Now that a lot of important Assembly elections are either happening or just about to happen, all major political parties are coming out with their manifestos. All of them are promising welfare handouts on an enormous scale.
A few months ago I had written that this sort of in-your-face welfarism was becoming the political norm not just in India but all over the world.
This was leading to huge budget deficits in nearly all the countries and the resulting increases in money supply.
So I am happy to describe a very recent working paper from the IMF (No 194) that says the same thing, namely, “parties across the political spectrum sound increasingly similar when it comes to fiscal policy: they all campaign on ideas of a bigger government and promising more spending.”
The paper has surveyed 65 countries. It says “political discourse on fiscal issues has become increasingly favourable to higher government spending since the 1960s.”
They have looked at “the fiscal content of over 4,500 political platforms from 720 national elections held between 1960 and 2022 in advanced and emerging countries.” The data has come from something called the “Manifesto Project”.
Indian commentators should read this paper carefully if only to feel superior that our politicians were amongst the pioneers of this kind of pay-as-you-go welfarism. Even now, despite the Modi government’s reasonably tight-fisted approach, they are no slouches at spending our money for buying votes.
As the paper says, “People want more infrastructure, schools, hospitals, and services (education, health, safety), preferably at low or no additional cost. And politicians want people’s votes.”
Another notable finding of the paper is that “fiscal discourse turns more conservative under more adverse economic conditions, including in the aftermath of public debt surges, and after the adoption of fiscal rules, but only to a limited extent.” That is, when the going gets tough, politicians the world over pay lip service to fiscal rectitude but, it turns out, only for a short time.
There are many other nuggets, such as “the widespread adoption of fiscal rules did not result in curtailing pro-spending rhetoric, suggesting that their success is only partial.” You can say that again.
Fiscal profligacy
Another nugget: “Expansionary fiscal policy seems to be one case in which politicians keep their election promises.” The paper quantifies this tendency to be true to their word and further adds that tax cuts are not to be blamed for higher spending. Budget deficits are caused solely by fiscal profligacy.
However, the moment the fiscal balloon goes up, “the gradual fall in deficits is achieved by revenue increases.” This means that the rich end up paying disproportionately for the votes bought by politicians.
The paper says that climate change, defence, infrastructure, healthcare, education and old people’s welfare are the main money guzzlers. There’s also good governance, which doesn’t come cheap. The paper doesn’t mention it.
But it has missed out an extremely important aspect. When you look at these expenditure items carefully, they all share one characteristic: they are all public or quasi-public goods.
Economics has studied public goods deeply for a long time and defines them as those whose marginal cost of producing one more unit is zero. They are goods whose consumption by one citizen does not reduce the consumption of another.
So while we can all berate politicians for using public funds for their own private gain, we also need to ask if what they are promising are public goods. Quite simply, an increase in the supply of public goods isn’t a bribe to the voters. The reverse is also true.