Primary surplus, fiscal deficit, over-board austerity policy, and existential threats

International Monetary Fund (IMF) wishes government to have primary surplus, which means that before paying interest payments the country’s expenditure should be less than its revenue. Expenditure constitutes non-development (or current) expenditure, and development expenditure.

Improving current expenditure requires improving the productive- and allocative efficiency of expenditure, which in other words means that expenditure should be shifted away from unproductive activities, including rightsizing the public sector, not giving sub-optimal subsidies, and overall providing wages/income that match inflationary pressures.

The high level of inflation means that current expenditure is also pushed upwards, including the need for better internalization of inflation in determination of real wages.

At the same time, development expenditure needs to be enhanced, and its allocation is made so that both resilience and economic growth can be created. Given the fast-unfolding nature of climate change crisis and likelihood of related to climate change, the ‘Pandemicene’ phenomenon, it is essential to invest in renewal energy sources, along with improving the disaster management, and making health and education sectors more resilient and adaptable.

Overall, fiscal deficit needs to be kept within reasonable limits, for overall macroeconomic stability. The problem though is that over-board adoption of austerity (or aggregate demand squeeze) policies has substantially enhanced interest payments on one hand, and also not dented inflation as such, given strong upward pressure on it from significant contribution from cost-push and imported inflation.

This is because inflation in developing countries, in general – due to less deep financial sector than in developed countries where there is more need for practicing austerity policies – requires both supply-side impetus and aggregate demand squeeze policies, particularly after the pandemic-caused global aggregate supply shock.

Moreover, prolonged practice of over-board austerity policies has hurt economic growth, which has likely had negative impact on revenue collection on one hand, and there has been lack of aggregate supply boost to adequately impact inflation in a reducing manner. Hence, both domestic production and exports have received a hit with negative consequences for employment, and foreign exchange reserves build-up, not to mention weakening consequences for the domestic currency.

Hence, lower level of revenues on account of lower growth, and lesser imports, and increase in current and development expenditures on account of high level of cost-push and imported inflation have contributed to fiscal deficit. Therefore, rather than shifting the wrong policy mindset from over-board austerity policies to a more balanced policy emphasis in terms of far less policy rate – closer to single digit –in turn, putting less pressure on inflation through the cost-push, and imported inflationary channels, and allowing for reaching higher revenues on account of much less economic growth sacrifice the same policy emphasis is being continued.

As a consequence, higher interest payments and lower revenues have meant that too much is being asked in terms of lowering current and development expenditures. The reason it is being indicated as ‘too much’ by this writer is because current expenditures’ reduction is difficult on account of still quite high level of inflation, while secondly, lowering current expenditures is difficult because of the overall weak implementation capacity of governments in developing countries, which require deep economic institutional, organizational, and market reforms that bring in productive and allocative expenditure efficiencies.

In weaker democracies, as is the case in Pakistan, it takes time in general—both because of traditionally strong elite capture and because of lower level of political voice not allowing for needed level of pressure on public representatives to take steps to dismantle this collusion of politico-economic elites that hurdles needed social democratic- styled economic reforms.

The reason why lowering development expenditures is asking for ‘too much’ is because of much-needed need for making expenditures to increase economic resilience in the face of existential threats, to unclog aggregate supply for positive consequences for reducing inflation, increasing domestic production, enhancing exports, employment, foreign exchange reserves, and overall economic growth, which, in turn, means greater level of revenues.

Therefore, the way to deal with fiscal deficit is not continuing with over-board austerity policies, which result in very high level of interest payments, and also produce stagflationary consequences, along with curtailment of both development expenditures and necessary imports that are important for economic growth, and revenue generation, but to reduce policy rate, and increase efficiency of state-owned enterprises and the energy sector for reaching gains in terms of reduced expenditure, and having more fiscal space to ensure a necessary level of subsidies for both reducing cost of doing business, and also making greater level of climate-, welfare-, and overall development-related expenditure.

This means that rather than cutting needed development expenditure, which needs to be enhanced drastically, given high, and rising level of poverty – with negative consequences for political voice, and overall economy, and democracy – current expenditure should be reduced to the maximum, along with reaching drastically lower interest payments at the back of reining-in austerity policies.

The goal is reaching sustainable level of fiscal deficit, and not necessarily primary surplus, and requires better policy emphasis from the government side to enhance tax base, and progressivity, and increase expenditure efficiency, and from the side of IMF in terms of better understanding the limits of austerity policies, and to provide enhanced level of special drawing rights (SDRs), given the enormity of challenge on account of fast-unfolding existential threats, and its impact in terms of increasing poverty, and enhancing debt distress.

Here, with regard to lowering debt distress – which in turn feeds into lower interest payments, and build-up of foreign exchange reserves – a better multilateral spirit needs to be invoked for quickly improving the global debt restructuring framework, for which the government also needs to employ more vigorous level of economic diplomacy.

Copyright Business Recorder, 2024