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July 9, 2019

Of, by and for the moneylenders


July 9, 2019

As Karl Marx wrote: “The ideas of the ruling class are, in any age, the ruling ideas” (‘The German Ideology’, 1845). Today, as the ruling class of global and domestic moneylenders is coercing the government to extract yet another pound of the people’s flesh, the ruling ideas on what ails the economy and what must be done are: (1) mistake the budget for the economy; and (2) misdiagnose “the roots of our budget crises” (as explained in my article in these pages on September 21, 2018).

This misdirected dominant narrative about ‘the Economy’ is that: the people avoid the government (non-filers, undocumented economy), so only a few pay taxes (low ‘tax-GDP’ ratio). Of revenues collected, the federation has to transfer the bulk to the provinces (NFC Award). Consequently, despite routinely delaying payments due (circular debt), the government spends more than it can afford (budget deficit). To compound matters, it is incompetent (limited institutional capacity), unable to control spending (fiscal indiscipline), and inept in managing public assets (state enterprise losses).

This leads naturally to ‘the mushroom strategy’ of public management: keep the people in the dark, feed them excrement and expect them to produce like mad.

The dominant narrative is disturbing. One, it reveals a disconnect between the government’s perspective and both popular perceptions and economic realities. Two, in selecting the ‘budget’ deficit as the main ‘economic’ problem, it mistakes a tactical front (the budget) for the theatre of operations (the economy, on which the war is being lost). Three, in restricting the choice of weapons to revenues and expenditures, it reduces the prospects of victory. Finally, by ignoring the fact that moneylenders – especially domestic moneylenders – have the government pinned down in a debt trap, it fatally misreads the battlefield terrain.

To strengthen the budget, the correct sequence should be exactly the opposite. The government should: (1) reduce expenditures; (2) eliminate unnecessary borrowing (by cancelling, for example, the $918 million just borrowed from the World Bank to eliminate corruption in taxation: ask the government to turn a key in a lock and they will borrow from the World Bank to pay for advice and help on how to do it); and (3) strengthen the economy to increase revenues.

The economy is much more than governments and budgets. It comprises people – who earn wages, profits and rents, besides interest, while producing, reproducing, consuming, investing, exporting, importing, and paying taxes. Besides jobs, money and policy support, they want security, justice, freedom and dignity: at home, in the workplace and in public spaces. Without their prosperity, political participation and loyalty, governments will always be short of cash and will end up borrowing the nation into slavery. The economy – not the budget – is where durable solutions lie. Policymakers’ silence on this is deafening.

But what of the dominant narrative’s view of the government’s financial difficulties? With apologies for the barbarism, this requires a brief lapse into numbers.

Avoiding billions, trillions and decimals, for clarity: Of every Rs100 that you and I are budgeted to pay the federal government in 2019-20 (as tax and non-tax revenues; Rs6.7t, 15.3 percent of GDP), it will transfer half (Rs49) to provincial governments and keep half (Rs51) itself. Yet, with only Rs51 in hand, it will spend Rs106 – to pay interest on past borrowing of Rs43 (Rs38 to domestic and Rs5 to foreign moneylenders); and meet expenses of government of Rs63 (Rs17 on defence, and Rs14 on development) – leaving nothing to spend on job creation, health, education and welfare. To spend Rs106, the government will borrow Rs55 more: half (Rs27) from foreigners and half (Rs28) from domestic sources – both net of principal repayments (Rs18 to foreigners). These numbers summarise the federation’s budgetary predicament quite comprehensively.

They tell us six things. One, that moneylenders are the main beneficiaries of government spending (receiving Rs61 of Rs100 in revenues). Two, that it is domestic – not foreign – moneylenders who collect the lion’s share of interest payments by government – which are considerably (20 percent) more than spending on even defence and development combined. These moneylenders are mainly rich citizens, not foreigners, who buy interest-bearing government bonds and bills through special bank accounts. Three, given its dire financial predicament, the government’s inessential establishment expenses are far too high.

Four, that the government is sinking deeper and deeper into debt – borrowing to service debt. Five, that operating without any plan or strategy (relying on markets, under IMF tutelage, for the last 30 years), the government is caught in a vicious circle: Its policy interventions lower incentives to invest, produce and export; in turn, lowering tax-paying and export capacity, then requiring more tax-price interventions, further deteriorating incentives, in a never-ending spiral. Six, neither the government nor the IMF have any credible, long-term programme to revive the economy.

Unrealistic to begin with, these budget figures – which will be significantly worse due to devaluation and increases in interest rates – do not support the dominant narrative. The people’s counter-narrative would be that the government, culturally, socially and politically alienated from ordinary people, bound by no constitution or law, has become both a debt collection agent for the moneylending oligarchy and itself a debt-addicted tyrant. Yet, it has borrowed too much. So, business-as-usual is no longer an option.

Anyone can tell the cabinet huddled in Islamabad: You can’t support a habit of Rs106 on an income of Rs51. Also, that if after selling your family wares (‘privatisation’) you are still in hock to the loan sharks, your life (‘national security’), liberty (‘sovereignty’) and wealth (‘state-owned assets’) are in danger. And anyone will laugh wryly if you tell them that this is “the last IMF loan” you will take.

What is the solution? After the 1953 uprising in East Germany, Bertolt Brecht wrote a famous poem (Die Lösung, ‘The Solution’):

“After the uprising of the 17th of June, the secretary of the Writers’ Union had leaflets distributed in the Stalinallee stating that the people had forfeited the confidence of the government and could win it back only by redoubled efforts. Would it not be easier in that case for the government to dissolve the people and elect another?”

Governments, Brecht seemed to be saying, can either serve a people, or go rule another.

The writer is a retired economist.

Email: [email protected]