
- One of the ways to do this is by resorting to “off-budget borrowings”.
- Such borrowings are a way for the Centre to finance its expenditures while keeping the debt off the books — so that it is not counted in the calculation of fiscal deficit
What is the fiscal deficit?
Off-budget borrowings are loans that are taken not by the Centre directly, but by another public institution which borrows on the directions of the central government. Such borrowings are used to fulfil the government’s expenditure needs.
But since the liability of the loan is not formally on the Centre, the loan is not included in the national fiscal deficit. This helps keep the country’s fiscal deficit within acceptable limits.
Why is it Problematic?
- Even though the borrowing and spending is outside the budget, it has implications for the budget and for all practical reasons should be included in that document.
- Since it’s not, this doesn’t reflect on the fiscal deficit number as well.
- Governments across the world use this to escape budget controls.
Implications of Off-budget financing
- Off-budget financing by its nature isn’t taken into account when calculating fiscal indicators.
- But the cost is borne by the budget through some mechanism or the other.
- Such financing tends to hide the actual extent of government spending, borrowings and debt and increase the interest burden.
- In the above example, the borrowing by the SPV should ideally be included in the government’s debt.
- To the extent that this spending is backed by a government guarantee, it entails a fiscal risk.
- Hence, Parliamentary control on such spending is also reduced as its remains outside the budget.
CAG favors a Policy for Disclosure
- In order to address these issues, CAG said the government should consider putting in place a policy framework for off-budget financing.
- The framework should specify the rationale and objective of off-budget financing, quantum of off-budget financing and sources of fund, among others.
- CAG further said the government should also consider disclosing the details of off- budget borrowings through disclosure statements in Budget as well as in accounts.
What is the fiscal deficit?
It is essentially the gap between what the central government spends and what it earns. In other words, it is the level of borrowings by the Union government. This fiscal deficit is the most important metric to understand the financial health of any government’s finances.