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Freebies work in the short term & aren’t really free
2 min read.Updated: 17 Feb 2020, 11:03 PM ISTPuja Mehra
There is no such thing as a freebie in economics because ultimately somebody has to bear the cost of the supposedly free giveaways
CAG’s financial audit for 2013-18 concluded that Delhi has no debt sustainability issues as its GSDP grew faster than its public debt
The Aam Aadmi Party’s win in the Delhi elections has inspired others to replicate its strategy. The West Bengal government’s last full budget before state polls proposed free electricity for quarterly consumption of up to 75 units. Mint explains the economics of freebies.
What’s the economics of freebies?
There is no such thing as a freebie in economics because ultimately somebody has to bear the cost of the supposedly free giveaways. The concept is popularly known as There’s No Such Thing as a Free Lunch, which is the name of a book by Nobel Prize-winning economist Milton Friedman, who showed that everything has to be paid for by taxes if not today or tomorrow, then the day after. When governments dole out gifts, citizens have to pay for them. It isn’t always the rich who pay. Often the poor pay for the gifts, as governments collect taxes on everything from matchboxes to diamonds.
The Aam Aadmi Party (AAP) government provides free bus rides for women, free electricity for up to 200 units consumed and subsidies for up to 400 units, free water for up to 20,000 litres a month, full school fee waiver for children of very poor families, free Wi-Fi, free pilgrimage for senior citizens and waiver of development charges for new water and sewer connections. It offers free treatment, medicines and test facilities in mohalla clinics and free surgeries at empanelled hospitals. The government also bears the expenditure for the treatment of victims of road accidents and fire mishaps.
Why is the AAP government relying on freebies?
Ahead of the assembly elections, Delhi chief minister and AAP convener Arvind Kejriwal wrote in a Twitter post that limited freebies make more money available to the poor sections of society and boost demand. “However, it should be done in such limits so that no extra taxes have to be imposed and it does not lead to budget deficits".
Are the AAP govt’s freebies sound policy?
Free and good quality healthcare and education are considered sound economics as the benefits are not limited to those receiving them directly, but extend to society. These are also services where the market typically fails. Free power and water up to certain levels of consumption act as incentives for devising techniques of meter tampering and theft. The AAP government hasn’t raised taxes or borrowed to pay for the freebies. That’s because Delhi’s finances have been healthy since Sheila Dikshit was chief minister.
Is the AAP model of freebies sustainable?
CAG’s financial audit for 2013-18 concluded that Delhi has no debt sustainability issues as its GSDP grew faster than its public debt. RBI’s state finances report says Delhi could have spent ₹20,142 crore more this year and still not exceeded the fiscal deficit limit. Other states lack this buffer. Much of Delhi’s fiscal space is a result of a revenue surplus and narrow fiscal deficit. While the revenue surplus is narrowing with each passing year, the fiscal deficit is growing.