The recently announced annual budget is one that would clearly be described as austerity-focused, with a view to satisfying the IMF board’s whims so that an already negotiated extended fund facility might be approved and lines of credit to Pakistan might resume. The budget comprises various belt-tightening measures on public expenditures, but there are also targets for raising revenues both through expanding the width of the tax base and also through a disproportionate squeeze on law-abiding tax filers through tougher tax rates.
The austerity mindset with which the budgetary measures have been announced looks very good at first glance. After all, in a society where 99% of the population does not contribute to the fiscal base, how can the economy run except through unsustainable kashkol borrowing? This is the problem that the IMF has correctly surmised, and there is no room for in the 21st century. The Pakistani masses, as well as the elites now being brought to account by NAB, must get their collective act together. If they cannot do so voluntarily, then a tough fiscal regime must be imposed from-on-high by the IMF.
But the dismal context in which the austerity budget was presented leaves much for the public to worry, particularly for those two million people who have done their fiscal duty to the nation. Above all, it is useful to take a step back and ask: what is austerity? And is austerity really the way to fix an economy?
What the IMF is doing to Pakistan, the EU has already done to Greece, and from that episode many academics and policy makers have drawn important lessons which are applicable to Pakistan today. The overriding consensus in the academic (if not in the policy) circles now is that austerity for a macro economy is fundamentally illogical. Belt-tightening works for households and for individuals, but for an economy overall, belt-tightening means that I will get fewer haircuts, and so the barber has less to pay the baker, who has less to pay the mechanic, and so forth. Put another way, the ripples of economic stagnation emanate through the macro economy when all agents hold back their consumption and slow the velocity of money circulation.
The devastation in Greece illustrates this vividly. From a society whose members three decades ago nearly all owned their own homes, had virtually no debt, and led autonomous economic lives, several problems arose. Today, 25 percent of the working population of Greece does not have a job, while household incomes have shrunk by nearly one-third, and one in every three businesses has gone bankrupt.
In the case of the IMF, the most seething irony is that its own reports since 2016 have come to frame austerity as the wrong approach to economic reforms, and the IMF itself now believes that it massively understated the damage that spending cuts inflict on a weak economy. As an IMF report by economists Ostry, Loungani and Furceri admits in economist-speak, “episodes of fiscal consolidation have been followed, on average, by drops rather than by expansions in output. On average, a consolidation of 1% of GDP increases the long-term unemployment rate by 0.6 percentage points.”
Countries that have refused externally imposed austerity have in fact recovered faster after crises. Portugal and Ireland are clear examples of this, and their economies bounced back by deliberately refusing to tow the austerity line, in stark contrast to Greece. The United States itself has used massive counter-cyclical stimuli in times of crisis: after 9/11, Bush encouraged Americans to raise consumer spending to help civic morale; and Obama authorized nearly $1trillion dollars through the Troubled Asset Relief Program (TARP) to grapple with the Global Financial Crisis of 2008. During that period, Australia gave AUD$1500 to each household to spend immediately, and other countries such as Japan also adopted measures that would be considered the opposite of any austerity diktat.
However, it has been forcefully argued that Pakistan had no choice but to go to the IMF. Assuming that is correct, and recognizing the limitations posed by a public of 19+ crores that refuses to shoulder its fiscal responsibility to the country, then Pakistan must adeptly manage the impositions of austerity: just getting enough through for the IMF board to sign-off on the bailout, and just going easy enough on the people that the recent price hikes, tax jumps, and currency devaluation do not further compress at least the 20 lakh that do contribute fiscally to society. This narrow band of society is facing the disproportionate brunt of taxation measures, which is a double-punishment and an incentive that runs counter to the government’s asset-amnesty schemes, since it nudges non-filers to remain outside the fiscal net for fear of ever-greater squeezes.
The strong-arming by the IMF ultimately seeks to end the black-economy lifestyle that an informal and illiterate mass has settled into, and for that they deserve credit. But the actual notion of austerity must be more critically examined, as it will lay a disproportionate burden on those who are not culpable (tax filers), while lowering the general growth trajectory of the country. In sum, given that : (1) the IMF itself does not buy into this politicized argument of austerity, (2) the IMF constitutes one of the main pillars for economic violence against developing countries, and (3) economies that have refused to allow austerity imposition have done much better; we should be wary of sticking to an austerity-budgeting culture for too long.
The writer is the Director for Economics and National Affairs at the Centre for Aerospace and Security Studies (CASS). He can be reached at cass.thinkers@gmail.com
