With the US economy plunging to new depths, the focus has swung back to Keynesian fiscal policy. George Bush has gone in for tax rebates as an “emergency stimulus package”. Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF),?supports?this move. He told the Financial Times that monetary policy may not be enough to curtail the present crisis. He gave two?reasons?for?this:?First,?rate?cuts may?not stimulate investment and spending as banks?which?are hurting with capital losses are being more cautious even with “normally low-risk assets”; and second, a slowdown might be “difficult to shake off” this time as US households need to rebuild their savings with housing and equity losses reducing their wealth.
Coming from the head of an organization that has browbeaten governments for decades into lowering fiscal deficits, this advice to governments in the West does seem paradoxical. But Strauss-Kahn is quick to point out that, having followed IMF advice over the years, governments now have better fiscal positions and hence some leg room. The space for accommodation will vary from country to country and such a policy has to be temporary, but is in his opinion unavoidable. His conclusion: “The global downturn can be short-lived and ultimately moderate if leading countries of the world understand the need for a sensible and well-timed policy response. And what is good for one country—a responsible combination of monetary and fiscal policy—will also be good for the world economy.”
So, what are the leading countries of the world doing? $150 billion in tax rebates have already been approved in the US Congress, and the US presented its first $3 trillion budget this year with a $410 billion deficit, just short of the record $413 billion in 2004. It looks unlikely that the stated aim of the US tax rebates, to boost consumer spending, will be met. A survey by the International Council of Shopping Centers and UBS Securities in the US last month showed that 46% would use their extra money to repay their debt, 28% would save it and 26% would spend it. Rather than tax rebates, it might have been better to give out vouchers to be redeemed against purchase of American goods.
In Britain, the chancellor of the exchequer has hinted at tax cuts in his coming budget. But high government spending and low tax revenues in a slowing economy have already led to a high deficit this year. In fact, the Institute for Fiscal Studies, a think tank, warns that taxes have to be hiked to bring the fisc back into shape and even a temporary fiscal accommodation would prove disastrous in the long run.
In Europe, as the world’s largest exporter since 2003, Germany is naturally concerned about the impact of the crisis and the dollar decline. Data so far shows healthy industrial production, though exports have dropped and the consensus is for a slowdown in growth, nothing as drastic as the US. While the German finance minister is intent on another balanced budget, in no mood to listen to tax cuts, some of his own party leaders favour more leeway. “When there is a winter storm raging out at sea, one has to take precautionary measures around the coast,” said Ludwig Stiegler, deputy floor leader, who wants the government to prepare a contingency budget as well, presenting the option of raising government borrowing and including subsidies and tax cuts.
Where does this leave India, where all eyes are now on the Budget, to be presented on 29 February? The economy is still doing well, but a slowdown in the world economy and a possible crisis ahead have to be factored into this Budget. Faced with elections, less than 9% growth and higher inflationary pressures, there are strong political compulsions to go in for higher expenditure, even as tax revenues can slow.
Unfortunately, even IMF in its current benevolent avatar would not recommend this for India. Higher revenues from a booming economy have been matched by higher expenditures. Subsidies are a leaking sieve. According to Planning Commission estimates, a rupee of budgetary subsidy is worth just 27 paise to the poor. Little thought has gone into changing the method of delivery. Vouchers or biometric smart cards to purchase goods that are currently being subsidized would be so much more efficient. What we need in India is more effective implementation, not a licence to raise spending and raise the deficit.
In fact, a fiscally acceptable solution will be politically acceptable if the government can show its commitment to efficiency, as the rewards from money reaching the intended beneficiaries will show up in improved growth opportunities. But this needs a new strategy from our political masters. Unequal growth leads to social tension and signs of that are rising every day around us. One wonders what will make them get the message. Maybe they should be made to listen to Bob Dylan when he sang, “He that gets hurt, will be he who has stalled. There’s a battle outside and its ragin’… For the times they are a-changin’.”
Sumita Kale is chief economist at Indicus Analytics. Comments are welcome at firstname.lastname@example.org