Prime Minister Imran Khan vowed to continue the process of taking important but hard decisions regarding economic and social reforms in Pakistan. The PM is focusing on austerity to attain his goals on an immediate basis.
The biggest challenge to the new government is debt crisis. With debt levels unacceptably high, the government is being forced to make dramatic cuts to make payments and avoid defaults. These acts of deficit cutting, reduced spending, and slashed public services are collectively called austerity measures. An austere individual is someone who lives within their budget in other words, they spend less than what they earn each year.
The first step towards austerity is to cut down on the Prime Minister’s staff and the use of dozens of bulletproof vehicles. His move to abolish discretionary funds for politicians and bureaucrats will also certainly ease the burden on the national exchequer. But still the discretionary funds of ‘invisibles’ have not been mentioned. In Pakistan, top government officials, ministers, bureaucrats and generals are known for their lavish lifestyles. They callously and ruthlessly use official vehicles for their children’s school run or shopping trips for their wives, they take unnecessary foreign trips, have huge travelling allowances, throw lavish parties and live in extravagant houses. This must end now as PM Imran Khan has promised to name and shame those who violate the rules of austerity.
The government must implement a ban on five-star venues for government meetings; foreign locations for conferences, exhibitions and seminars; and executive class airline tickets for officials on immediately. This would be the great step for creating a better image in public perception by saving their tax money.
For austerity, PM Imran Khan should also turn massive buildings used by governors, chief ministers, ministers, bureaucrats and generals to either educational institutions or for any other services which generate revenue for the state.
Austerity sends a message to investors and lenders that the economy in question in not founded on an indefinite strategy of “buy now, pay later” and that there is a viable long-term plan
It is important to discuss how the austerity can actually work. When asking “does austerity work?” one must first establish what the objective is. A sharp reduction in public expenditure, coupled with an increase in taxes, reduces the budget deficit, while increasing the confidence of private investors. This will lead to a significant flow of private capital that will expand the economy, compensating for the short-term negative impacts of the fiscal consolidation. These assumptions are based on the conviction that the value of fiscal multipliers tends to be low or even negative, in the extreme version of expansionary austerity.
In the short-term, generous public spending funded by large government deficits will stimulate economic activity and alleviate the hardship caused by recession. But in the longer term, habitual deficit spending will weaken the nation’s finances, leading to a loss of confidence from creditors and higher interest rates on national debt, moreover it will place an unacceptable burden on our future generations. The end game is sovereign default and eventually completely withdrawing from credit. Hence the government effectively becomes bankrupt.
The aim of austerity is to avoid conditions which lead to sovereign defaults. It paves the way for sustainable economic progress by seeking to increase confidence in the government of Pakistan and its finances. It sends a message to investors and lenders that the economy in question in not founded on an indefinite strategy of “buy now, pay later” and that there is a viable long-term plan.
Austerity works if it is applied before it is too late. If the interest payments on government debt are already crippling the economy then a default might be unavoidable. The consequences of this are that the government will not be able to afford the expenditures of government officials on non-productive activities. Planned austerity to restore financial balance will avert this outcome.
Implementing austerity measures can benefit Pakistan, and also its currency, in several ways. The merits of austerity are even more striking during a debt crisis, as a nation can help push interest rates lower by getting its fiscal house in order and alleviating concerns regarding defaults on existing debts. Reducing interest rates generally helps support economic growth. More specifically, it facilitates both investment and consumption in sectors that respond to significant changes in these borrowing costs. In addition, keeping budget deficits modest can help create the perception of stability, which in turn can produce foreign Direct Investment (FDI).
The Pakistani government is facing huge pressures on its finances due to economic mismanagement. Austerity brings around a fundamental change in economies. Over-investment and over-consumption will become under-investment and under-consumption. Once interest rates are sufficiently low for investment and consumption to take place, there will be an uptick in demand, leading to strong economic growth.
There are some other aspects of austerity which are important to discuss. The public may in principle accept the need to deal with the high costs of governance, but it will remain apprehensive about its impact on public services and doubtful about the wisdom of moving so fast. If austerity becomes the slogan, then several government agencies that duplicate responsibilities and those that are simply cost centers may have to face disintegration or mergers. And this goes strictly against the new administration’s plans to create jobs.
A possible narrative is this. The very wealthy will be more likely to keep a low profile, at least in the early years. They will spend less on loud displays of wealth. They will spend their wealth in quieter ways; even better, education for their children, physical security for them and their families and holidays far from envious eyes. Middle-class income earners with jobs will be happy to keep them; few will get large pay rises. But for the masses, it perhaps is going to become tougher. In several states, taxes will rise and public services will become more cost-conscious.
Belts will tighten and tempers will shorten. The masses will be furious at the mess the country is in, and will blame not only the past regimes for their failures, but the present one for its inabilities as well. Rupees don’t fall from the heaven; they have to be earned here on earth. Indebted countries like Pakistan can only grow out of their debt troubles through strong economic growth; austerity measures alone cannot work. It is imperative to engage in deep structural reform to spur growth as this is the right time for the government to put the brakes on big spending.
The writer is a PhD Scholar, Media and Crime and author of different books on International Relations, Criminology and Gender Studies. He can be reached at [email protected]
Published in Daily Times, September 2nd 2018.