Parties’ freebies and doles blow hole in state coffers, economists sayDuring the election season, political forces make announcements of free goods and services which could do more harm than good and destroy the system.
Free wifi, free water, free electricity, increment in elderly allowances, health allowances and what not. Election season is here, and it’s the time parties promise the moon and offer freebies galore. What the parties, however, do not seem to be taking into account is at whose expense such giveaways come.
Experts and analysts say the politics of freebies is largely a South Asian culture, especially seen in India, but in the long run, this practice is economically unsustainable. According to them, there is nothing that comes for free because someone has to pay for it.
“Has any party reviewed what progress local governments made in the area of fiscal federalism—revenue, expenditure, loan, fiscal governance and transparency?” said Achyut Wagle, a professor at Kathmandu University School of Management who is also a columnist for the Post. “They are taking grants from the federal government and distributing them.”
Nepal is holding its local elections at a time when the country’s financial health is not in the pink. The state is not earning enough but its expenditures are soaring, with the surge in imports.
The foreign exchange reserves are under pressure. The balance of payment (BoP) deficit is ballooning. With little to export to make money, the major source of the government’s earning is revenue collected from taxpayers, whose collection has also suffered lately.
The country’s foreign exchange reserves decreased by 16.3 percent to Rs1,171 billion in mid-March 2022 from the beginning of the fiscal year, which is sufficient to sustain imports for 6.7 months against the target of seven months. BoP, also known as balance between the money coming in and going out, suffered a deficit of Rs258.64 billion, according to the central bank.
Revenue collection is far from satisfactory with tax offices failing to meet the collection target by Rs32 billion as of the third quarter of the current fiscal year, according to the Inland Revenue Department.
The government is struggling to sustain the recurrent expenditure with its own resources, leading to increased reliance on loans to meet the resource deficit to fund budgetary programmes.
Experts say unless political parties and their leaders understand how the economy functions, a country is doomed to fail and the way they are offering freebies does more harm than good, as it could lead to financial disaster.
Sri Lanka is a recent case in point. One of the reasons it suddenly plunged into crisis—the crisis was in the making for quite a while though—is that the government decided to cut taxes, hurting the state coffers. The country’s bill was bigger than its earnings.
As these are local elections, the parties have offered freebies on a small scale, but if the practice continues, more such offers—and bigger ones—will be made during the national elections, as all the parties want to win.
“If they dole out freebies and don’t conduct proper review of finances and governance, this may lead to what you call municipal bankruptcy,” said Wagle. “We have seen such cases in Brazil.”
Experts say the tendency of distributing freebies will encourage political parties to engage in running distributive campaigns that would create long-term liability which cannot be sustainable.
If most of the government revenue is spent on distributive programmes, the government has to rely on domestic and foreign loans to finance the major infrastructure projects—both physical and institutional.
Nepal’s debt has already reached over 40 percent of the GDP as of the second quarter of the current fiscal year from 25.65 percent in the fiscal year 2015-16.
Experts say that unsustainable government doles could lead the country in the direction of the Sri Lankan and Greek debt crises.
“Political parties should be responsible. What happened to Sri Lanka after massive tax cuts, social security spending and unsustainable debt?” said Chiranjeevi Nepal, former central bank governor. “If government revenue does not increase in line with freebies and social security spending, the country will have to pay heavily for such cavalier moves.”
When a government distributes goods and services for free, it either has to pay from its own chest, which eventually could run dry, or it has to raise the money from taxpayers. So ultimately, experts say, what the parties call “free” are actually not free, as it’s the people who will end up paying it.
A quick analysis of manifestos of major political parties for the local elections shows the Nepali Congress is far ahead when it comes to free giveaways.
“The Congress appears to be trying to prove that it is more socialist than others and has adopted the socialist redistributive model of the economy, deviating from its policy of free market economy,” said Wagle. “After seeing that communist forces are making electoral gains by promising freebies, the Congress also appears to be in a bid to woo voters with free offers.”
In principle, local elections are meant for ensuring the participation of communities in governance, delivering goods and services in an effective manner and carrying out development projects as per local needs.
When it comes to development, Nepali parties have a tendency of making outrageous promises, some of which are simply impossible—both mathematically and financially.
During the last local elections, the Congress said it would turn Nepal into a middle-income country in the next 10 years by achieving a steady annual economic growth of seven to ten percent. It also promised to build flyovers, tunnel roads and overhead bridges, and operate monorails in big cities. The manifesto of the CPN-UML wasn’t different either. It promised to generate 15,000 megawatts of electricity. Experts say the promises were totally flawed as well as impossible from a financial point of view, and on top of that such pledges were unnecessary for local polls, as what they had promised don’t fall under the jurisdiction of local governments.
And when it comes to goods and services, Nepali parties take a cavalier approach and announce them for free.
Nobel laureate Milton Friedman in his book “There is no such thing as a free lunch” elucidates that freebies do not exist in economics, meaning everything has to be paid for by taxes—if not today, then tomorrow or the day after.
“Eventually someone has to bear the cost of what the parties say are for free,” said Pushkar Bajracharya, an economist. “We have to see the long-term implications of freebies. Even if today’s generation doesn’t pay, the future generation has to pay for the politics of freebies because there is the cost involved which should come from somewhere.”
In India, where freebie culture is rife, the Supreme Court in January this year issued a notice to the Election Commission of India and the central government on the issue of political parties wooing voters with the promise of freebies, according to the India Today magazine. The Supreme Court said the promise of freebies was a “serious issue,” the paper said. Earlier in 2013 also, the Indian Supreme Court had said freebies and other benefits routinely promised by political parties to woo voters destroy the level playing field in a democracy,
Experts say it is difficult to label pre-election promises and freebies as corruption, but the practice, if continued unchecked, could lead the government to fall off the cliff. According to them, if parties are offering free giveaways in local elections, they can come up with more such populist schemes during the national elections, which could either put pressure on state coffers or on taxpayers.
Due to the freebie culture, many state governments in India have been heavily indebted. According to a report by CRISIL Rating Limited, most Indian states are in precarious debt situations, which will constrain their ability to spend on capital expenditure.
The central government has limited resources from its own sources and relies on domestic and external financiers for more than one third of resources, according to the replacement bill on the budget.
Most local governments are heavily reliant on the grant from the centre to sustain their spending.
Local governments collected just Rs35.62 billion from their sole revenue sources against total resources of Rs410.2 billion that they received from internal resources, revenue-sharing and grants from federal and provincial governments in the last fiscal year 2020-21, according to a report titled “Economic Detail 2020-21 of the Local Governments” released by the Financial Comptroller General Office this week.
“As many local governments cannot sustain the basic expenditure, they have to rely on federal and provincial governments to fulfil their campaign trail promises,” said Khanal, the former finance secretary. “So, there is a possibility that most promises will not be met, like in the past.”
The biggest harm of freebie politics is that parties often tend to adopt this easy method for political gains, while putting the issues of governance, service delivery, and infrastructure development on the backburner.
“Distributing freebies is an easier option for politicians to lure voters,” said Khanal, the former finance secretary. “What parties are not taking into consideration is what to do if the revenue is not enough to sustain such distributive announcements.”
According to Bajracharya, the economist, freebies constrain the governments’ ability to spend on essential services and infrastructure.
“The government’s capital budget is hugely affected by such giveaways,” he said.