The Indian government is set to present its budget for the next financial year (2016-17) in less than a fortnight’s time. All the focus is on the proposed tax sops the Finance Minister could potentially dole out as well as on the fiscal deficit, which is the indicator of government spending in excess of what it earns. I think it’s time governments all over the world got rid of attaching undue importance to fiscal deficit.
Governments are expected to run deficits – it’s their job to do so. Whether the deficit is 5% of GDP or 15% of GDP is immaterial as long as it is a deficit. I know governments should not be allowed to run away with a large deficit which can have disastrous consequences. Having said that, it doesn’t need so much coverage and examination since the world has changed significantly since John Maynard Keynes suggested deficit financing by governments as a way to tackle recessionary trends in the 1930s. The Keynesian theory held fort for the better part of the latter half of the 20th century and also did receive a big boost during the last recession in 2008. I’m a huge fan of Keynes but strongly believe that the time has come for us to de-emphasize the importance of fiscal deficit.
In a world where economic cycles show signs of quicker churn (please refer to my earlier piece – https://sreedeeps.wordpress.com/2016/02/07/366days366posts-day-38-how-to-tackle-the-next-recession/), governments have an important role to play. When the government spends, it should be looking at how that spending has created impact on the economy. Therefore, rather than the magnitude of the difference between spending and revenue, governments should focus on the quality of spending and report numbers to that effect. I call this Government Spending Quality Index (GSQI), which can be indexed against Gross National Savings less government savings. Any increase in the GSQI over the base year value of 100 would represent an improvement in government performance as far as the economy is concerned whereas a decrease would show that the quality of the expenses was not quite the way it should have been. The idea is that good quality government spending should lead to households and businesses saving income and thus creating wealth for the country, thereby increasing the GSQI. This is an index which the government can report every month and a summarized picture presented in the budget. The fiscal deficit can still continue to be shown, albeit with not much importance being attached to it other than on the quantum with reference to the size of the country.
The GSQI would be of much greater relevance than fiscal deficit in a recessionary situation because with the power of this tool, one can track whether there is an actual improvement in the situation. Fiscal deficits are largely myopic in this regard. In a situation of boom, the GSQI would give the government the much needed intelligence on thrust areas to improve the index further. Along with the stock market, the monthly GSQI would be a great indicator for monitoring economic cycles, both as a predictive tool as well as a tactical one. There will also be the extra pressure on governments to shift their focus from mere spending to quality spending. Modern day governments are not just spending contraptions or deficit havens, but are watchdogs of the economy. GSQI can drastically change the way government accounts are viewed. I guess there’s no better time for governments to use GSQI than now, when there are some ominous signs lining the clouds warning of a threatening deluge that is another global slowdown, barely years after the last one ended.