It just happened. Mr. P Chidambaram just laid out the Union Budget for the Fiscal Year 2013-14. As usual, it was accompanied by the usual hoopla including portraying P Chidambaram dancing Gangnam Style and interviewing his granddaughter who has just turned 12 (Bless the child!) and was apparently very excited at being allowed to be in Parliament for the occasion. Newspapers and television channels allotted prime space/time for discussion of budget expectations (pre-Budget) and budget analysis (post-budget).
But how relevant is the Union Budget to our lives really? If at all it is, in what way is it relevant? These are important questions for everyone of us to understand.
What is the Union Budget?
It is basically a declaration of the government’s plans to spend money and its corresponding plans to fund these expenditures. Government incurs a wide variety of expenditures, every one of which needs to be paid for. The Union Budget lays out the sources of funding for government’s expenditures. This is usually in the form of proposals related to taxation of different forms. Announcements are made regarding tax structure and levels of taxation. As part of the Budget, government also makes certain policy announcements. These too, incidentally, take the form of government’s approach to taxing individuals and corporations.
As the expenditures of the government typically exceed its tax revenues, the government usually also indicates its borrowing plan. This is usually indicated by the Fiscal Deficit. The larger the fiscal deficit, the more the government will need to create new money or borrow from the markets.
An important supporting document usually released just before the Budget is the annual Economic Survey. This document is put together by the Ministry of Statistics and Programme Implementation through the different statistical bodies working under it. The Economic Survey presents the state of the economy in terms of the total output of goods and services in the just-concluding fiscal year. The MSPI also comes up with projections on various macroeconomic indicators, the one most watched out for is the GDP growth estimate for the coming fiscal year, i.e., the year for which the Union Budget is being presented.
The perceived relevance of the Union Budget
Ordinary people look to the budget to know how much tax they are going to bear in the year ahead. Business houses look out for policies that would particularly impact the businesses they are into or plan to enter, specifically through proposals related to taxation. Economists study the Budget in terms of the macroeconomic consequences of its implementation. That means looking out for the impact of policy initiatives on key economic indicators such as growth, inflation, unemployment, etc.
Is the budget relevant to the common man?
Of course it is. It tells people how much of their income they get to keep and how much will be taken away by government. The common assessment of the budget is largely in terms of who will be benefited by it and who harmed, and by how much. A broader assessment of the Budget is in terms of the macroeconomic effects of Budget proposals. Typical analysis looks at which sectors and industries would be benefited by the budget proposals and which ones adversely affected, in what way and to what extent. Even broader analysis looks at GDP growth estimates, the impact on the economic climate and key economic variables like money supply.
How to judge a Budget?
Every affected party typically evaluates the budget in terms of the impact on him. Those who carry a relatively larger burden typically deride the budget while those who are relatively less burdened or benefited praise it. Economists judge it is terms of the extent to which it addresses what they see as the key macroeconomic issues of the day. An economist who sees slow growth as the problem would judge it according to the extent to which it will accelerate growth.
How do we judge Budget 2013-14?
In simple terms, it is a bad budget. Frankly, any budget that does not show zero expenditures and hence zero revenues is a bad budget. The best that one can say about this and any budget is if it indicates an intention to slowly roll back government expenditure to the point where it eventually just does not exist and therefore government has no need to identify sources of revenue.
Why do I say this?
Government spending money is nothing more than a form of intervention in the otherwise free market. Any government intervention in the economy is economically detrimental. Since the Budget is essentially a statement on government’s plans to spend money, and tax and borrow to fund it, thus intervening in the economy at many levels, it is fundamentally bad.
Is this an extreme view?
Of course it is. But then one needs to decide whether an extreme view is necessarily an unsound view. For instance, none of you would argue that I am presenting an unjustifiably extreme view point if I say that a person who wants to stay alive and maintain good health should consistently eat healthy foods and not regularly consume a mixture of healthy foods, unhealthy foods and poison. So, do not be in a hurry to judge what I say as unsound just because it is extreme.
What is the justification for this extreme view?
The free market is the complex of voluntary exchanges engaged in by all individuals. The very fact that every exchange is voluntary means that every individual is ex-ante subjectively better off as a result of every exchange he decides to enter into. Since every exchange leaves every person better off, the sum total of all exchanges leaves every individual at the point of greatest possible well being given his circumstances.
Government intervention in the form of taxation followed by spending, on the other hand, is a form of violent exchange. One individual is coerced into parting with his resources so that government may pass it on to other individuals. While the recipients benefit, the individual who is coerced to part with his resources is clearly worse off. The very fact that the individual is coerced tells us that whatever he may get in exchange for the resources he is forced to give up is valued less by him than what he gives up. Therefore, he is clearly worse off. It is impossible for the economist to square this off with the benefits accruing to the beneficiaries because (the economic concept of) value is a subjective quantity that is not amenable to interpersonal comparison of any kind. So any attempts at cost-benefit analysis of tax and spend policies are essentially economically unsound. The only thing that is certain is that some people are worse off as a result of the intervention. This is in keeping with the fundamental nature of violent exchange as can be seen in the simple case of robbery.
Government intervention through tax and spend policies also diverts resources from private preferences for consumption and investment into consumption according to the political preferences of those in government. It draws society’s scarce resources away from the market where they are applied to the satisfaction of the ends most valued by all individuals. These resources are no more available for consumption and investment by individuals and the economy is consequently adversely affected.
Yes! Government does build roads and bridges and other things that we call infrastructure. It does run schools and hospitals. It does engage in a wide range of welfare activities. But the important point to note is that none of these was voluntarily preferred by the people who constitute the market. If they had, there would have been no need for government to fund them by coercively taking away private resources. Anyone who wants to argue based on the positive effects of government spending would be well reminded of Frederic Bastiat’s point about the seen vs the unseen.
While it is tempting to look at the roads and bridges built, the schools and hospitals run and the poor fed and clothed by government’s spending, it is also important to look at what the individuals whose resources were coercively taken away would have done with these resources had they not been taken away. All the spending and the consequent production in those lines, the spending and production that never happened but would have happened, is the unseen that we should take note of.
As Bastiat notes in the example of the baker whose shop window is broken by a stone throwing vandal, society is a net loser in such cases because while the breaking of the window results in income and employment in the glass making and allied industries, some other industry where the baker would have spent the money he spends to mend the window loses income and employment. The baker now has only a shop window. Had the window not been broken, he would have had the window AND whatever else he would have spent on, say a suit. From an economic perspective, we can clearly see that society is a suit less as a result of the broken window.
Anyone claiming that the government’s spending and the subsequent spending of the income by the recipients of the government’s largesse has beneficial effects would essentially be engaging in a modern instance of the Broken Window Fallacy.
Further, it is important to note that all government expenditure is fundamentally consumption. The mere building of structures and implements does not constitute investment from an economic perspective. If I build a pathway to beautify my garden, it would constitute consumption and not investment, unless of course I plan to capitalise it when I sell the house subsequently. Similarly, for the government functionary, the dam or the road is an end in itself and not a means to another economic end (though it is indeed a means to a political end – more public support and a longer stint in power).
Like every government budget presented thus far, Budget 2013-14 too is an exercise in interventionism. The Budget is fundamentally a political and not an economic document. It is just a refined way of adding gloss to the Broken Window Fallacy and justifying unsound economic policies. It only lays out whom the government plans to enrich at someone else’s expense. It is a sophisticated cover for the government’s essentially violent actions aimed at redistributing wealth according to the preferences of those in power. The sooner finance ministers get down to the job of reducing government expenditures systematically, preferably with the aim of bringing them down to zero, the sooner we will be on the path of greater well-being for all.