There's an opinion among among some our intelligentsia that the our fiscal deficit is largely due to a bloated and self serving federal bureaucracy. Broad sweeping statements are made against evil bureaucrats perks & privileges. This would by itself be not an issue but when this
argument is extrapolated to suggest that the government's efforts to document economic activity and ensure broad based taxation, then such an opinion needs to be questioned. Before attributing our fiscal woes on any section of the government it is only fair to ask for evidence
It might useful to start by agreeing on basic facts eg Tax/GDP is c11% & NFC award to provinces is 58% of this or c6% of GDP. If we accept that then we would also agree that the federal government is only left with 5% of original 12% (in terms GDP) for Federal Govt spending
If we also assume approximately 3.5% is unavoidable spending for debt servicing since we can't use a magic wand to erase legacy borrowings. There's a further 3% for defence that's also pretty inflexible given the neighbourhood we are located in.
Effectively we start with 1.5% deficit before even saying hello to nice stuff like investment in future of our people through spending on education or health or infrastructure. If we assume 3% of GDP for health, education, poverty alleviation, etc we are already 4.5% in deficit
To execute those longterm investments in health, education, etc we unfortunately we need people to execute the various programs. Let's call these people bureaucrats. If we assume that their combined costs in various ministries is about Rs400bn or approximately < or =1% of GDP
So we already down to 5.5% of GDP as deficit. If we don't want to add to our borrowings since we accept government borrowings is a horrible thing, our tax revenues should be at least 16.5% of GDP. But wait I've not yet included circular debt or SOEs. But let's say both disappear
So to have something that obviates further government borrowings, the lowest figure for tax/GDP ratio appears to be 16.5% or an increment of 50% from the current level of 11%. Its worth noting that even in a highly efficient city state like Singapore tax/gdp ratio is over 14%
It's worth remembering Singapore doesn't have to spend much on legacy debt servicing. Its compactness makes spending on infrastructure like roads lower than countries where large distances between cities have to connected. It doesn't have hostile neighbors so can limit defence
Before beating up our bureaucracy for their profligacy & inefficiency, we might do well to understand what's a realistic Tax/GDP for a modern functioning state. The average for OECD countries is approximately 34%. For both China and India's tax/gdp ratio is in excess of 18%
The only countries that seem to have less than 11% tax/GDP ratio are: Chad (c 5%), Gabon (10.9%), Voodoo land Haiti (9.4%) and few more such wonderful examples prosperity, joy, and democracy. However one is not convinced that they serve as best examples to follow
* argument is extrapolated to suggest that the government's efforts to document economic activity and ensure broad based taxation is wrong, then....
