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Dealing public sector spending and economic revival

Last quarter of any financial year is not less than a budget season. Everyone including government institutes, corporate sector, government employees and even common persons are generally found debating upcoming budge and its impact on their economic lives. This debate becomes more vehement and intense in the times of struggling economy and stagnant economic growth. As such, the current year is not an exception and there are debates how to push start economic growth to put the economy back on track. Government institutions are analyzing the reasons for missing the tax collection targets, low GDP growth, soaring circular debt and mounting trade deficit. The measures to improve all the economic indicators are also being planned by the respective government institutes. The short run and long run impact of IMF loan on the lives of the common person is also a hot topic for such discussions.

Some financial experts advocate a check on government spending to control economic meltdown. Most of the common people and media easily got influenced by this austerity drive oriented narrative making it a popular approach to resolve complex economic problems. At the most, the austerity drive can be just one of the various remedial measures but realistically speaking this is an over simplified cosmetic approach and an over emphasis on it can sometimes have a negative effect delaying the economic recovery. Austerity drive is usually interpreted as a restraint on public sector spending that can further aggravate the economic recession.

Government intervention and use of public spending to revive economy has always been a subject of debate among the economists. Capitalism believes in laissez-faire economy where the economic activities are free from government interventions and are based on supply – demand factors. This sounds good, everybody is free to compete and get its share based on its ability and competitive advantage. However, what to do if something goes wrong with the economy? Should the government wait for the auto recovery system to revive the economy leaving common people to suffer during the recovery process or the government should intervene to help the early economic recovery by taking the brunt of economic stagnation on it?

The proponents of the market economy and the Austrian Economics believe that the market factors should be allowed to freely interact and settle. Adam Smith believes that there is a tendency of free markets to regulate themselves by means of competition, supply and demand, and self-interest. However, Maynard Keynes suggest that sometimes it becomes inevitable for the government to intervene to mitigate the sufferings of its people. Under a market economy, the government does not intervene and economy is left to recover by the interaction of the market factors. However, Maynard Keynes apprehend “the market can stay irrational longer than you can stay solvent”. So waiting for the economy to recover in the long run without intervention could be fatal to the economic wellbeing of the common people and the business. Pointing sarcastically to this hypothesis of economic recovery in the long-run Keynes stated,” In the long run we are all dead”.Adam Smith, despite being a supporter of the Capitalism, has once mentioned,” In market economy investor behaviour is governed by animal spirit of investors.”

The above description of some economic thoughts may highlight the importance of government intervention to resolve the economic recession by triggering the economic cycle. The government can intervene by borrowing and spending money in the infrastructure projects and/or by subsidizing certain business operations especially the export oriented industry. The most effective way having multifaceted economic implications is to spend money on the infra structure projects and create jobs. For example by allocating more funds to the Public Sector Development Programme (PSDP) is an important tool of government intervention to push start economy prompting the economic cycle.

 

In the early history of USA, President James Monroe averted economic recession, known as Panic of 1819, by a policy of spending in infrastructure projects. The recent examples of the government interventions to avert economic recession and financial meltdown are USA’s bailout package of more than US$ 700 billion for banks through Emergency Economic Stabilization Act of 2008. China and India are also investing in infrastructure projects resulting in their economic growth. Building or upgrading transport or energy networks can boost aggregate demand in the short run through increased construction activity and employment. Moreover, infrastructure investment boosts economic growth in the long run by adding to the supply capacity of an economy.

In the current economic scenario of Pakistan, we recommend our budget to be investment/industry friendly by allocating more to PSDP. Prime Minister housing scheme of Naya Pakistan can play a vital role to revive the economy as spending on construction and infrastructure related projects stimulate 40 allied industries creating jobs and income opportunities for the common person.

In the recent past, increased spending on infrastructure projects by allocating more to PSDP and the projects of CPEC have provided a kick-start to the economy of Pakistan and continuing this would provide an opportunity to revive the economy and to overcome the current financial meltdown.

Austerity drive is just a buzzword the economic illiterates use to gain popularity and equating it with low spending in PSDP is economically naive. Expecting such drives to have some positive impact on macroeconomics is not more than a publicity stunt.

The actual remedy lies in reviving the industry of the country by special incentives and support from the government facing economic crises. In economic slump people not only become short of their disposable income but also tend to sparingly spend their money in the market slowing down the overall economic activity. There should be a difference between the response of individuals and the government to such crises. If the government even resort to such so-called austerity drive by withholding public sector spending, the result would be further aggravation of the economic chaos. The economists who advocate and believe in long-run impacts of such cuts on public sector spending should once again read John Maynard Keynes quote:”We are all dead in the long-run”.

(The writer is a sales and business specialist based in Islamabad. He can be reached at nadeem_naj@hotmail.com)

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