Age of austerity

June 23, 2019

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The writer holds a PhD in politics from the University of Oxford.
The writer holds a PhD in politics from the University of Oxford.

PAKISTAN’S federal budget announcement, followed by the prime minister’s midnight speech, mirrored the words of former Tory leader David Cameron a decade ago. He declared that “the age of irresponsibility is giving way to the age of austerity” and advocated for a new fiscal policy favoured by his party, which saw excessive government spending as the source of Britain’s economic crisis at the time.

While it is important to understand how Pakistan ended up with its extravagant levels of public debt — and Prime Minister Imran Khan announced a commission to probe this — it is equally important to see what lessons can be learnt from a decade of Britain’s ‘age of austerity’ before embarking on one ourselves.

Britain’s policy of ‘fiscal consolidation’ was characterised by across-the-board cuts in public spending as well as increase in taxes. Social services, housing subsidies and welfare saw cuts of £30 billion in the last decade. Over 1.1 million public servants, including 200,000 police officers, were also laid off. Health and education budgets as well as public-sector salaries were officially frozen but saw a rapid decline in real terms. The policy also increased council tax, capital gains tax and, critically, VAT.

Pakistan seems to be following exactly the same prescription by significantly reducing development spending and undertaking cuts in health and education. Meanwhile, indirect taxes in the form of GST, levies, withholding taxes and other instruments have seen a sharp rise. The only increase in direct taxation has been in income tax, mostly from the salaried class, with no clarity on how the government plans to widen the tax net. The expectation is that these measures will increase revenue, bring the deficit under control and help avoid default on debt servicing.

How will fiscally conservative policies impact our economy?

The British experience, however, shows that not only did the government struggle to achieve its goals but the social, economic and political costs of austerity proved extremely prohibitive. The policy resulted in a prolonged recession as a result of negative economic growth, and led to an unprecedented rise in unemployment, poverty, mortality rates and homelessness.

Some studies also attribute increasing crime rates and social unrest to the policy. Worryingly, intensified competition for increasingly scarce economic resources, job opportunities and overburdened public services led to the rise of extremist tendencies. This includes an exponential rise in anti-immigrant sentiment, Islamophobia and anti-Semitism. Far-right political parties benefited immensely from this situation and made huge electoral gains — successfully managing to put the UK on the path to international isolation as evident by Brexit.

For Pakistan, given its youth bulge, inflationary pressures, greater inequalities along ethnically concentrated geographic regions and urban demographics, history of political instability, violence along sectarian and religious lines, and a weak economic base, the potential social impact of such policies can be devastating. Politically, these will hit the middle class that forms the PTI’s core support base and the working class the most, making it difficult for the party to maintain its approval ratings.

The government must consider an alternative school of thought that argues that lower economic growth as a result of fiscally conservative policies leads to lower profits and wages as well as consumption. This results in decreased government revenue, meaning that the intended reduction in deficit (gap between government expenditure and revenue) remains elusive despite funding cuts and tax rise. The problem, therefore, lies not in government-spending per se, but in the sectors of the economy that this spending is directed towards.

Pakistan may have seen higher levels of growth in the last five years, however, these came on the back of investment/growth in unproductive sectors such as real estate and the stock market. The solution is to stimulate growth — even at the cost of higher debt — in manufacturing, agriculture and SMEs, by investing in infrastructure, technology and improving women’s labour participation. Subsidised health and education must be a priority at par with defence to ensure that our youth can innovate and compete in the global economy.

These measures will create jobs and increase economic activity, leading to greater consumption and higher government revenues. These efforts can be further augmented by taxing less productive sectors such as real estate, particularly rental income, large dwellings and inheritances, and imported luxury goods to further reduce the deficit.

When David Cameron left office in 2016 after the embarrassment of Brexit and six painful years of austerity, Britain’s gross debt had increased from 52pc of the GDP (in 2008-09) to a whopping 86.5pc. PM Khan and the PTI would do well to avoid a similar fate.

The writer holds a PhD in politics from the University of Oxford.

dr.adnanrafiq@outlook.com

Published in Dawn, June 23rd, 2019