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Budget 2021: Should the Finance Ministry prioritize reducing pandemic inequalities or focus first on boosting economic growth?

Whenever a person devises, evaluates, or even judges the Union Budget the level of fiscal deficit becomes one of the most sought after details. When we say fiscal deficit, we refer to the gap between what the central government plans to spend in the coming and what it plans to earn. Another way to explain it is by stating it as the level of borrowings that need to be undertaken by the Union government.

The pandemic has worsened the scenario for us with deeper income divide and stagnating economic growth. The projections of revival are still extremely uncertain, not only in India but across the world. So, with the new union budget near the door, we have a lot to expect and a lot to demand. But does all that we demand viable and sustainable enough?

What should be done about such high levels of inequality?

Thomas Piketty wrote a book titled “The Economies of Inequality” which talked about the two traditionally opposing points of view in economics.

The first is the right-wing free-market position. This means that in the longer run, productivity, market growth, and individual efforts and potential determine how much a person earns/ distribution of income and/ or his standard of living. This can also be interpreted in a way that the least well-off members of society put in the least economic value. Therefore, this school of thought requires the government efforts to redistribute wealth be as limited as possible and rely on instruments with minimum interference in the virtuous mechanisms of the market-instruments.

The opposing viewpoint to this is the traditional left-wing position. This revolves more around the social welfare sentiment and is passed down from 19th-century socialist theory. It believes that the only way to we can work towards bettering the misery of the poorest strata of the capitalist society is by raising up the issues in a social and political domain. Unlike the right-wing market position, it requires the government to dig deeper and deeper in the society and penetrate to the very heart of the productive process.

And the policy prescription of the Union Budget would vary depending on which approach appeals the most to the Union Finance Ministry.

So, a socialist person might demand the government to make the Public Distribution System universal (PDS) and include more and more poor people so that no citizen of the country hits the sack with an empty stomach. The same individual might as well want to the government to expand rural jobs guarantee scheme or MNREGA, and devise and implement a similar jobs guarantee scheme for the unemployed in the urban area.

Well, this does sound simple on paper but then the government also has limited resource and massive debt burden. To implement all the social welfare schemes, it needs to spend piles and piles of money.

But there are a couple of problems in this strategy.

To begin with, as right quoted by the former UK Prime Minister, Late Margaret Thatcher: “There is no such thing as “public or government money”. There is only “taxpayer’s money”.

This means that if one as a taxpayer wants more social welfare schemes in the budget then we should be ready to keep our wallets open to pay more taxes, especially when just 1% of Indians actually pay income tax.

You may say that the alternative to imposing higher taxes is to raise funds by selling (disinvesting or privatising). The government can indeed raise money by selling off its assets such as a government-owned bank or a public sector enterprise but, there are again 2 issues with that.

  1. These assets too, are not solemnly owned by the government. They belong to the taxpayers as well.
  2. The government does not really have any assets of its own.

If after that one may ask the government to resort to deficit financing. In other words, printing fresh notes to solve the problems mentioned above. This might look like an attractive option to many but, in the long run even this deficit financing gets converted into an added tax burden on the general public. This is because the increased money supply in the economy becomes the cause of an elevated level of inflation.

What is the long- term problem of solely focusing on the social aspect?

If the government focuses only on reducing the income inequality over economic growth, the results can be disastrous even if the government does so by increasing the taxes. Deviating from the aim of bolstering the economic growth and undertaking capital expenditures, there is an undeniable chance of the already struggling economy to get stuck in a low-income equilibrium.

In such a case, it would appear that income inequalities have been reduced and overall poverty has declined. But that charade would only exist for a brief period or short term because ignoring investing in building up productive assets in the economy is not a sustainable path. The economy will stagnate in the absence of these capital assets which could have boosted overall economic growth of the country for a much longer period. Therefore, we can say that the presence of fast economic growth is the necessary condition for declining poverty and reducing inequalities disparity although it may not be a sufficient one.


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