The burden

The discussions on the idiot box relating to the economy, and the fact that almost all anchors on talk shows are apparently economists, continues to amaze; the passionate portrayal that the economy is spiraling downwards, is sufficient to create panic amongst the masses and cannot be deemed responsible journalism under any definition. Undoubtedly the situation is difficult, and maybe that too is an understatement. Inflation is definitely knocking on the door hard, but simply broadcasting the knocking, without an accurate analysis of the causes and possible remedial action achieves naught.
Electricity, gas, fuel are up, amongst other things, and the rupee is down; but what can the government do to insulate the masses against this burden? At the outset there are no simple solutions and even if there are, perhaps those steering the economy are better informed about the course of action than those who carry out an analysis on the basis of selected indicators.
Take electricity for instance. The government can choose to continue subsidizing the cost per unit, which cost admittedly includes a sizeable portion of line losses and technical inefficiencies, but that would result in further increase to the already sizeable circular debt. So what is the solution? Recall that the last time the circular debt was paid off, it was through more debt, and apparently there is no other option to settle the current trillion or so of circular debt, other than through debt again. And by the way efforts to reduce line losses due to theft and inefficiencies can take a while, if at all successful; the problem will still need to be managed in the interim. Perhaps by hindsight, electricity at any cost was not completely thought through.
Take gas prices. Apparently, the gas distribution companies were ringing in their own version of a circular debt, which if subsidized will only change the debt classification, as in the case of electricity. Frankly, even when we compare fuel prices with international oil prices we are only looking at the rupee impact of the prices, not the economic impact because of the higher trade deficit resulting from ever increasing quantitative import of oil and fuels. Finally the rupee depreciation, as discussed in many earlier articles, was perhaps not a choice.
But what if the government did subsidise? Well, all the debt to subsidise these utilities obviously will have an adverse impact on the fiscal deficit; so the question is what the government can do to reduce future fiscal deficits. Increase taxes is one option. Albeit even if it is doable, taxes will have to be increased a lot since currently Federal Revenue Receipts are barely sufficient to meet debt servicing obligations; the reason the Government wants to revisit the 18th Amendment. Additionally, taxes create what is referred to deadweight loss. Tax increases reduce profits for producers and/or increase prices for customers, which results in lowering of consumption of items which take the brunt of additional taxes. The net impact is inefficient markets which as the argument goes results in less than optimum utilization of resources hence lower growth and inflation.
The only other way to cut the deficit is by cutting government spending. But development spending is probably already at trickling levels. And nothing can seemingly be done about debt servicing obligations and defense costs. The maximum savings that can possibly be considered through reducing government's cost of operation will perhaps be synonymous with a drop in the ocean. And let's not forget, we started from government increasing the subsidies it pays for, therefore spending in any case increases rather than reducing. In fact if you add housing, health and education objectives, spending cuts is not even an option.
If you think about it we are moving more and more towards socialism: which perhaps may not be an issue considering an article in The Economist titled "Millennial socialism", a few weeks back. Current related thoughts apparently include state intervention in industry directly or through forced "co-operativisation"; coupled with a higher minimum wage and more public spending. As the Economist puts it, ancillary goodies include robust economic growth and guaranteed employment; rather unbelievable! The idea about a social wealth fund is intriguing and so is the statement that globalization is more a generator of insecurity, unfreedom and unfairness. Unfortunately while there are lots of ideas in that particular article about increasing the size of the government, but none on how to manage a fiscal deficit if you continue to subsidize utilities, and everything else for that matter.
And don't look at me! We on the economic front, as a nation, are in what can be referred to as a perfect storm. Every which way you look at it, pain is here, and here to stay for a while. The Government cannot continue to subsidize and passing the burden on to the consumers will result in reducing disposable incomes across the board. Perhaps what the Government needs to do a better job by explicitly communicating the on ground situation to the populace, especially on the causes of, and the strategy to manage the burden.
(The writer is a chartered accountant based in Islamabad. Email: [email protected])