Austerity

Most of our problems are political in nature, not economic. The IMF programme just by itself is not going to be enough. Question: why do we have 34 ministries, 48 divisions and hundreds of attached departments at the federal level? Answer: Because it is politically expedient to have 34 federal ministers. In the post-18th Amendment era, to have 34 ministries, 48 divisions and hundreds of attached departments at the federal level has nothing to do with economics – it's all political. All we really need at the federal level is five ministries: finance, foreign, communications, defense and revenue.

Now there’s no way out but strict government austerity. Austerity is all about managing government finances. The government must reduce the budget deficit. And, the government must reduce public debt levels. There are two types of austerity measures: expenditure-based and tax-based. The IMF favours tax-based austerity measures. I am totally against tax-based austerity measures – and I am all for expenditure-based austerity.

There are two types of expenditure-based austerity measures-current expenditure based and development expenditure based. I am totally against development expenditure based austerity – and I am all for current expenditure based austerity. I am totally against tax-based austerity measures because of three reasons. First, they exacerbate inequality and widen the gap between the rich and the poor. Second, they harm economic growth by making it harder for businesses to succeed. Third, they are mostly ineffective as they lead to reduced tax revenue as the economy weakens.

Our federal government must control its stream of expenditures – there’s just no other way out. Whether the IMF says so or not, our budget drafters must generate a primary fiscal surplus (which is a situation in which the government’s revenues exceed its expenditures, excluding interest payments). Whether the IMF says so or not, our government must reduce the size of the public sector – it is in our own national interest. Whether the IMF says so or not, our government must privatize the profusely bleeding SOEs – it is in our own interest. Whether the IMF says so or not, the government must control the multi-billion rupee losses in the electricity and the gas sectors.

Government austerity does three things. One, it restores market confidence. Two, it reduces borrowing costs. Three, it promotes long-term fiscal sustainability. Yes, there is a direct connection between government austerity and enhanced economic performance. In the 1990s, the government of Canada implemented significant austerity measures to reduce its budget deficit – and that led to an improved fiscal position and a period of sustained economic growth. In Ireland, after the global financial crisis of 2008, the government undertook strict austerity measures that restored investor confidence and stabilized the economy.

The federal government doles out Rs6 trillion for ‘general public service’ every year. These ‘general public services’ must be rationalized. The federal government doles out Rs1 trillion worth of ‘grants’ every year. These ‘grants’ must be rationalized. The federal government doles out Rs664 billion worth of ‘subsidies’ every year. These ‘subsidies’ must be rationalized. The federal government doles out Rs553 billion to ‘run the civil government’. This ‘running of the civil government’ must be rationalized.

The writer is a columnist based in Islamabad. He tweets @saleemfarrukh and can be reached at: farrukh15@hotmail.com