The budget is a couple of weeks away and one only hopes that our economic managers do not repeat the mistakes of previous years. The debate between balancing fiscal deficit (austerity) and growth is now at the centre stage of the world and nations that are unable to strike this delicate but important balance either fall behind in providing their people with employment opportunities and basic support facilities leading to social unrest and poverty or end up piling huge amounts of unsustainable cum unserviceable debt. That leads to what is often referred to as financial collapse/meltdown – Meaning, today’s investments do not yield tomorrow’s dividends making the debt burden unsustainable and in the process rendering the economy uncompetitive. Trouble is that governments in general are never efficient users of capital (borrowings included) and invariably end up spending them in unproductive areas and in un-judicious ways. Political priorities take precedence over financial pragmatism resulting in poor economic governance thereby expanding the role of external lending institutions (IMF, World Bank, etc) at the expense of national sovereignty. The shining surface that initially meets the eye soon loses its glare once the veneer is scratched to ascertain what lies underneath. Euro-zone (with the exception of Germany) is a prime present day example of economic mismanagement cum short sightedness. Even our much revered neighbour, India, has just been given a rude wake-up call by the Standard & Poor (S&P), which has moved the Indian debt rating from stable to negative. Its current rating on India is –BBB, so a downgrade would put India’s debt in ‘junk’ territory. This dramatic change of heart in S&P’s perception of India has come about primarily due to the recent signals coming from the Indian economy’s performance; Slowing growth, high borrowings and rising as a ratio to GDP, and a ballooning current account deficit. This indicates that unless the Indian economic managers can quickly turn things round, the balance or the equilibrium of India between growth and austerity may also just be getting a bit disturbed!
Once the proverbial ‘veneer’ is scratched from the deficit figures released by the government, the deficit in reality tends to be much higher than depicted. For example, the fiscal deficit as officially stated does not take into account the over Rs 1.3 trillion of circular debt, which is parked in a holding company or is due against PEPCO. It does not take into account over Rs 500 billion losses of the public sector companies that are funded through bank loans every year and it also ignores a huge chunk of loan (compounded by billions of rupees every year) raised through the National Saving Schemes paying out exorbitant profit rates. The rates on such schemes were, incidentally, again raised last month to generate additional unsecured funds! In principle, the government raises money from the savers on a promise to pay a much higher rate than the commercial banks, without actually putting up any kind of tangible collateral to secure these borrowings. The borrowings from these savers run into trillions and just servicing the mark-up on these is now becoming difficult for the government with each passing day.
The good news, however, is that there are plenty of examples around us to learn from, provided of course the will is there. Turkey and Germany have emerged as the new trapeze champions of the modern day balancing act. They have shown that how while keeping fiscal deficits in check an economy can still generate employment and post current account surpluses. Both undertook some very tough labour reforms and cutting edge investments in human resource development at a time (nearly a decade back) when others were busy splurging. They have demonstrated that with the right incentives, prudent sector prioritizing by the state, providing a labour environment that encourages discipline and productivity and by supporting small and medium sized enterprises, an economic model can be crafted where unemployment is low, exports are booming and a budget deficit is well under control – Germany’s deficit is barely 1% of its GDP. Thanks mainly to the reforms begun by the Social Democrats back in 2003, Germany’s Mittelstand cluster firms (basically family owned small and medium sized enterprises) got a new lease of life and today find themselves to be in an ideal shape to benefit from the rocketing demand for high quality capital and consumer goods in emerging markets. The German mindset, ironically, even today favours austerity over growth, saving over spending, and foreign over domestic demand. Come to think of it, the other success stories, China and Turkey, behave no differently. Turks, who have always lived under the shadow of the powerful German economic house, have in recent years done well to simply emulate the model they envied and China as we know can be quoted as the classic case of using foreign capital to fund domestic growth.
Very soon the Pakistanis will also get to know how serious is their government in protecting and planning their future? Though by now the budget has just come to be regarded as a numerical exercise at the beginning of a fiscal year that is changed and chopped at the fancy of the economic managers as the year goes along, still it does reflect the very mindset of the policymakers.
It provides an important gauge to determine that: Will it again be a budget with an inflated revenue column and a disguised spending listing to be conveniently altered, as fancied, to fund the lavish expenses of the governing elite instead of undertaking the originally earmarked development projects for the poor? Will we again see critical borrowings being squandered to gain political mileage instead of being used on productive projects with long-term yields? Will we again see opportunities being wasted due to infighting and questionable competence? One can only hope that we learn from others who have taken pains and some very hard decisions to arrive at that critical balance, so necessary for successfully taking economies forward. For any government the real goal always needs to be to generate employment, alleviate poverty and in doing so leave a legacy that ensures future generations do not inherit the kind of liabilities which they cannot possibly pay.
n The writer is an entrepreneur and economic analyst.