Columns

Fiscal consolidation that is absolutely essential for the economy’s recovery is a politically challenging task. Although fiscal consolidation is imperative to mitigate the current financial and economic crisis, obtain IMF financial assistance and for economic stabilisation, recovery and growth, the country’s   political culture is inimical for adopting and implementing the needed fiscal policies.

Pre-condition

Fiscal consolidation is a precondition for economic stabilisation, recovery and development. However, the political context, culture and milieu of the country are unlikely to enable the adoption, implementation and sustaining of needed measures to increase revenue and curtail expenditure for fiscal consolidation. However, fiscal consolidation that is absolutely essential for the economy’s recovery is a politically challenging task.

Politics

The structure and functioning of the political system, the inability for a political consensus on economic policies are crucially important to resolve the economic crisis. Party politics whose main interest is in retaining or gaining popularity and power, ideological impractical policies and a popular lack of understanding of economic issues make the adoption of needed fiscal policies extremely difficult.

Unlikely

For these reasons, the adoption of policies for fiscal consolidation are unlikely to be adopted and sustained.

Fiscal indiscipline

Over the years, the final fiscal outturn has been a higher budget deficit than the budget figures owing to expenditure overruns and revenue shortfalls. This annual fiscal feature has made some commentators to characterise budgets as a piece of fiction. This cannot be allowed to recur in 2023 and after.

Programme

The current fiscal situation and the needed programme of fiscal consolidation is imperative and a condition for assistance from the International Monetary Fund (IMF).

Political culture

However, the recurrence of this phenomenon of fiscal indiscipline is most likely, sooner rather than later. The political culture of the country, character and behaviour of political parties and the socio-political conditions are unlikely to enable the adoption, implementation and sustaining of needed measures to increase revenue and curtail expenditure for fiscal consolidation.

Need

Previous columns have stressed the need for reducing the budget deficit from the current 12 percent or more to about eight percent immediately and its progressive reduction to five percent by 2025.

This has to be achieved by drastic reduction in expenditure and higher revenue collection by pragmatic and implementable tax measures such as those that were indicated in last Sunday’s column.

Reduction in expenditure

The reduction of public expenditure is as vital as increasing revenue.The recent expansion of ministers, deputies and state ministers, and their concomitant expenditure, are illustrative of political compulsions that override economic imperatives. Furthermore, the curtailment of the large defence expenditure and other imprudent and wasteful expenditures that are vital for reducing expenditure to any appreciable extent is unlikely.

Wasteful

Similarly, there are many items of wasteful expenditure that are “politically sensitive” but unnecessary, that cannot be curtailed in the current political context.

Political culture

The ingrained political culture of the masses is one where people are of the view that the Government has inexhaustible resources that could be doled out to people. There is a lack of understanding that what the government gives with one hand has to be recouped from the people by the other hand. Otherwise, it has to be obtained by money printing that leads to inflation or increased local and foreign borrowing.

Free lunches

The idea that “there is no such thing as a free lunch”, is alien to our popular thinking. Successive political parties and governments too have cultivated the practice of promising people what it cannot give or in Li Kwan Yu’s celebrated words, “the auctioning of unavailable resources.”

Political milieu

The country’s political and social milieu makes economic and fiscal reforms extremely difficult, if not impossible. This is especially so in respect of economic reforms.

Electoral politics

Party politics whose main interest is in retaining or gaining popularity and power, ideological impractical policies and a popular lack of understanding of economic issues, make the adoption of needed fiscal policies extremely difficult.

These are the reasons why the adoption of policies for fiscal consolidation that is essential for economic recovery are unlikely to be adopted and sustained. Consequently, reforms will continue to be the stuff of discussion rather than adoption and implementation. They will continue to be postponed till inevitable.

The country will fail to adopt the needed reforms and remain underdeveloped and shift from crisis to crisis. This is especially so with respect to economic reforms.

Needed economic reforms

The needed economic reforms, among others, are fiscal reforms, reforms of state owned enterprises, social welfare programmes and wasteful public expenditure. All these have vested political gains that ensure their continuation in inefficiency and corruption.

Vested interests

The vested interests in not reforming state enterprises lies in ministers, politicians and some officials have resources and influence by their control of SOEs, especially the possibility of providing employment. This is also a reason why state enterprises are heavily over employed and run at losses.

Elections

Over a long period of time, government expenditure has risen sharply in pre-election years. This has also meant that past agreements with the IMF have been discontinued as the agreement to contain the fiscal deficit has been violated. Will not history repeat itself?

Revenue

Government revenue has progressively declined to as low as eight percent of GDP. This is not only a very low revenue to GDP ratio, but almost the lowest revenue collection ratio in the world.

Taxation

The implications of this are that several drastic changes to increase personal and corporate taxes, as well as other revenue measures, would be needed. There has to be a drastic increase in both direct and indirect taxation.

Direct taxes

In the case of direct taxation, the current threshold for income taxation has been reduced from a very high exemption level in the 2022 interim Budget and likely to prevail in 2023. However this would be inadequate due to the small number of income tax payers due to widespread tax evasion and avoidance.

Summary and conclusion

There is little understanding on the vital importance of fiscal consolidation for economic stability and growth. Fiscal consolidation is not only needed to mitigate the current financial and economic crisis and obtain IMF financial assistance, but a prerequisite for economic stabilisation, recovery and growth.

However, our political conditions, nature of party politics and “pork-barrel” electoral politics and political culture is inimical for reducing Government expenditure and increasing revenue. Consequently, sustained fiscal consolidation and the country’s economic recovery is uncertain difficult and unlikely.

Fiscal consolidation is economically imperative but politically challenging.