Keynes & Pakistan’s budget
THE process of budgeting involves planning and allocating funds to different activities and sectors of the economy.
In Pakistan, the annual budget is a hot topic making headlines not because it is passed in the scorching heat of June but because it affects all segments of society, ranging from traders to the general public and from the defence forces to civil bureaucracy. The federal budget for FY 2021-22 was no exception.
Depending on who you ask, the budget for FY 2021-22 was either awamdushman (anti-people) or a great equalizer that will correct the future economic trajectory of Pakistan by generating sustainable gross domestic product (GDP) growth, social welfare and development.
The reality, as always, is more complex than any black-and-white categorization and warrants an in-depth investigation.
To begin with, it is quite clear that the current budget passed by the incumbent government is a deviation from the trend of the past few years, where the focus was on belt-tightening, cutting expenditures and fiscal consolidation.
This time, however, the government has increased the budgetary allocations for current as well as development expenditure to Rs 7523 billion (from Rs 6346 billion) and Rs 964 billion (from Rs 792 billion), respectively, thus indicating a change in economic strategy.
In fact, many political pundits, with a keen eye on the developments in the Red Zone, were already predicting a budgetary aberration with the change of guard at the Q-Block.
Indeed, a closer look at the contents of the FY 2021-22 budget gives an impression that the government aims to revive the aggregate demand (or the purchasing power of people & institutions) after taking demand suppression measures in the early fiscal years of its tenure.
For instance, the government increased projected expenditure by 19%, defence budget by 6.2%, public sector development programme (PSDP) by 37%, subsidies by a whopping 226% and also constituted a special provisional fund for COVID-19 worth Rs 100 billion.
While the government’s allocation for expenditure has gone up, it has also committed itself to providing more tax relief to a broad segment of society.
For example, no new taxes have been imposed on the salaried class; manufacturing & financial businesses have received a tax cut; the industry is given an exemption from customs duty on a broad range of products (such as textiles, leather, pharmaceuticals, steel, paper, cables, fibre-optic, and automobiles) and taxable income ceiling of small businesses has gone up from Rs1 crore to Rs 10 crore.
In every aspect, the present budget can be termed a stimulus budget that targets the demand-side factors by loosening the fiscal policy in terms of greater government expenditure and lower taxation.
In fact, governments, throughout the world, use such stimulus budgets and loose fiscal & monetary policies when dealing with a severe recession or a macroeconomic crisis.
Such policy treatments are a direct legacy of British economist John Maynard Keynes (1883-1946), who undertook a comprehensive study of the world economy in the immediate aftermath of the Great Depression of the 1930s that lasted almost a decade
Keynes theorized that aggregate demand plays a greater role in any macroeconomic crunch than supply-side factors and is also the key to its successful resolution.
An economy slows down because people do not have enough money in their pockets to get the goods & services that they desire or require.
As a result, the sales of businesses go down, and then they are forced to lay off their workers in droves.
This leads to further demand suppression and the cycle continues unless the government intervenes and jolts the system with a stimulus.
Keynes’ solution to such a crisis is simple: loosen the levers of fiscal and monetary policy by increasing government expenditure, reduce tax rates, and increase the money supply while slashing interest rates.
Keynes explains this logic by using a rather witty analogy. He writes that in case of an economic crisis, the government should bury bottles full of banknotes in a coal mine and then, ask unemployed people to use their labour to dig them up.
This would end two grave problems that characterize all depressions: unemployment and low aggregate demand.
Milton Friedman—another giant of 20th Century macroeconomics—termed this idea ‘helicopter money’ in his scholarly work.
Keynes summarized these ideas quite eloquently in his book The General Theory of Employment, Interest, and Money which is considered to be a masterpiece of macroeconomic theory and the history of economic thought.
In fact, Keynes is widely recognized as the father of modern macroeconomics taught in universities around the world.
History has proven time and again that the Keynesian diagnosis of economic recession and its policy prescriptions are far superior and much closer to on-ground realities than competing theoretical claims.
However, unfortunately, due to the onslaught of the neo-liberal doctrine backed by the processes of globalization, the Keynesian theory was relegated to the sidelines of economics, and for a time described as a relic of the post-World War II era.
However, his ideas appear to be coming back in vogue since the pandemic, with many countries adopting a Keynesian attitude towards budgeting, and Pakistan’s new budget is no exception.
Indeed, Keynes is indispensable for countries — Pakistan included — that are looking for sustainable economic growth, low unemployment, booming industry and a strong welfare system.
—The writer is a researcher at Centre for Aerospace & Security Studies (CASS).