Budget & the Common Man, Assessing the short- and long run-effects

A question that rises in every sane mind is: ‘How a budget affects the life of a common man in short as well as in the long run?’ Let us find the answer by shedding some light on the dynamics of a budget in this regard. Budget is the name of annual plans of expenditure and revenue for a country. A budget generally falls in one of the three types, that is, a surplus, a deficit or a balance budget. Surplus budget is the one in which annual revenue is more than the expenditure within a year; in a deficit budget, annual revenue is less than the annual expenditure, and a budget is called balance budget when revenue and expenditure sides are equal. Most of the countries, including Pakistan, on average, make a deficit budget each year.

Now, what are the implications of deficit budget on the income of a common man? The answer depends on the ways a country adopts to cover such deficit. There are different sources to make up the budget deficit. The first is borrowing from own citizen — through bonds and other such tools. The other avenues are to borrow from commercial banks or central bank. Borrowing from central bank – State Bank of Pakistan (SBP), in case of Pakistan – is also known as printing of new money. Pakistan uses all these means for deficit financing. However, borrowing from the central bank i.e. printing of new money, is not considered a preferred mode as it leads to inflation and is considered a kind of tax (Inflation tax) on the income of the people.

One may ask the question that is deficit in a budget something detestable? There is no one answer to this question as it depends on the use of the borrowed money. If such money is used on building infrastructure like construction of dams, hospitals, etc., then borrowing has some justification. On the contrary, if the use is for meeting current expenditure such as salaries, then it is not considered a wise decision by the government. Why it is so? One big reason is that such usage of borrowed money transfers the burden of payment on next generations. And, such intergenerational transfer is considered against the rules of justice. It’s a sheer injustice that a generation enjoys the fruits of borrowed money, but the bill of such fruits is to be paid by the next generation. Hence, the optimal use of the borrowing is to leave – along with the burden – some asset for the next generation so that they may also enjoy the fruit and also share the bill. The situation regarding intergenerational transfer of burden is not very satisfactory in case of Pakistan. For example, the total amount of country’s national debt in 2007-08 when Musharraf era ended and Pakistan Peoples Party (PPP) came into power was about 7,000 billion rupees. But in 2013 at the time of the transition of the government, the amount of such debt had soared to about 11,000 billion rupees. And by the end of fourth year of the incumbent PML(N) government, the volume of such net public debt has reached to about 18,000 billion rupees. This shows that every successive government in Pakistan has transferred the burden of debt on the next generation. A baby getting birth in 2018 will have the albatross of around 100,000 rupees debt around her neck. Under no rules of justice such transfer can be justified.

Another worrying aspect of such borrowing is that it leads to the accumulation of debt and eats up a large chunk of the annual budget in the shape of debt servicing, that is, for retiring the principal amount of the due loan and interest on the undue loans. It is pertinent to mention that there are two main heads of expenditure in a budget: current and development. The current expenditure is made on running the administration of the country – salaries of government staff and other bills. It also includes normal day-to-day running expenses of government departments. In short, expenses that do not result in the creation of assets are considered current expenditure. Moreover, the share of debt servicing in the current expenditure is more than that of the defence budget. It, too, is larger than the share of developmental expenditure. On the one hand, we allocate a significant amount of budget for retiring the already accumulated loans while, on the other, we borrow for meeting our current expenditure in financial year.

Now let’s take up the question as to how the current income of a common man is affected by the budget? This happens through taxes. A government covers all of its expenditure through three sources: taxing, borrowing and printing of money. We have already discussed how borrowing is made and what repercussions does it have on the income of a common man. Now we analyze the repercussions of the taxes on the current income of the people. Government imposes either direct taxes on the income of people or indirect taxes on their expenditures. Direct taxes, which include income tax, property tax, corporation tax, estate duty, etc., are to be paid by the person on whom they are levied and its burden cannot be shifted to someone else. Contrariwise, indirect taxes are levied on commodities and services and affect the income of a person through their consumption. Here the burden can be shifted to common people such as customs duties, sales tax, services tax, excise duties, etc. Direct taxes, on average, are levied on rich people in the economy. Such taxes are considered fair as rich people are earning from the society, hence they should contribute towards building that. However, indirect taxes are assumed unfair. The reason is that such taxes are taken from rich as well as poor. However, in Pakistan tax-to-GDP ratio on average remains around 9.5%. That is if the wealth is equal to 100 rupees, only 9.5 rupees are paid to government in the form of tax. To keep economy safe from more loans, we will need to take measures for increasing this ratio. In other words, the people of Pakistan must bear the burden of the expenditure made on them by the government.

What are some other important aspects of the budget for the general people? Those who are employees of the government are interested in an increase in salaries. However, such increase in salaries is fruitful if general price levels remain constant. Hence, the good thing a government can do is to control inflation, which benefits salaried class in both public and private sectors. It is to be noted that inflation is either demand pull or cost push. The simple solution is to ensure the supply of goods and services. For this, government provides incentives to farmers in the form of subsidies and fixing the procurement prices of main crops.
Accumulation of debt is another principal cause of inflation. The ideal solution is to bring an end to the accumulation of debt, which is possible if the current amount of loan is freezed and all future loans are taken without interest. However, such outcome is not possible without brining change in the whole philosophy of economy. Unless the people of Pakistan are made cognizant of the fact that government initiates projects for their welfare on their behalf and that they should support the projects with interest-free loans instead of asking for interest, we might not see the dawn of a debt- and inflation-free Pakistan. Moreover, the concept of raising loan for current expenditure must also be brought to an end.

The writer is an Assistant Professor at Quaid-i-Azam University Islamabad.