The right processes for a good budget

Live Mint, January 24, 2017

Pradeep S Mehta and Amol Kulkarni

A transparent policymaking process is necessary for taking the right decision and obtaining a buy-in from stakeholders

Decision making is a difficult ask, especially when the decision is going to affect millions. Politicians are in this profession, and are expected to make difficult choices almost every day. The presentation of the annual budget is one such important occasion wherein the Union finance minister is expected to lay out difficult choices while explaining the rationale in a manner which soothes those likely to be hurt.
The challenge that finance minister Arun Jaitley faces this time is far greater than any of the earlier occasions. Our economy is still grappling with the impact of demonetisation, while simultaneously being force-fed digital payments despite inadequate infrastructure. As if this double whammy on the domestic front was not enough, protectionist voices are globally gaining political mileage and threatening to disrupt the movement of people, capital, goods and services that we have grown accustomed to.
So what choices should Jaitley make to ensure India remains on the inclusive growth trajectory? A lot has been written pertaining to this, including by myself. Whatever decisions are taken in the budget, there will always be supporters and critics, both with strong hypotheses in favour of their arguments. Post-mortems of decisions are always easier than ex-ante assessments of the potential impacts that the decisions are likely to have. This is despite the fact that an ex-ante assessment is much more important than a post-facto assessment for an economy.

Good processes lead to good outcomes

To tackle the twin challenges of taking the right decision (which is often unpopular), and obtaining a buy-in from stakeholders, a transparent policymaking process is recommended. It involves publishing the different policy options and related costs and benefits in the public domain, and involving the stakeholders in decision making.
This is not just theory but has been put into practice by several governments. For instance, the UK publishes Tax Information and Impact Notes on proposed tax policy changes to provide a clear explanation of the policy objective together with the details of the tax impact on the exchequer, economy, individuals, businesses, civil society organizations—as well as any other specific area of impact. In addition, at least three months prior to the introduction of the Finance Bill, it publishes consolidated draft clauses for inclusion in the Finance Bill, for public comments. This provides taxpayers with more certainty, and a window for pre-legislative scrutiny. Details of public consultation along with government responses to suggestions are available for review in the public domain.

With every budget, the UK also publishes a comprehensive document on “Policy Costs” which sets out the assumptions and methodologies underlying costing for tax and annual expenditure of policy decisions having a fiscally significant impact on public finances. The document also explains the general methodology used to calculate the cost or yield of each government policy. A comprehensive document on “Data Sources” is also published to facilitate transparency, public scrutiny and accountability. Taking into account the concerns of the common man, another dedicated document the UK publishes relates to distributional analysis of the “Impact on Households” of the government’s tax, welfare and spending decisions.

The UK has also introduced several organization-level reforms to complement its process reforms. It has set up an Office of Tax Simplification (OTS) to provide advice on simplifying the UK tax system with the objective of reducing the compliance burden on both businesses and individual taxpayers. In addition, it has in place an Office for Budget Responsibility (OBR) to examine and report on the sustainability of public finances. While the OTS aids in the assessment of impact of policy proposals on households, the policy costs estimated by the government are reviewed and certified by the OBR.

Make a beginning

While adopting reforms as comprehensive as the UK will require significant preparation and resources, it is time the Indian government at least made a beginning. In almost all the pre-budget consultations with the finance minister over the past few years, I have argued for competition reforms, which includes the adoption of a Regulatory Impact Assessment (RIA)—similar to one of the ex-ante impact assessment process reforms adopted by the UK. Unfortunately, I have met with limited success.
I am not alone in calling for the adoption of RIA in India. Since 2011, almost every other high-level expert committee has made this suggestion. These include the Planning Commission’s working group on business regulatory framework, the Financial Sector Legislative Reforms Commission, the Damodaran committee and the Ajay Shankar committee, among others. Even the recently executed memorandum of understanding (MoU) between the UK and India on ease of doing business includes cooperation on RIA. I hope this MoU can be a catalyst for the government to take concrete steps for the adoption of RIA in the policymaking process.
It is time that a structured ex-ante assessment framework is integrated in the government decision-making process to ensure that right policy choices are made, to the extent possible. This will go a long way in ensuring that policy decisions are well-thought-out and impose minimum costs on the economy to achieve the desired policy objectives. We will be able to avoid knee-jerk reactions originating from the sub-optimal wisdom of a close coterie of government advisers. The country deserves this. Make the right choice, finance minister!

The authors work for CUTS International
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