Column: Does the budget matter?

By: | Updated: February 29, 2016 8:42 AM

India needs a body like the UK’s Office of Budget Responsibility

Arun JaitleyA balanced budget may unbalance an economy.

By the time you read this, the TV channels would be excited about what is coming in the Budget. For the next 24 hours, everyone will write and talk about the Budget and experts will analyse and judge it. The impact of the Budget on the ordinary persons will be laid out.

Forty-eight hours later, say by Wednesday morning, the Budget will be forgotten. Like yesterday’s leftovers, budgets get stale very quickly.

They are ultimately a quaint idea. The financial year has a strict beginning and an end. In a happier time, we may be able to settle accounts in continuous time. But rules are rules and accounts have to be presented. And balanced. Of course, this is just a convention of accounting. How you balance is the finance minister’s choice. Keynes taught us that the budget accounts may balance but the economy may not. So, a public budget has to take account of not just the revenue and expenditure but also its impact on the economy. A balanced budget may unbalance an economy.

The economic debate has been about whether the FM should relax the deficit target to ‘kick-start’ the economy. If the CSO numbers are to be trusted (if not, let us have a strict examination as to why we cannot trust the CSO), the economy is not in a recession. It is growing still, at 7-7.5%, the highest in the G-20. Even if one were to reduce the growth rate to 6-6.5%, it is not in recession. Thus, an argument for relaxing the deficit target on ‘Keynesian’ grounds will not wash. The overall stance of the Budget has to be fiscally conservative if India is to demonstrate that it wishes to attract capital from domestic and foreign creditors.

There are structural problems in the economy concerning the stalled projects and the associated NPA of PSU banks.

This is not an issue of fiscal policy. There are sectoral issues in agriculture due to the two successive droughts. There is, no doubt, a demand for relief. But it has to be carefully calibrated so that the subsidy is not just a consumption subsidy, but one that gives incentives to farmers to adapt to shocks. The idea of crop insurance seems to have caught the imagination of policymakers. If farmers are to be helped, it should be to make them more able to cope with shocks than just pay for consumption.

There is a great pressure on finance ministers to have a populist budget. Most of the Budget speech concerns the announcement of spending schemes which benefits one or the other MP’s constituency. Ideally, it should be separated from the Budget speech. The Budget speech should confine itself to the overall macroeconomic logic.

The main problem with Indian budgets has always been the imbalance between revenue-raising proposals, where the demand is for tax-cuts or relief, and the spending proposals, which are seldom critically examined. The Union government collects only about 9% of GDP and spends about 12-13 % . The structural issue is whether this is enough. Can, or should, the government try and collect more and spend more or should it cut down? This question of “meta-fiscal policy” needs to be asked.

Take, for example, the rather paltry amount collected from income tax. Not many people—fewer than 1% of population—are liable to pay. It falls more inescapably on salaried workers in the organised sector. Would it be better to have a consumption tax, direct or indirect, which would cast a wider net and raise more money? Income and work should be ideally not taxed. Consumption of goods and services and of non-renewable resources should be taxed. This will cast the net wider and raise more revenue. There is a presumption that direct taxes are progressive and indirect ones regressive. But there is no reason why that should be the case. It is worth setting up an inquiry into the possibility that income tax could be abolished and a more versatile consumption tax introduced. That will also end tax terrorism, a large and unavoidable business transaction cost.

There is also a lax attitude when it comes to salaries and pensions of government employees. Successive pay commissions raise expectations about salary hikes as well as inflation-proofing via dearness allowances. Pensions are unfunded and, as the OROP example shows, continuously ratcheted upwards. There needs to be an investigation into the size of unfounded pension liabilities the government is generating. It may be affordable while the demographic dividend is yet to be encashed. But, in the long-term, it is a time-bomb.

India needs something like the Office of Budget Responsibility (OBR) which the UK has introduced in 2010. The OBR provides a check and thereby gives credibility to the FM’s proposals . It is a grown-up way to budget. The sooner we have it, the better.

The author is a prominent economist and Labour peer

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