Austerity for all

LAHORE: Governments implement austerity measures when their large public debt increases the risk of default or the inability to service the required payments on its obligations becomes a real possibility. Pakistan meets this criteria and needs austerity. Only meaningful austerity can bring financial health back to Pakistan. If we continue with our high spending spree, the default risk will spiral out of control quickly, as it already has. As a consequence, lenders will continue to demand a higher rate of return for future loans. For a highly indebted country, it becomes difficult to raise capital.

Austerity refers to strict economic policies that a government imposes to control growing public debt, defined by increased frugality. There are three primary types of austerity measures: revenue generation (higher taxes) to fund spending, raising taxes while cutting non-essential government functions, and lower taxes and lower government spending. Austerity is controversial, and national outcomes from austerity measures can be more damaging than if they hadn't been used. Many countries in the past have introduced austerity measures during times of economic crisis, including Spain, Greece, and the United States.

Pakistan has been facing a financial crunch for the last fifteen years, and each government during this period has claimed to introduce austerity measures. However, the financial crunch of the government has increased with every passing year. Austerity only takes place when the gap between government receipts and government expenditures shrinks.

This situation occurs when governments spend too much or when they take on too much debt.

As such, a government may need to consider austerity measures when it owes more money to its creditors than it receives in revenues. Austerity means that the government expenditure would be curtailed, but we have seen that the state expenses in Pakistan have increased every year compared with the increase in revenues. Austerity measures work better if the state succeeds in revenue generation through higher taxes. This supports more government spending. The goal is to stimulate growth with spending and capturing benefits through taxation. Angela Merkel, the German chancellor, observed austerity by focusing on raising taxes while cutting non-essential government functions. Another option, which is probably not applicable in Pakistan, is to lower taxes and lower government spending.

In Pakistan, the rulers announce austerity measures without going into the details of the impact of those measures. Generally, governments announce steep reductions in the budget allocated to the prime minister, but at the end of the year, we usually find the expenses overshooting last year's expenditure and a supplementary grant is then sought. For government departments, a uniform cut of 20-30 percent is announced without going into the details of those cuts. For instance, a 30 percent cut in health expenditure would mean 30 percent less availability of medicines, which are already in short supply.

A cut of 30 percent in the expenses of the Information Ministry and many other departments could be managed by improving efficiencies. Higher cuts could be managed in numerous departments. For the prime minister and ministers, the cuts should be specific, entitling all of them to maximum three-bedroom houses built on 500 square yards (still bigger than 10 Downing Street, where the British prime minister resides). There should be no electricity allowance or other perks. Salary could be increased by 20 percent. No government servant, including the judiciary, must be allowed more perks and salary than the chief executive of the country. Annual salary raises must be allowed to government servants from grade 1-18 only for the next five years.