Column: Let budget planning be more realistic

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SummaryThe presentation of this year’s Union Budget will be unique because most analysts have already prejudged the content on grounds of it being the last Budget before the general elections, which will give a tilt to populism.

This begins with more honest estimates of growth and extends to a tight rein of expenditure

The presentation of this year’s Union Budget will be unique because most analysts have already prejudged the content on grounds of it being the last Budget before the general elections, which will give a tilt to populism. A populist Budget is one that is extravagant in terms of spending while giving benefits through tax breaks, hence putting austerity under jeopardy. Is this a likely scenario?

The answer is that it is unlikely that there will be profligacy in the Budget given that we have a very astute finance minister who has been working hard to rein in the fiscal deficit for FY13. Let us see what all he has done. With tax revenue not rising given low economic conditions, he has cut down on expenditure. There is now some talk that the fiscal deficit number may be closer to 5.1% rather than 5.3%. The disinvestment plan has taken off suddenly and the R30,000 crore target could be met by March. The spectrum sale of R40,000 crore and the subsidy slippage of around R60,000 crore could be problem areas, which are being countered through expenditure cuts. While this is a different way of controlling the fiscal deficit, such a strategy affects growth in the medium term when development expenditure is pruned.

Budgets are basically accounts of the government that have evolved over the years to be the growth-driver through their proposals. Non-development expenditure involves transfer payments that are growth-neutral unlike development expenditure that is Keynesian in spirit. Tax incentives are used more on the supply-side to push up growth while expenditures work directly. If the finance minister actually brings the deficit down to 5.1% this year, it would be a clear compromise on growth. In fact, one of the shortcomings of the efficacy of budgets is that finance ministers tend to cut back on expenditure to control the deficit, which actually affects medium-term growth prospects. Therefore, ideally, expenditure cuts towards the end of the year, though pragmatic, should be eschewed.

The crux of the problem lies in assuming a high growth rate when formulating the Budget. Once we assume a high GDP growth number, which is 14% normally, then tax revenues tend to get exaggerated as excise, customs and corporate tax collections are dependent on this rate. Revenue accrues during the course of the year, but expenditures are incurred

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