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Austerity: an end of the era of profligacy?

Prime Ministers’ recent visit to USA costs about 90 percent lesser than his predecessors while minimum expense on the previous visits by the PM and other cabinet members reveal that austerity measures are fully functional specially at the upper tier of the government and there is no need to mention that, these simplicity measures are getting international attention too. The austerity led budget of the fiscal year 2019-20 was devised with an objective to collect Rs. 5500 billion tax revenue with 12.6 percent targeted tax to GDP ratio in the current fiscal year along with the promise of a reasonable decline in government spending. Despite following strict austerity measure the target seems to be quite an ambitious. Up to some extent austerity is acceptable and there are certain really heart winning actions: simplicity, sanctions on medical treatment of the political figures, no or very less protocols, minimum expenses on VIP travelling etc. making these austerity measures like killing two birds with one stone. One is the political side and the other one is the economic side, but now, it seems that political side is given more projection with a little lesser attention towards the economic side. Although government imposes a strict cut on spending yet we could not find any ambitious target of spending cuts in the lump sum just like there is a clear and ambitious estimate of the revenue to be collected through taxes. The state bank of Pakistan has reported an increase in spending during the current fiscal year by 12.6 percent as compared to the previous quarters although it is less than the third quarter of fiscal year 2018-19 in which 16.0 percent increase in spending was reported but still without a defined target the level of spending cannot be measured according to the target which is not known.
Austerity is a future oriented approach of the policy making and when a country decides to give an austerity led budget, it ultimately becomes a multi-layer and multi-year policy package with several degrees and stages where an economy can lie making austerity an economic plan beyond a binary concept. In order to reduce deficit sometimes a mixture of expenditures cut and tax increase is considered a viable solution and, in some countries, only one option suits well depending on the size of the economy. In a consumption-oriented society like Pakistan, austerity can be regarded as a “pain after party” as cutting down development expenditures on the key areas directly related to the working class are snatching the purchasing power that may ultimately lead to a slower economic growth. In some of the economic literature austerity is also regarded as a “Zombie Measure” and it is believed that a sovereign nation that can print its own money can never go bankrupt because it can always produce more fiat currency in order to service debts. Pakistan’s debt to GDP ratio is 67.2% while austerity becomes necessary when debt to GDP ratio exceeds 77 percent for an extended period. According to world bank every percentage point above this level costs the state 1.7 percentage point loss in economic growth. But at the current state of economy the strict austerity reveals the future oriented approach of the current government but it is required to keep the nation well informed regarding the targets achieved so far, otherwise the government can lose the political support of the nation who is bearing “pain” but waiting for some good future consequences of the austerity led policies.
There are countries where austerity led policies proved effective but most common and successful are of those where government spending cuts are accompanied with the reduction in taxes also. Estonian government reduced tax from flat 21 percent to 20 percent and as a result reduced its national debt to only 6 percent of GDP.



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