If fiscal deficit can help generate demand and take the sluggish economy forward, there is no reason why the government should ignore this time-tested solution.
President Donald Trump came to power in 2017 promising to eliminate the budget deficit in eight years. For the fiscal year 2019 ended September 30, the deficit stood at $984 billion, 26 per cent higher than last year’s figure. It must have been a great learning experience for Trump and the Republicans who were obsessed with the budget deficit when President Obama was in charge. The US government spent $4.45 trillion in the year, while its revenues stood at $3.45 trillion. Low tax revenues and high military spending seem to have resulted in the ballooning of the deficit figure to 4.6 per cent of the GDP. The deficit is forecast to top $1 trillion mark in the next fiscal.
The Trump administration will find it difficult to defend this year’s high deficit. The US economy is going through a period of economic growth and low unemployment. High budget deficits are unusual during such periods as these indicators translate into high revenues. Critics of Trump administration blame the corporate tax cut and large spending increases enacted in 2017 for the ballooning of the deficit. In 2011, the republicans who had control over the House of Representatives pushed for a constitutional amendment that would have made it mandatory for the US administration to have balanced budgets. The Obama administration was forced to set up a deficit commission to suggest ways to cut government debt.
The Obama administration had to spend huge amounts to put the economy back on track. It inherited an economy in ruins and a record $1.4 trillion deficit in 2009 from the Bush administration. The US government saw budget deficits exceeding $1 trillion for four years. The 1.4 trillion figure for 2009 was close to 10 per cent of the GDP, a record since World War II.
The economy improved markedly and deficit dropped to $587 billion in Obama’s last full year in office, thanks to the much-maligned stimulus spending. Donald Trump rode to presidency slamming his predecessor’s spending record despite its apparent success and promising to eliminate the budget deficit. The irony is that the deficit grew by 50 per cent since Trump took charge of the world’s largest economy.
Coming to India, the economy is going through its severest crisis since Manmohan Singh initiated reforms in 1991 as the finance minister of the Narasimha Rao government. The Indian economy has not been the same since it posted 8 per cent growth in April-June, 2018. The sixth-largest economy in the world recorded 5 per cent growth in the first quarter of 2019-20, its slowest growth since Prime Minister Narendra Modi took over in 2014. The unemployment rate was 6.1 per cent in the fiscal year ended March 2018, the highest in the last 45 years. Most economists blame the current crisis on weak consumer demand. This looks like an ideal situation for stimulus spending and leaves enough money in the hands of people to buy goods and services.
A combination of weak demand and a global economic slowdown seems to be driving down the economy. The government has effected a major cut in corporate tax and reduced GST rates on some items, but neither step is expected to give the economy the growth impetus it badly needs. Despite the tax cut, corporates seem to be wary of investing. In fact, private investment has been sluggish since the global meltdown in 2009.
Many economists believe that the Union government has no fiscal room left to come up with a stimulus package. The fiscal deficit of the central government this financial year is unlikely to touch the level of the US Federal budget deficit despite cuts in corporate tax and GDP rates. This means there is some fiscal room left for the Modi government for a substantial stimulus package. An overwhelming number of experts including Abhijit Banerjee, the winner of Economics Nobel in 2019, believe that the government has no choice but to spend its way out of the current crisis. They put forward measures like more money in the hands of the poor through higher support prices for farm produce, increase in MGNREGA wages, widening the scope of employment guarantee schemes to urban areas, and higher payout through government schemes such as PM-Kisan. In an exclusive interaction with Financial Express Online, Kerala finance minister Thomas Isaac had termed the fiscal restrictions on government as artificial. His solution to the problem is coordinated spending by the central and state governments to pump-prime the economy.
Like several world leaders before him, Prime Minister Modi may do well to rediscover John Maynard Keynes in the current crisis. If fiscal deficit can help generate demand and take the sluggish economy forward, there is no reason why the government should ignore this time-tested solution.