Calamities, debt crisis, growth: prospects — II – Opinion

Calamities, debt crisis, growth: prospects — II – Opinion

Historical precedents show the many ways in which various sectors of the economy do this. As the increase in debt leads to a widening gap between demand and supply, economic agents understand that this gap will be solved by a combination of means, including inflation, higher taxes, higher unemployment, wage suppression, financial repression, capital controls and currency depreciation.

The point is this: to the extent that rising debt must lead to some sort of adjustment in which certain economic sectors will lose purchasing power to balance demand and supply, each sector recognizes the risk and changes its behavior to protect itself from being forced to absorb the Cost.

These actions can in turn cause a host of ripple effects. Business owners can typically divest or shorten their investment horizons, property developers can scale back development projects, and factories can postpone expansion plans, and all of these actions reinforce similar behavior in other economic sectors. .

It is important to note that the government has imposed a super tax of 10% on banks, cement, iron and steel, sugar, oil and gas, fertilizers, LNG terminals, textiles, banks, automobiles, cigarettes, beverages, chemicals and airlines. This supertax was therefore imposed primarily by the manufacturing, industrial and a few professional services sectors, but was not intended to target those in real estate or retail.

But the government did not stop there and soon rumors swirled that it might still impose a special 5% income tax on manufacturers to create fiscal space to give billions of rupees relief to traders, bankers, brokers and real estate actors.

This behavior is particularly destructive because it is highly self-reinforcing: rising debt levels create increasing uncertainty about how the associated costs will be distributed, triggering financial distress behavior that undermines the growth, further widening the gap between debt service needs and debt service capacity and leading to more financial distress behaviors.

Conclusion:

Unable or unwilling to see deficit spending for the ruinous model it is, government must at no cost repeat the past mistakes made by many African economies and drive the economy further into economic ruin by accumulating debt excessive (and therefore imposing heavier tax burdens). Excessive indebtedness harms the Pakistani economy in eight ways:

Calamities, debt crisis, growth: prospects – I

  1. It perpetuates the state-led approach to development, which has failed to generate economic prosperity and has left the economy in a precarious state characterized by dependency, poverty, tyranny, corruption, runaway inflation and deindustrialization.

  2. By perpetuating the state-driven approach to development, debt-fueled public spending is deepening poverty, consolidating political and economic repression and thus further delaying market-friendly reforms that Pakistani society urgently needs to develop. truly and weather the global economic storms.

  3. Debt repayments further cripple already crippled economies by diverting larger and larger shares of government revenue to debt servicing. Worse still, Pakistan pays much higher interest rates (9-16%) on its Eurobonds than developed countries.

  4. Like most government spending, Pakistani government spending tends to be mired in corruption, cronyism, embezzlement, rent seeking, overcharging and waste, which ultimately means it makes more harm than good. This only leads to further indebtedness to maintain the spending spree – a vicious cycle that attracts more political and economic opportunists seeking employment or to enrich themselves through government spending and favors.

  5. This leads to injustice and a wider income and wealth inequality gap, as politicians and their associates (e.g. big business and other interest groups) benefit first and most from these injections. money through various programs.

  6. Debt-driven government spending also means a heavier (i.e., more oppressive) tax burden in the future. High taxes are one of the main obstacles to economic development. Less development means more poverty, more human suffering and more poverty-related deaths.

  7. Moreover, excessive indebtedness leads to a situation where people, their children and even unborn children will have to be taxed to pay for today’s largely unnecessary and counterproductive government spending, which only enriches politicians. and their associates.

  8. On top of all this, debt (loans and grants) locks Pakistan into poverty and vassalage to foreign governments (mainly Western states, but others too these days).

    Sophisticated versions of 21st century financialized debt inevitably have to be repaid by the state, either through economic growth or increased taxation, hinting at the deep connection between fiscal and financial governance. Often, developing countries almost never repay their debts because they don’t have a strong economy. Increasing tax burdens in precarious economies such as Pakistan will only further impoverish an already impoverished society.

Instead of maintaining one of the most oppressive tax regimes in the world, targeting sectors that generate significant economic growth and proactively contribute to exports, Pakistan should implement tax policies that encourage local capital formation, investment, entrepreneurship and sustainable economic growth. The government should therefore consider suggestions from tax policy expert Dr Ikramul Haq, who says a paradigm shift is needed – the best tax is one that has the lowest possible tax rate on the highest possible tax base.

The entrepreneurial spirit is not lacking in Pakistan. To unleash this enormous potential, the government must first do much less. Above all, they must stop trying to micromanage the process of industrialization, whether through trade policy, industrial licensing, or direct control of state-owned enterprises. But they also need to do more. They should strive to control government borrowing and inflation, while investing adequately in physical infrastructure such as bridging the digital divide and non-physical infrastructure such as human capital.

Copyright Business Recorder, 2022

Robert P. Matthews