Bite of the budget

National budgets in countries around the world end up as ‘events’ or ‘non-events’ depending on how impactful they are on the common man/people of a country.

In much of the GCC, the absence of corporate and personal taxes means that their budget announcements year after year are followed more by analysts and businessmen than the average citizen or expatriate. User fees are usually less resisted as they are for a service or convenience, e.g. good infrastructure/roads and so Salik.

The GCC merchants and professionals tend to track spending and capex details of the regional budgets simply to assess how their own businesses will be benefitted or adversely affected.

True, the indirect impact of budget deficits or surpluses, on inflation and growth, is of interest to economists and rating agencies. And the budget exercises in the GCC each year do grab a few headlines in the media. But it is certainly devoid of the obsessive hype and hoopla generated in some countries — both before and after the tabling of their national budgets before their parliaments.

For instance, in India, the railway and the federal budgets will be tabled in parliament on the 26^th and 28^th of this month. The media is already gearing up to anticipate and analyse what additional taxation measures, fiscal amendments and relief may be in offing and which subsidies will be targeted to be reduced.

Global credit rating majors and leading financial institutions are closely following this dialogue and will monitor whether the ever-escalating budget deficit will be contained in this fiscal year. Even more importantly, they will want comfort that the gap will stay within the range forecast by the Indian finance minister P. Chidambaram; albeit for the next financial year. If this is not demonstrably and credibly seen by them to be achievable, India could get downgraded quickly to junk rating... much to the chagrin of Mr Chidambaram whose personal credibility and his party’s electoral fortunes in the 2014 national elections are at risk from yet another hammering.

Unlike the GCC finance ministers who may get grilled in the shuras or the FNCs, Mr C will not just face the wrath of the people at large across India but immediately encounter noisy scenes from the opposition in parliament.

Any premature retirement or retrenchment can give rise to the social stigma of unemployment The EU’s heads of state slashed the budgetary spending for their own reasons

Numerical cobbling together of a parliamentary majority may at best get some muted support and even applause from the ruling party benches but even they will have to be re-elected in a year’s time. The Indian finance minister will thus have to juggle the twin ends of containing budget deficit to protect the country’s credit rating and palpably the well being of the rural and urban masses — what with this being the last budget before elections next year.

His predecessor sadly took the deficit from Rs150 billion to Rs600 billion over five years but his political/coalition compulsions dictated such deficits; stemming from budgetary giveaways galore just to survive as the ruling party/government.

Those gifted chickens are coming home to roost for Mr C… even if they are not of his making. But as they say, if you make the bed, you will have to lie on it.

The US is another, but decidedly different “gridlock” story. There the president has a big popular mandate for another four years; but a polarised Congress can frustrate his best-laid plans because of political stand-offishness between the Republicans and the Democrats.

Recently, the EU, despite being disparate in many ways, responded with a rare unity to the repeated crises and has shown monetary and fiscal leadership. By tightening its budgetary spending for the first time since inception of the EU, its summit has, willy-nilly, provided some relief to the UK prime minister who may have otherwise faced hostile ranks back home and within his own Tory Party and accused of returning empty-handed.

The EU’s heads of state slashed the budgetary spending for their own reasons, but David Cameron can claim credit for the cuts, however undeservingly, so as to set the stage for his chancellor of exchequer to wield the knife across UK’s tax and spending regime in 2013-14.

In emerging markets, especially in the Arab world, another set of explosive issues that have proved hugely unpopular are certain specific remedial and fiscal measures such as removal of subsidies, social spending cuts and administrative reforms leading to downsizing of bureaucracy. Subsidies anywhere, create a sense of dependencies and entitlement.

Some governments out of expediency and in fits of blatantly political or populist stance, dole out subsidies or create government jobs — where there should be none at all at tax payers’ expense. They deliberately and/or unwittingly, create and defer the growing deficits by inflicting enormous tax burden on successive governments and future generations. I recall how a few years ago there were riots in Egypt and North Africa over bread and retail food prices going up because of subsidies’ reduction. Similar was the reaction to steep rises in onion prices in India.

Indeed in the EU and also in the US, the removal of agricultural subsidies is akin to attacking the ‘holy cow(s)’ what with rural farmers blocking the roads in France. In India, the farm lobby is equally powerful and can frustrate any fiscal measures aimed at diminishing their pampered status.

The finance minister is thus in a quandary given his limited elbow room. Recently (and cleverly) the Indian government reduced diesel subsidy through its executive authority and managed to keep the issue outside parliamentary discussions. Administrative orders authorised the petroleum distribution firms to incrementally raise prices on diesel and other products, over weeks, thus perceptibly cushioning the impact.

In any fractured polity, tax or subsidy removal can trigger street demonstrations stoked by the now ubiquitous 24x7 media who will persist with such feverish pressures until the next controversy overtakes the previous as per “the law of diminishing media impact”. Social spending cuts and subsidies removal are thus calibrated by governments depending on whether the ruling party (or the president or the Congress in the US) can ‘gain’ or ‘give in’.

An over-riding imperative and a bitter pill to swallow for any democratic government of the day is how to trim the bureaucracy. Sadly, most finance ministers or cabinets have neither the ‘nerve’ nor the clarity of vision and understanding of the budgetary dynamics. Bloated bureaucracies are the cumulative build-up by and the bane of successive governments, who create monsters of and thwarted by powerful vested interests. For any democratic head of a government to even attempt to ‘right-size’ the civil service is a Herculean task.

An efficient and cost effective administrative structure should result in the closing down of many ministries and government departments. Outsourcing services to the private sector and disbanding sinecure structures and organs of the government are akin to amputative surgery. But our politicians would rather have pens rather than knives in their hands. Unfortunately, it is a case of ‘who will bell the cat’ (or more appropriately the bandicoots).

The very upper echelons of bureaucracy that have to assess and advise the ministers and the governments often avoid the issue. They can hardly be expected to pro-actively initiate such measures or even expeditiously act should independent advisors or administrative reforms commissions recommend salutary measures. Sadly, only in the third world countries this problem is most acute, when they can least afford the luxury of parasites and procrastinators.

True, this surgery needs to be done with great sensitivity and compassion. Any premature retirement or retrenchment can give rise to the social stigma of unemployment. No electable politicians will want a poisoned chalice i.e. risk facing the wrath of their electorates. There are innovative solutions to such vexatious issues. However, smart (no fallout) options do not occur to die-hard bureaucrats.

For instance, by declaring zero-job losses as a pre-condition for privatising municipal services or dispensing with governmental departments and requiring the investors and PPPs (public-private partnerships), they can deal humanely and sensitively with people issues. Yet they can enhance efficiency by minimising future recruitment of vacancies caused by, say, reducing the retirement age or by not recruiting for staff vacancies or departures or they can encourage both natural and incentivised attritions. If a pool of surplus staff can be re-trained for new viable projects, it will avoid one arm of the government routinely filling jobs as bureaucrats leave/retire at all levels and another doing the opposite.

Ultimately, the true test of enlightened leadership in any form of government (be they democracies, monarchies or autocracies) is when their leadership address both revenue and capital expenditure issues in a fair and square manner; having gone through the details with a tooth-comb to prune. Unfortunately, the finance ministers and their tax and fiscal systems in many countries operate in silos and feel obliged to raise revenues to meet unwise spending by some other departments of their governments.

No wonder it is said that the administrative cost of tax collection (i.e. the army of bureaucrats employed to collect direct taxes such as income and personal taxes) eats up 80 per cent of the proceeds — only 20 per cent net revenues.

The adage that smaller bureaucracies are more efficient and thus less government leads to better governance ought to be the starting point — the sine qua non for every government.

Any such fiscal disciplining transformation must not only have political support at the highest level within a government but also in democracies — from a majority in parliament or Congress. Or else it will always be a hotch-potch — viciously botched by compromise of sorts, at best.

At worst, the process will end up simply as a case of ‘passing the parcel’ (or the burden) to future generations via their hapless successors in power.

The author is a veteran banker and now chairman of the Federal Bank and its subsidiary in India and the Values Group in the UAE. Views expressed by the author are his own and do not reflect the newspaper’s policy

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