Decentring Fiscal Deficit Target Numbers

You can find my article in the Economic & Political Weekly of 09-05-2015.  Or follow this link:

independent.academia.edu/SashiSivramkrishna

The article questions the obsession with fiscal deficit traget numbers like 3.1% of GDP or 3.6% or 3.9%. Does it really matter?  Should it be the goal of macroeconomic policy??

This is what MMT is weary about ....

Union Budget 2015: FM Arun Jaitley hints at more cuts in spending

Ahead of the Budget 2015-16 to be unveiled later this month, Jaitley hinted at a stable tax regime, saying that 'no unfair effort' will be made by states and the Centre to mop up revenues.

Having already crossed the fiscal deficit target in November, Finance Minister Arun Jaitley today hinted at more cuts in spending so as to contain it within limits for the current fiscal, saying he does not believe in living on borrowed money.

"We're trying to rationalise expenditure as far as the government is concerned because we do not want the government to live on borrowed money indefinitely," he told a gathering of industrialists and planners here via video conferencing.

"The whole concept of spending beyond your means and leaving the next generation in debt to repay what we are overspending today is never prudent fiscal policy," he said. The additionally hinted spending cuts would be over and above 10 percent that the government has already announced to meet the budgeted 4.1 percent fiscal deficit target which was crossed in November itself -- four months ahead of the end of the financial year on March 31. 

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Read more at: http://www.moneycontrol.com/news/economy/fm-arun-jaitley-hints-at-more-cutsspending_1294457.html?utm_source=ref_article

Exogenous v/s. Endogenous Money Theory!

I found this statement by Raghuram Rajan in the Deccan Herald of December 29, 2014 (p.13):

"Some budgetary incentives for household savings could help ensure that the country's investment is largely financed from domestic savings ... Domestic demand has to be financed responsibly, as far as possible through domestic savings."

The conventional circular flow and endogenous money

Once again a report in the Livemint of 27-11-2014 caught my attention;

“Perhaps the reason we have been so willing to protect the borrower against the creditor is that the hated moneylender looms large in our collective psyche. But the large borrower today is not a helpless illiterate peasant and the lender today is typically not the sahukar but the public sector bank. In other words, we are the lender,” said Rajan in his speech on Tuesday, adding that when the large promoter defaults wilfully, he is essentially robbing the taxpayer and making it costlier to fund new investment in the economy.*

This sounds so much like the conventional circular flow reasoning - that deposits come before lending.  Endogenous money questions this view; loans create deposits.

I am not questioning the fact that growing NPAs are a cause of concern but simply raising the point that economists still cling to the conventional view that banks use savings to lend just like the moneylender.


* Read more at: http://www.livemint.com/Money/TaNyxECKa6pbuWYuS7vAaN/RBI-ready-to-give-more-flexibility-in-recasting-distressed-l.html?utm_source=copy

Here is some conventional macroeconomic rhetoric, extracted from an article in the Livemint of Friday, Nov.7, 2014.  MMTers can obviously see through the anxiety that is being raised here.


... “Given the sluggish growth of tax revenues in (the) first half of 2014/15, meeting the disinvestment target would be crucial to ensure that the fiscal deficit remains in line with the budgeted level,” said Aditi Nayar, an economist at ICRA, the Indian arm of rating agency Moody’s.

... Officials worry that a shortfall in proceeds from share sales and lower tax collections due to the weak economic recovery could force them to cut budgeted spending again.

... “The situation is not as bad as last year, but we may need expenditure cuts, maybe of Rs20,000-25,000 crore,” said the first source, adding there could be savings in capital spending as some ministries were unable to spend allocated funds.

Read more at: http://www.livemint.com/Politics/fUvEGpLThR9rVAtYvpDinN/Govt-may-fall-short-of-its-95-billion-privatisation-target.html?utm_source=copy

German austerity: will the euro zone break up?

Anyone familiar with MMT would see the misery Germany is heading towards.  Even worse it will take with it the rest of Europe.  Excerpts below from an article that appeared in the Livemint today (25 October 2014) (http://uk.reuters.com/article/2014/10/24/uk-eu-summit-idUKKCN0ID0VF20141024) clearly highlights the fears that many modern money theorists have been warning us about.  What is surprising is that there is no popular political voices coming from Germany that make an MMT argument against German austerity.

Stagnating euro zone seeks German shift

BY FRANCESCO GUARASCIO AND ROBIN EMMOTT

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After the bloc's revival came to a halt in the second quarter, France and Italy want to shift course away from the spending cuts that marked the bloc's response to the 2009-2012 crisis Germany says debt discipline must continue.

Seated around a large oval table in the EU summit's red marble building, Merkel said no country with a national debt greater than its economic output should be borrowing more, diplomats said.

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According to people in the room, Merkel said record low interest rates gave the euro zone "room to breathe" and that a mix of private investment, fiscal discipline and openness to fast-growing Asian economies was the way forward.

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The debate is complicated by EU rules that seek to keep country's public finances in order and Germany's promise to balance its books next year for the first time since 1969.

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How mainstream macroeconomics thinking finds its way into popular discourse.

Two excerpts from articles that appeared in the Livemint of 20 October 2014 show how the need to achieve a fiscal deficit target is becoming an end in itself.  More than the fiscal deficit number per se the debate needs to focus on the real effects of subsidies in distorting resource allocation (if that is so) and the unproductive expenditure of the government that fails to ease supply side constraints and raise productivity.  There is surely space for an MMT perspective on these issues.

Is the centre finally cracking down on subsidies?

Decisions on diesel prices and cooking gas subsidy will help meet centre’s fiscal deficit target of 4.1% of GDP

Remya Nair

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The move will also enable the government to meet its fiscal deficit target of 4.1% of gross domestic product (GDP), even after taking into account the expected shortfall in revenue collections.
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A Union cabinet minister, who did not wish to be identified, pointed out that the government cannot afford to continue with the current subsidy regime. “There are no freebies. We cannot afford to bankrupt the state exchequer,” the minister said, signalling the central government’s intent to overhaul the subsidy regime.
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Read more at: http://www.livemint.com/Politics/h9P8fnfqgoehC9iRbAHzuL/Is-the-centre-finally-cracking-down-on-subsidies.html?utm_source=copy

What it takes to make in India

The first and most important condition for manufacturing success in India is to have a low inflation regime

Narayan Ramachandran 
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The first task in ensuring a low inflation environment is to eliminate the primary deficit. This deficit is the difference between the total revenue and total expenditure of the government with debt payments netted out of the calculation. India must begin to deliver upon both a primary and fiscal deficit target as measures of fiscal consolidation in its annual budget. The elimination of the primary deficit and a reduction in the fiscal deficit (to say 2.5% of GDP) will ensure that we live within our means each year, do not increase the stock of debt and crowd out less capital from the productive economy.

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Read more at: http://www.livemint.com/Opinion/ZNh0XaD02lIvreFus5PHlL/What-it-takes-to-make-in-India.html?utm_source=copy