Prime Minister of the United Kingdom David Cameron and his coalition partner as well as Deputy Prime Minister Nick Clegg have begun a series of town hall meetings, explaining to the general public the reason why total government expenditure needed to be slashed, which has led to around half a million job losses in the public sector and would have a direct bearing on the public's access to social services to which they are accustomed.
So which are the services that would witness a decline in terms of budgetary support in the UK? Ministries were given the task of coming up with two savings scenarios, one with cuts of 25 percent and another with cuts of 40 percent. Only the health and development ministries were exempt. It was subsequently decided that ministerial budgets would be cut by an average of 19 percent and state expenditure slashed by 83 billion pounds and taxes increased by 29 billion pounds.
Expenditure cuts approved include the following: (i) police budget to be cut by 16 percent in four years; (ii) the interior, justice and foreign ministries budgets to be cut by 24 percent each; (iii) spending on the economy, environment and culture to be reduced by at least 28 percent; (iv) defence and education ministries escaped relatively unscathed, with just 8 percent in cuts; (v) money for local councils to be slashed by 7 percent; (vi) social welfare payments, including child allowance and rent subsidies, to be capped at 18 billion pounds; (vii) retirement age to be increased to 66 by 2020, six years earlier than previously planned; (viii) train ticket prices to rise by 3 percent on top of increases for inflation; (ix) The civil list, the royal family's budget, to be cut by 14 percent in 2012 and would be calculated differently from that point forward.
Numerous economists have argued that reducing expenditure during a recession would merely fuel the recession further, thereby impacting negatively on growth. Joseph Stiglitz, the Nobel Prize-winning economist and author of numerous books, including The Three Trillion Dollar War, wrote in the Guardian that "austerity is a gamble which Britain can ill afford." He also expressed a fear that the austerity measures could well slow down the economy and stall the country's economic recovery.
Martin Wolf, a columnist for the Financial Times, estimated that the savings measures could dampen growth by one to two percentage points a year. In addition, there has been a public outcry and trade unions are gearing up for a winter of discontent, but these are considered necessary measures by the government to turn the economy around and it is sticking to its economic agenda in spite of serious public concerns.
The Labour opposition has accused the Tories of using the debt crisis as a pretext to push through their vision of a smaller national government. Other European governments are undertaking similar austerity measures that are being resisted by the general public.
Contrast this with the Pakistani government's economic policies. The government has been unable to meet its budget deficit target as stipulated under the Stand-By Arrangement (SBA) with the International Monetary Fund (IMF). In addition, the country has suffered from devastating floods whose estimated impact on our economy is around 9.3 billion dollars. So what action, if any, has been taken so far to either raise revenue and to lower expenditure?
The revenue rise remains focused on the controversial value added tax, renamed not so cleverly by Finance Minister Dr Hafeez Sheikh as Reformed General Sales Tax (RGST). Talk of flood tax and lack of response from a citizenry, angered by continued government profligacy as 20 million Pakistani flood victims struggle to get their lives back on track (as reflected by demands for importing expensive bullet-proof cars to the 100 plus cabinet members and advisors) with no concrete steps taken to check corruption in ministries/Federal Board of Revenue (FBR) is hardly likely to convince the taxpayers that they must pay taxes honestly.
The latest PPP appointed Finance Minister has publicly accepted that he is unable to tax the elite, which raises serious questions about his suitability for the job as he is not able to reform the tax system in order to make it equitable and corruption-free, one half of his terms of reference.
The reticence of the senior officials of the Ministry of Finance to take the people of this country into confidence with respect to the need to impose a VAT, reportedly under instruction from the Finance Minister, has led to rendering this tax controversial and its implementation has again been deferred till the beginning of next year. What is lamentable is that the Finance Minister has not even changed the tax law that would compel all Pakistani passport-holders, working abroad to pay a tax to this country, a tax from which he was himself exempt during his long sojourn abroad, as a goodwill gesture.
On the expenditure side too, the performance of the Ministry has been poor. Perhaps, the decision that best describes the complete lack of understanding of the rudiments of economics is the PPP stalwarts' insistence that reinstatement of those fired in an effort to right-size the labour intensive state-owned entities (SOEs) reflects their humanity. Benazir Bhutto's statement in court where she reportedly told the judge that she had no regrets with respect to providing jobs to the unemployed in SOEs without taking note of the fact that overstaffing would lead to the financial collapse of that entity, requiring ever increasing budget support is impossible to endorse for a student of economics.
The incumbent Prime Minister has also made periodic statements where he has ridiculed the case against him for providing jobs in an institution where extra hands were not performing any duties at best and actually reducing output due to over staffing at worst.
At present, the situation facing this country is appalling. We have an executive that simply does not have the capacity to understand basic economics. To have a technocrat as a Finance Minister, who accepts that he has no power to either impose a tax on the elite or to change the tax system or indeed to make any meaningful cuts in expenditure is a waste of the country's time and money. Those who argue that he can at least talk to the multilaterals and request increased assistance are erroneously implying that our politicians do not have the capacity to seek assistance from abroad. The large cabinet, as well as the President, have been actively engaged in convincing the rest of the world to extend financial assistance to this country.
What is required is unstinted political support to incumbent Finance Minister to enable him to take measures urgently required in an effective and meaningful manner. At the same time, there is a need to take all the stakeholders on board, which has to include the general public, the taxpayers of this country.