Austerity and reforms
Government spending must be balanced with reform-backed optimal utilization of limited resources
Last year, while announcing economic packages to revive the Covid-hit economy, the Ministry of Finance had also issued instructions on austerity. The directions included discouragement of celebrating foundation days, review of appointments of consultants in various departments and, ban on creation of new posts in ministries and departments. The idea was to save resources from being wasted on non-developmental expenditures and instead focus on spending in key sectors like agriculture and infrastructure. Austerity is always relevant as it prevents wasteful or extravagant use of public money. The measures can be exhaustive. Ban on purchase of vehicles, furniture, carpets, computers, unnecessary air travel by officials, hosting meetings in five-star hotels etc. can save huge expenditure in the long run, and austerity drive, in a wider perspective acts as a deterrent against irresponsible spending. As the jingle goes in the power sector 'energy saved is energy produced', we may well echo the same by saying 'money saved is money earned'.
The age of austerity descended soon after the economic meltdown in 2008 and the impact was visibly felt in India too, at least in air travel, where cold snacks have replaced free meals in the long duration flights. Many nations have implemented austerity measures, especially as stipulated in IMF loans. When Italy's public debt crossed 120 per cent of its GDP, the government announced a three-year freeze on public salaries. Besides, only 20 per cent recruitments of vacancies, cuts in pensions, an increase in healthcare fees and higher tax rates for the rich were additional steps. In 2011, Ireland secured an economic bailout of 85 billion Euros from the EU and IMF and as a part of the deal, it was decided to cut down the deficit by six billion Euros. Austerity followed — reduction in hourly minimum wages to workers, five per cent cut in public-sector wages, cuts in social welfare benefits, 25 per cent rise in capital gains, the imposition of carbon tax etc. Greece too, as a precondition for a bailout package of 110 billion Euros from IMF and EU, imposed freezing of civil-service hiring until 2014, increased VAT rates by four per cent, cut down allowances and bonuses of public sector employees. In 2010, the UK in order to address its budget deficit of around 10 per cent of GDP resorted to the most severe cuts in government spending. Downsizing of more than 40,00,000 jobs in four years and 25 per cent cut in all department budgets were some of the measures. In 2011, Germany, in order to cut its budget deficit by 80 billion Euros decided to slash down its armed forces by 40,000 troops and civil services by 10,000. Spain imposed tobacco tax up to 28 per cent and reduced the infrastructure budget by 30 per cent as part of its austerity drive.
Though the efficacy of austerity followed in the west continues to be debated, it is no denying that the measures were meant to save the economies from distress and the philosophy still continues to inspire governments. Nevertheless, austerity has to be qualified in relation to a particular political economy. Policies popularly associated with the former US President Ronald Reagan and former British Prime Minister Margaret Thatcher during the '80s were poor examples for developing countries. These were chiefly governed by the philosophy of laissez-faire which minimises the government's role through deregulations and reduced spending. Critics rightly argue that such austerity leads to more unemployment and social costs and instead economic packages with stimuli to investment and enhanced capital expenditure can ensure economic revival. However, the importance
of austerity cannot be undermined as resources are limited and a sense of proportion in public spending is indispensable in times of crises
like the pandemic that caused the global economic slowdown.
Interestingly, far from the concerns of austerity or the fear of a possible increase in fiscal deficit from 4.4 per cent of GDP last year to 6.8 per cent this year, the Budget 2021-22 provides for huge government spending and the thrust is said to be on growth alongside reforms. Compared to Rs 4.12 lakh crore in the revised estimate of 2020-21, the Budget is increased by 34.46 per cent, to Rs 5.54 lakh crore in 2021-22, aptly called as expenditure Budget. Capital expenditure for 2021-22 is raised by 34.5 per cent to Rs 5.5 lakh crore to push growth through infrastructure creation. Four states, Tamil Nadu, Kerala, West Bengal and Assam are given major highway projects with a total outlay of Rs 2,27 lakh crore and in the next four years, if actually realised, they can boost employment in infrastructure and related sectors. Agriculture credit is increased to Rs 16.5 lakh crore, including animal husbandry, dairy and fisheries. The rural infrastructure development fund is proposed to be increased to Rs 40,000 crore. The worries of the agrarian sector and rural economy are taken care of.
Naturally, the vision is to revive the economy. Undoubtedly, government expenditure is one of the factors for the rise in aggregate demand. However, complacency can be a mistake as there are serious concerns with regard to spending. Firstly, extravaganza, cost overruns, and lack of accountability have been perpetual problems in government spending. Secondly, it's essential to distinguish between productive and unproductive spending, especially when the fiscal deficit is planned to be filled by borrowings. Given the circumstances, it is all the more important now to strictly adhere to financial discipline so that not just pennies but pounds are saved. Austerity is still relevant as it will support and supplement the efforts of the government. Prioritization of areas of spending is necessary to boost demand and ensure supply. In addition to exploring areas for more taxation, cutting down expenditure in sectors like defence which constitutes 15.5 per cent of the budget and 2.1 per cent of GDP, banning recruitments, reviewing entitlement regime (freebies) and rationalising non-plan expenditure could be prudent measures at least for next two years. These steps will mean a radical departure from the prevalent narrative of governance but it's the call of the hour in these difficult times, especially when the COVID-19 is apparently knocking at the door again and the economy's health is still a worrying cause.
If austerity is seen as politically incorrect, then reforms must aim at optimum and best utilisation of resources. 'Opportunity cost' for every rupee spent must be kept in mind so ward off wasteful spending. The experience shows that a wide gap exists between plans and programmes designed and their realisation on the ground. Delays in execution lead to cost overruns up to 10 times the original sanctioned project cost, amounting to thousands of crores of rupees. Selection of viable projects, timely reviews of spending, constant monitoring of
progress by third party agencies, control on red tape and fixing accountability are essential in a business-like manner as seen in the private sector. Improving delivery mechanisms has also to be a part of reform. Many departments report substantial chunks of budgetary allocations every year as unspent. Hundreds of audit paras in departments point to the fact that often government spending is either against financial discipline or wasteful. Leaving the vexed question of corruption aside, basic professionalism and accountability have long been issues in the government machinery. Resizing and reconstituting ministries and departments can streamline the system besides saving huge expenditure on the establishment. Winding up superfluous boards, regulatory authorities, commissions and agencies which often serve as parking lots for 'unsuitable' officers or as a favour to appease politicians, is not a bad idea. Likewise, disinvestment drive can be made more aggressive to deal with PSUs that are either sick or running in losses.
The writer is a former Additional Chief Secretary of Chhattisgarh. Views expressed are personal