A Fiscal Responsibility and Debt Limitation Bill (FRDL) 2003 has been introduced in the National Assembly by the government to bring the revenue deficit down to zero by June 30, 2008 and maintain a revenue surplus thereafter (Dawn, 28-10-03).

Once passed, it will be binding on the government to meet this stringent revenue deficit requirement that is contractionary in nature. A contractionary fiscal policy has an unfavourable impact on the employment situation unless offset by an easy monetary policy as was the case in the 1990s in the USA when fiscal deficit reduction was a priority item on the then President Clinton’s agenda.

Despite Clinton’s fiscal tightening, American economy boomed as the fiscal policy’s contractionary effect had been countervailed by loose monetary policy. The upshot eventually was not only fiscal surpluses but an economic boom which absorbed the jobless. We need to know whether this turnaround was due to Congressional legislation or was it due to a fresh economic outlook of the new US government in the 1990s to which point I will revert later.

However, we are nowhere near the above happy situation as despite a significant decrease in lending rates of interest for big businesses, the investment demand has not responded to the extent that would favourably impact the employment situation. For, investment demand is a function of a host of other variables that may include the law and order situation, infrastructure availability, investors’ own goals, domestic and international demand, domestic and international competitiveness, and the evolving trade regime to name a few. While investment demand may not be triggered by a simple favourable movement in lending rate of interest, a tight fiscal policy will depress it further.

Attempts to increase the tax-to-GDP ratio without a commensurate increase in the tax base to foster horizontal equity in the structure of taxation would be yet another irritant or a depressant. For, one would need to know whether the fiscal responsibility proposal taxes all income earners equitably or does it continue to incorporate the existing discrimination in the taxation structure which tends to net in only the ones visible and available.

For as long as the agricultural sector remains unavailable for equitable taxation purposes, the taxation system will remain unfair and people will then try to develop their own “norms” of fairness, however unfair they may be from a legal standpoint. And, for as long as the agricultural sector continues to justify their virtual exemption on the grounds that they already pay several types of taxes, others will find their own means to evade, however illegal it may be, if even individuals in the salaried class actually pay more than six or seven types of taxes and levies.

Any attempt at meaningfully increasing the tax revenues will lack legitimacy for as long as it is perceived as iniquitous by the target groups. So, revenue deficits may be forcibly brought down as above and by even slashing some essential expenditures, it is important to determine what impact such a strategy will have on the economy. One might recall that during the Great Depression of the 1930s, there was more emphasis on balancing the budgets rather than on balancing the economy. Pro-cyclical measures then prolonged and deepened the recession into a depression when counter-cyclical measures are required to emerge from a recessionary situation.

The world grew wiser since then until the stagflation of the 1970s which, inter alia, revived the conservative school of economic thought. As the Fed went conservative and Reagan assumed the highest political office, their conservative experiments together led to huge deficits in the USA which Clinton inherited and tried to deal with first and foremost. In the process though, the economy revived too as the monetary policy turned expansionary thus showing American emphasis on the economy even when the fiscal deficits were being dealt with. However, the economy responded to monetary signals mainly because in a developed economy other variables, discussed above, are in place which enables a revival as soon as the signal is given out. Also, labour markets in the USA had been made more flexible during the 1990s which also favourably affected employment during this period.

So, even though there was the Gramm-Rudman Act of 1985 which required fiscal deficit reduction and a balanced budget by 1991, the deficit targets were not met until in 1990, the targets were replaced by spending limitations which were incorporated in the 1993 Budget Act. Other budget constraints on legislatures ensued but these worked mainly because of the sheer determination of the Clinton government which was balanced by a responsible Fed that cushioned the impact on the economy. So, it was not the Gramm-Rudman Act of 1985 that worked in the 1980s. It was a new economic outlook in the 1990s that worked to also impose spending curbs on Congress. This was done in a manner that brought prosperity to the people.

How our bill will bring jobs to our people is unknown? While there is emphasis on debt reduction, would fiscal deficit and debt reduction comprise ends in themselves or are these means to the ends of a healthy economy and if so how?

Even if these are viewed as sub-goals, one would like to see the linkage with the end-goals of jobs and poverty reduction that should not result too much into the future when “we will all be dead.” Another popular example cited in this context is the stability and growth pact of the Eurozone economies according to which budget deficit should not exceed 3 per cent of the GDP. Another key convergence criterion was the public debt-to-GDP ratio of 60 per cent. While the tight fiscal condition has already taken a toll on employment; France, Germany, and Portugal have all breached the 3 per cenr GDP fiscal deficit requirement.

France and Germany are expected to breach this requirement this year as well. The GDP growth rates of eurozone countries declined considerably since they joined the eurozone. And, the unemployment rates remain high with 10.9 in Germany (2002), 11.3 in Finland (2002), 8.8 in France (2001), 9.2 in Italy (2002), 11.4 in Spain (2002), and 9.9 per cent in Greece (2002). Only the Netherlands, Luxembourg, Ireland, and Portugal have low rates of unemployment ranging from 2.3 to 5.1 per cent but three of these are smaller economies. While others approach the debt-to-GDP criterion of 60 per cent; this ratio for Belgium, Italy, and Greece remained considerably high, around 100 per cent or above, even in 2001. With an European Central Bank (ECB) focused more on inflation, the economic situation appears grim for the people of many eurozone countries.

So, just because the eurozone restricts its fiscal deficit through a pact is no reason why we should do it too. And, eurozone restricts it to 3 per cent of GDP. If eurozone’s example is to be taken at all, why are we being even more ambitious, if at all our policy must reflect European concerns?

Our case appears more like the IMF’s deposits or residue that will be left behind even after the end of IMF’s current PRGF (poverty reduction and growth facility). Or, we will probably have more of it after the IMF is bid farewell prima facie. For, tight fiscal controls have always been an essential component of the IMF’s stabilization package which was only rechristened to poverty reduction so as to make the painful stabilization package more palatable for the general public. So, while none would dispute fiscal discipline, very ambitious targets on this front might completely change whatever little human face our economic policy tries to display.

And, if the larger goal of economic policy is zero revenue deficit and revenue surpluses in our environment that does not respond to easy monetary policy, official concern for employment and poverty will only remain on the lips. The situation might even aggravate given the emphasis on market reform that tends to include only the haves. As concern for revenue deficit, in the fiscal responsibility bill, assumes overly ambitious proportions after the departure of the IMF; public concern for employment and poverty will also rise.

Investment in human capital is the next prescription that we receive from the IFIs. While not enough would be left for investing in education and health if prime emphasis is on zero revenue deficit, investment in human capital ought to take a broader meaning if it is to alleviate poverty and increase employment. Investment in human capital should go beyond education and health to also include financial empowerment through distribution of land assets to the poor, unemployed, and displaced small peasants whose status needs to be restored first and foremost if poverty and unemployment are to be taken a jab at in a lasting manner.

As these get engaged in economic activity, they will integrate with the formal sectors of the country’s economy. This integration is difficult to bring about if focus remains only on macro stabilization that may aggravate the unemployment situation causing or reinforcing discontent and an instability which if keeps simmering beneath the surface will hinder all other efforts towards growth and development. True development is the economic, social, and political development of the people that the policy makers ought to remain alert to in all their “responsible” stabilization efforts. For, first responsibility is direct responsibility towards the people of the country as indirect routes tend to get too convoluted to reach the people.