The myth that governments possess infinite money to spend is quite prevalent in contemporary society. The public sentiment hinges on the fact that the economy runs on altruism and that the state should spend prodigiously to orchestrate a better life for its citizens. Everybody wants a discount on their livelihood irrespective of their social standing.

The farmers want a subsidy on their agricultural produce, the industrialists want tax breaks and the consumers want subsidies on petrol and energy prices. Even though the idea of a generous state draw parallels to the extent of romantic idealism, the cost is eventually paid by the recipients of governmental benevolence in the form of economic turmoil.

There is no such thing as a free lunch. The courtesy of affording the luxury of subsidies may be coming out of the pocket of a wealthy businessman in the form of corporate taxes, or it could be that the wage earners are taking the hits in the shape of direct income taxes.

The elusive nature of government spending also hints toward the lower income groups being caught in the line of fire. It is fairly plausible that a poor man paying indirect taxes (sales tax) on daily products could be contributing to the grants or subsidies given to key industrial players.

Government tax breaks and subsidies are a win-win situation for those who care more for the next quarter’s income statement than the country’s long-term growth

Pakistan continues to be the prisoner of excessive government spending and it is unlikely that this fiscal extravagance will come to a halt anytime soon.

Since the tumultuous affair of the Great Depression 1929, governments worldwide have taken a proactive approach towards adopting Keynesian economics and accruing the dividends of government spending. However, the true essence of government intervention was lost in translation.

The policymakers in Pakistan have misinterpreted the ideological definition of government spending to achieve political ends. Pakistan’s susceptibility to fiscal extravagance is clearly recognisable in the statistics pertaining to the accumulation of public debt.

According to the recent data released by the State Bank of Pakistan (SBP), total debt and liabilities have ballooned to a staggering sum of Rs59.6 trillion, noticeably a red flag for the prospects of financial stability. This vicious cycle of debt and the inability to enforce tighter monetary controls has paralysed our strides to achieve sustainable growth.

Pakistan is amid spiralling inflation, but still the reluctance of the government to pursue contractional fiscal policy is hard to fathom. The adrenaline rush to stimulate short-term growth has befogged their decisiveness to apply pressure breaks when the economy overheats.

Tax breaks and subsidies have been gratuitously distributed when instead, the approach should have been the contrary. The consequence is a prolonged bust characterised by high inflation and high unemployment. Certainly, a win-win situation for those spoiled brats who care more for the next quarter’s income statements than long-term growth.

It is difficult to educate the masses struggling to put food on the table about the intricacies of economics. However, it is in their best interest that the government abstain from indulging in expansionary policies. These policies advertently erase the purchasing power of hard-earned money or take away the value of the savings upon which their financial health is contingent.

More harm than good is done to alleviate the suffering of the downtrodden. With such inflationary policies, life could seemingly appear a bed of roses for a few months but jeopardise families’ subsistence in the next few years.

Gen Dwight Eisenhower, the president of the United States from 1953 till 1961, was one such individual who championed the concept of fiscal restraint, notwithstanding the cacophony arising from the critics as a consequence of his unpopular manoeuvres. Eisenhower despised deficit spending when it was in vogue, and his far-sightedness paved the way for inclusive economic growth in the United States for years to come.

Although legitimising contractional fiscal policy as the foremost priority on the economic front is a bitter pill to swallow for the incumbent government politically, it may prove to be instrumental in warding off the threats of an economic meltdown.

Deficit spending captures the eye, but it isn’t so pleasant once the inadequacies of reality set in, as in the case of Sri Lanka. The root cause behind the intransigence of successive governments to reduce government expenditure lies in the consolidation of power.

Power politics always precedes economic vulnerabilities, while the latter is subject to merely political point-scoring. Institutional interference is another impediment that endangers the legitimacy of an elected government and forces its hand to abandon long-term strategies in favour of measures popular among the vote banks.

The habit of excessive government spending must be curtailed. Old habits die hard, but it is a sacrifice that the policymakers should be willing to undertake for the sake of larger national interests.

The author is a Finance Graduate from Nust Business School.
taimur.nbs@gmail.com

Published in Dawn, The Business and Finance Weekly, September 12th, 2022