States have limited options for appealing to voters by reducing taxes and have little incentive to adopt pro-growth economic policies that can boost tax revenues.
States have limited options for appealing to voters by reducing taxes and have little incentive to adopt pro-growth economic policies that can boost tax revenues.
In the past few weeks, there has been intense debate over whether freebies, or certain goods or services provided by governments to the people for free, are justified. political back-and-forth began PM Narendra Modi’s comment That while the central government was spending public money on properties like roads and airports, many state governments were spending extravagantly by giving goods free of cost. Supreme Court also took Public interest litigation in this matter.
Meanwhile, a lot has happened The debate about what counts as a freebie, as opposed to being classified as an actual welfare expense, The underlying assumption in the debate seems to be that some government spending leads to a sustainable increase in the standard of living of the people while other types of spending only lead to erosion of the capital base of the economy without providing long-term benefits. For example, spending on education and health care is considered essential because it enables human development, while giving free food or electricity is viewed by some. As a wasteful expenditure that depletes resources.
blurred line
However, the fact remains that it is not easy to differentiate between these two types of expenses. As critics of the prime minister have pointed out, freebies given to poor families can in some cases actually increase their long-term economic well-being. For example free electricity, can provide a poor family with access to the Internet, the opportunity to use gadgets that enhance the quality of their daily lives and improve their productivity, and (for farmers) ensure higher agricultural yields. To provide better irrigation potential to their land. Things like free meals can also help poor families get adequate nutrition and save money to invest in properties that will improve their economic condition in the future. In fact, critics have pointed out that a large part of the central government’s own spending goes into providing ‘free gifts’.
People wait to pick up mixers and grinders provided by the government free of cost in Puducherry. file photo | Photo Credit: T. Singaravelou
In other words, whether a freebie will result in a permanent increase in the standard of living of recipients cannot be determined by the fact that it is a freebie, but should only be assessed on the basis that it results in affects how. over the long term. However, the hypothetical idea of long-term benefits for the poor can be used as an excuse by spending, populist governments to justify all kinds of spending. It is also not necessary that money spent on roads and other infrastructure projects is productive. In fact, since infrastructure projects are considered public goods that are not bound by the monetary discipline of the profit-and-loss system, it is impossible to know whether they are actually adding value to the economy at the scale intended. Without economic calculations, it is not possible to know whether the resources used to offer public goods can be better used elsewhere in the economy.
GST factor
An important element that has largely been missing from the debate on freebies is the incentives that state governments have been facing ever since. Goods and Services Tax (GST) Regime was introduced in 2017. Some critics warned that the nationwide GST could lead to some distorted incentives, undermining the fiscal autonomy of states.
Under the GST regime, when it comes to fiscal policy of the states, they have major control over how they spend the money they receive from the central government. On the other hand, the power to levy taxes on citizens is mainly with the central government, the state governments have the power to levy taxes on certain items like immovable property, liquor and petroleum products at the state level. This means that, at the state level, political parties have limited ways of appealing to voters by reducing taxes and little incentive to adopt pro-growth economic policies that can boost tax revenues. At this point in time the only way to appeal to voters is to spend as much as possible, which in turn leads to fiscal degradation. This is probably why there is a growing conflict between the central and state governments over the latter’s fiscal negligence.