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1. Imran Khan in his speech in the Senate today said that like a house which has a high debt - it makes sense to decrease government spending and increase revenue.
The revenue part is right, but spending isn't, because governments don't work like households.
Here is why.
The revenue part is right, but spending isn't, because governments don't work like households.
Here is why.
2. Governments are not like houses - because the income is exogenous to households, for governments it isn't.
In other words - houses usually get income from outside, so decreasing spending at home wouldn't impact their income.
Government's don't work like this.
In other words - houses usually get income from outside, so decreasing spending at home wouldn't impact their income.
Government's don't work like this.
3. Briefly two things, first, unlike households governments, have far more means to get money - they can borrow money, put new money into the market ("quantitative easing") etc. (as long as they can keep inflation in check)
4. But more importantly, if a government cuts spending, they might also end up decreasing revenue because governments "spending has an influence over the taxation".
The expenditure influences income - you decrease one, the other is effected.
The expenditure influences income - you decrease one, the other is effected.
5. Think about this way - you have a set income and you are spending more than your income on your expenses. If you decrease your spending, your income doesn't change.
6. But, if the government cuts spending, that also decreases the state investment into the economy. Government's spending also contributes to our income.
7. Now, there are so many caveats to this (!), but what is clear that comparing households to governments is wrong. One should be very suspicious of these simple narratives.
8. At least in Pakistan's case, there is a need to invest more in public services and back activities with high positive externalities.
History is a witness to what happens when developing, unequal countries roll back spending. (Spoiler: the rich benefit)
History is a witness to what happens when developing, unequal countries roll back spending. (Spoiler: the rich benefit)
9. Pakistan needs a lot of state investment in infrastructure and other forms of public spending.
Even if we have to take debt to do that - it is fine. As long as we are able to have a comprehensive approach to economic development - which includes an effective taxation system.
Even if we have to take debt to do that - it is fine. As long as we are able to have a comprehensive approach to economic development - which includes an effective taxation system.
10. I will leave you at this - don't buy the austerity mantra. It doesn't work. Countries are not like households, and all debt isn't equal.
I. WAS. ON. TO. SOMETHING.
