Poverty and the budget

Low economic growth, resulting from contractionary fiscal stabilisation policies, is a serious issue – but it is far overshadowed by debilitating poverty and unemployment.

An unemployment rate of 4.5 percent out of a labour force of 74 million (ILO 2019-20), with an annual addition of 1.1 million, will translate into 5.2 million being unemployed by next year. IMF unemployment estimates of 5.1 percent projected onto 2021-22, show unemployment of 7.125 million. The average of ILO and IMF estimates works out to 6.25 million, or 8 percent of the labour force being out of work.

But the more alarming aspect of the economy is the very high incidence of poverty. The poverty rate was nearly 31.3 percent in 2017-18 (WB/H Pasha) or in absolute terms 69 million lived below the poverty line. By 2020-21, due to growth lagging population increase, an additional 19 million persons were added, enhancing poverty levels to 40 percent. It is safe to assume that, due to growth keeping a bare 1.4 percent above population growth, depressed by food inflation ranging between 16 and 18 percent, poverty levels in absolute terms may be 100-105 million or 45-48 percent.

The budgetary policy aims at not further increasing poverty. But the fiscal strategy does not address squarely reversing the massive levels of impoverishment and unemployment occasioned by the unabated pursuit of an IMF-led stabilisation agenda leading to steep recession. While enlarged PSDP and Ehsaas outlays may contain poverty from increasing, no dedicated, focussed strategy, with fixed targets, is invoked to reduce the cumulative, harsh impact of poverty and unemployment.

Budget 2021-22 aims at increasing GDP from 3.9 percent to 4.8 percent, by resource diversion towards the profit-earning sectors through reduced import tariffs on raw materials and machinery, tax exemptions, incentives to construction and agriculture sectors and reduction in capital gains tax from 15 percent to 12.5 percent. An increment of roughly one percent in GDP, or approximately Rs5 trillion, would divide into shares of roughly Rs4.50 million gains in per capita incomes of about 5 percent of the top profit-makers, whereas the wages of the bottom nearly 48 percent are likely to increase from Rs17670 pm to Rs18800 pm, or just equal to the poverty line, adjusted for inflation, of Rs18340 pm.

The expanded PSDP and Ehsaas outlays totalling Rs400 billion, with 10 percent salary increases, are unlikely to assuage the plight of nearly 48 percent of the population living below the poverty line. Perceptions about poverty reflect the reality of people’s actual living experience. The French market research survey company IPSOS Consumer Confidence Survey, June 2021, showed that whereas 95 percent of the population evinced ignorance about such terms as GDP, budget deficit or current account, 70-80 percent people considered high prices, particularly food prices and utility costs, as the main problems impacting their livelihoods.

Keynesian economics, translated into a practical agenda for resolving problems of acute recession, high unemployment and wide-ranging poverty – such as in the Great Depression of the US – had conclusively shown the inadequacy of the free market and were merely growth-led strategies to provide a way out, without resort to large, deficit financed, public sector works programmes or other interventions. Thus, while the enlarged PDSP size of Rs900 billion and Ehsaas outlay of Rs260 billion are well intentioned, they do not measure up to resolving the sheer size and magnitude of the existential poverty and unemployment crisis.

What is required is an exclusive Unemployment and Poverty Alleviation Programme of Rs1 trillion investing in quick yielding public works like roads, bridges, rural electrification, railway rehabilitation, watercourses and canal reconstruction etc.

Extraordinary situations warrant special unconventional remedies. To finance the programme, Rs250 billion may be diverted from the PSDP, Rs250 billion from the provincial ADPs, on a pro-rata basis, and an additional deficit financing of Rs500 billion. The increase in the deficit by one percent should be self-correcting through increase in consumption-led growth, accentuated through the ‘multiplier effect’. The IMF should not have serious reservations regarding a self-correcting and self-compensating mechanism that reduces poverty, enhances growth and restores deficit levels to targeted figures of 6 percent or even lower. The reduction in PSDP/ ADPs sizes will merely replace one with another more quick-yielding programme of public works, while safeguarding ongoing projects. Furthermore, an enhanced, temporary deficit should not pose any increase in default risk, since the programme will be completely rupee financed.

Poverty reduction is closely affiliated with both growth in the agriculture sector as well as reduction in the regional disparities of poverty distribution. The proposed loaning facility to the agriculture sector should be indexed to the size of land holdings to obviate disproportionate appropriation of the facility by big landowners. Besides, the relative regional inequality in poverty spread may also be factored into the public works programme.

At the time of the US Great Depression, the orthodoxy of the affluent and classical economists greatly doubted the ability of government investments in a programme of public works to induce growth by placing cash into the hands of the unemployed and the poor. They were to be proved wrong principally by Keynesianism. The massive public sector New Deal programme, financed through deficit financing, led to monumental levels of US growth during 1934, 1935 and 1936 – of 10.8 percent, 8.9 percent and 12.9 percent, respectively. Unemployment reduced from 30 percent to 10 percent or from 11.5 million to 1.4 million.

During the last three years, the adoption of a highly austere, front-loaded IMF stabilisation programme, dictated by an adverse foreign account situation, has led to serious stagflation, with sharp increase in poverty and unemployment.

The surest way out of this crisis is to ‘kick-start’ the economy through a massive programme of public works so that poverty is reduced from 48 percent to 20 percent and unemployment curtailed from 8 percent to about 3-4 percent. Besides setting the ‘virtuous cycle’ into motion, reduction in widespread poverty and unemployment will lead to improved social stability and cohesion.

The writer is a freelance contributor.