G20 SUMMIT

According to an associated press report, world leaders made some bold pledges to cut their rising budget deficits by half, within the next three years, This understanding was reached at the Group of 20 (G-20) summit held on June 26-27 in Toronto. The G-20 nations – including US, Canada, UK, France, Germany, Italy, Japan, Euro Zone, Russia, South Korea, China, India, Indonesia, Saudi Arabia, South Africa, Turkey, Brazil, Argentina, Mexico and Australia – represent 85 per cent of the entire world’s output.

After spending trillions of US dollars to rescue their economies from the worst downturn in decades, the G-20 nations have now reversed course and decided to cut their budget deficits by half till 2013. The rescue packages were necessitated to spur the recession-ridden economies which – instead of moving upward – had been sliding downward. Of the G-20 nations, only six (China, India, Indonesia, Australia, Saudi Arabia and South Korea) posted positive growth in 2009, while the remaining 14 economies recorded negative GDP growth during the year – ranging between 0.2 per cent and 7.9 per cent.

Reducing budget deficits by the G-20 nations could mean significant increase in taxes, together with marked cut in government spending. Leaders of the G-20 nations had reiterated their resolve to stick to the decisions taken at the G-20 summit, in their closing news conferences on June 27. It appeared from the environment at the summit as if a new age of austerity was around the corner.

The developed countries agreed to cut their budget deficits (as a percentage of their GDP) till 2013 and stabilize their debt burdens by 2016. For the US and a number of other countries, it would be just the opposite of what they had been doing during the recession years. During 2007-09, the aforesaid countries had slashed taxes and boosted spending to keep the Great Recession from becoming a replay of the Great Depression of the 1930s.

As a result of steps taken to spur the economy during 2007-09, budget deficits of governments had soared and their debt burden had increased alarmingly. The US budget deficit hit a massive $1.42 trillion last year – the highest in history – and analysts are of the view that it would come down only marginally to $1.3 trillion this year. US spending plan released last February shows that the budget deficit will come down from 10 per cent of the GDP in 2009 to 4.2 per cent of the GDP in 2013 – a cut of more than half.

As far as Europe is concerned, the Greek debt crisis had scared many European nations with similarly high debt burdens into taking appropriate steps to cut their budget deficits before it was too late. Greece itself faces painful austerity measures after bailout packages from its neighbours rescued its economy at a time when Greece could not meet the debt obligations itself.

Coming to Asia, India recently decided to completely lift subsidies from petrol and diesel, to bring down its budget deficit and bolster government’s finances. It is feared that the move would hurt farmers, raise transport costs and aggravate inflation. Nevertheless, the move was considered necessary to reform the economy and overcome the financial difficulties facing the country.

Although Pakistan is not included in the G-20 nations, it is facing a predicament similar to the one faced by the G-20 nations. The government is facing tremendous difficulties in achieving its target of budget deficit. Before the announcement of the new budget, it was expected that the budget deficit could be contained at 4.9 to 5.1 per cent of the GDP. However, since the tax collection by the FBR is likely to remain far behind the revenue collection target of Rs1, 380 billion, it is feared that the budget deficit during 2009-10 would move upward to around 5.5 per cent of the GDP. For 2010-11, the fiscal deficit has been budgeted at Rs.685 billion. However, the actual budget deficit might exceed the aforesaid amount due to lower tax collection and higher government’s non-development expenditure.

Due to higher budget deficit, the country’s internal and external debt burden continues to rise. Public debt burden has already risen to 56 per cent of the GDP and it is likely to grow further in the coming months, as the government has made no serious effort in the budget to raise the tax-to-GDP ratio. The World Bank and the IMF had cautioned a few months ago that the government could face the problem of public debt sustainability if it did not take appropriate measures to bolster its finances and cut its non-development expenditures. In other words, the country is gradually moving towards a debt trap, while the government remains indifferent and unconcerned.

High government expenditures and low GDP growth are among the factors, which are keeping the inflation rate high. The stubborn double-digit inflation forces the State Bank of Pakistan to keep its policy rate at a higher level which results into higher cost of doing business, lower industrial production and exports, as compared to the country’s potential. Load-shedding and terrorism add fuel to the fire, causing severe damage to the economy.

The decisions taken in the G-20 summit carry a valuable lesson for the domestic economy. In order to ensure a respectable status for itself in the comity of nations, the government should try to put its own house in order. All possible efforts should be made to make the country self-reliant, by boosting government’s revenues, cutting non-development expenditures and keeping the debt burden at a sustainable level. For a nation of more than 160 million people, it looks awkward and disgraceful to continuously depend on the IMF, World Bank and aid-giving nations, for its existence. 

-www.thenews.com.pk