Balancing public welfare and fiscal responsibility

LAHORE: Public appeasement expenditures may be necessary in times of crisis, but they must be employed judiciously. In Pakistan, public appeasement policies are often designed to gain favour with the general population, typically by offering subsidies, welfare programmes, or benefits popular with voters. However, such measures are frequently unsustainable from a financial standpoint.

These policies tend to focus on short-term relief instead of long-term economic health and are usually implemented in response to political pressure, economic crises or as a means to bolster electoral support. While generally unsustainable, there are circumstances where public appeasement expenditures can be justified despite resource constraints. In cases of severe poverty, food insecurity or natural disasters, immediate relief is critical to maintaining social stability and preventing widespread suffering.

In periods of political or social instability, appeasement expenditures might be necessary to prevent unrest or violence. Similarly, during severe economic downturns, subsidies or direct financial support can stimulate demand, help avoid deeper recessions and mitigate job losses.

In extraordinary events like pandemics, significant spending on healthcare and social support may be essential, even if state resources are limited, as the cost of inaction could result in greater long-term damage to both lives and the economy.

Pakistan, which operates under a large fiscal deficit and faces high energy costs, must carefully balance social welfare and fiscal responsibility when determining the level of subsidies. Each rupee spent on subsidies, when financed by borrowing, increases the national debt, raises future repayment obligations and potentially risks financial instability. A thorough cost-benefit analysis of each subsidy in terms of social stability, economic productivity and political risk is crucial.

Unfortunately, wealthier segments in Pakistan often oppose cross-subsidies, which transfer costs to help the poor. Rather than providing blanket subsidies, targeting subsidies based on income levels or consumption patterns ensures that only the most vulnerable benefit, thereby reducing the overall cost to the government.

Subsidies should gradually be reduced in favour of structural reforms, such as investments in renewable energy and improvements in power sector efficiency. Over time, these reforms can make the system more affordable without the need for recurring subsidies.

In principle, energy prices should reflect the true cost of production to ensure the sustainability of the sector. However, passing the full cost onto the public, particularly lower-income groups, could lead to widespread dissatisfaction, increased poverty and potential social unrest.

One possible solution is cross-subsidization, where wealthier consumers or industries pay higher rates to allow subsidized tariffs for poorer households. Gradually adjusting tariffs to reflect true costs, coupled with measures to improve energy efficiency and reduce waste, can help ease the financial burden on the population while ensuring the power sector’s long-term viability.

Blanket subsidies on staple foods, though popular, are often inefficient and costly, particularly when they benefit those who can afford market prices. By providing blanket subsidies, resources that could be better directed towards the neediest are wasted on higher-income groups.

Targeting subsidies to low-income or vulnerable populations ensures that the government’s limited resources are allocated where they are most needed. This can be achieved through means-tested programmes or direct cash transfers, enabling the poor to purchase food at market prices.

Blanket subsidies are also prone to leakage and corruption, preventing benefits from reaching the intended recipients. A targeted approach helps reduce this risk while ensuring more effective use of government resources.