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Wednesday, March 03, 2021

ExplainSpeaking: Two ways to approach rising inequalities and Union Budget 2021

Budget 2021: Should the Finance Minister prioritise reducing sharply widening inequalities or focus first on boosting economic growth?

Written by Udit Misra , Edited by Explained Desk | New Delhi |
Updated: January 30, 2021 10:56:52 am
A day laborer wearing a protective mask sits on a tricycle outside a shuttered store in New Delhi (Photographer: Anindito Mukherjee/Bloomberg)

Dear Readers,

Earlier today, Oxfam International released a new report, titled “The Inequality Virus,” in which it states that Covid-19 has the potential to increase economic inequality in almost every country at once — the first time this has happened since records began over a century ago.

Oxfam points out that “it took just nine months for the top 1,000 billionaires’ fortunes to return to their pre-pandemic highs but for the world’s poorest people recovery could take … more than a decade.”

In fact, the increase in the 10 richest billionaires’ wealth since the crisis began is more than enough to prevent anyone on Earth from falling into poverty because of the virus, and to pay for a Covid-19 vaccine for everyone.

In India, too, according to Oxfam’s calculations, the increase in wealth of the top 11 billionaires of India during the pandemic can sustain the NREGA scheme for 10 years or the health ministry for 10 years”.

The past 12 months have not only seen economic growth contract sharply but also an acute rise in inequalities.

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“Growing inequality is neither good for society nor the economy. It leads to greater fissures, more violence and undermines democracy and democratic processes. For economic growth as well, inequality in opportunity means reduced productivity,” said Dipa Sinha, Assistant Professor in Economics at Ambedkar University, reacting to Oxfam’s findings.

Indeed, 2020 stood out for the fact that unlike the past three decades, when economic growth reduced abject poverty — even if the gap (or inequality) between the rich and rest kept widening — the past 12 months have seen an increase both in poverty and inequality.

What should be done about such high levels of inequality?

In his book, “The Economics of Inequality,” Thomas Piketty summarises the two traditionally opposing viewpoints.

“The right-wing free market position is that, in the long run, market forces, individual initiative, and productivity growth are the sole determinants of the distribution of income and standard of living, in particular of the least well-off members of society; hence the government efforts to redistribute wealth should be limited and should rely on instruments that interfere as little as possible with the virtuous mechanisms of the market-instruments such as Milton Friedman’s negative income tax,” writes Piketty.

“The traditional left-wing position, passed down from 19th-century socialist theory and trade-union practice, holds that the only way to alleviate the misery of the poorest members of capitalist society is through social and political struggle, and that the redistributive efforts of government must penetrate to the very heart of the productive process. Opponents of the system must challenge the market forces that determine the profits of capitalists and the unequal remuneration of workers, for instance, by nationalising the means of production or setting strict wage schedule. Merely collecting taxes to finance transfers to the poor is not enough,” he points out.

Migrant workers sit at a bus terminal as they wait to catch state-provided transportation in Noida. (Photographer: Anindito Mukherjee/Bloomberg)

Depending on which approach appeals to you, your policy prescription for the Union Budget will vary.

So, on the one hand, there are already calls for making the Public Distribution System universal (so that no poor goes hungry), expanding rural jobs guarantee scheme and starting a similar urban jobs guarantee scheme.

Of course, to do this the government needs to spend money. But there are a couple of problems here.

For one, as former UK Prime Minister, Late Margaret Thatcher, enjoyed pointing out that there is no such thing as “public or government money”. There is only “taxpayer’s money”.

In other words, if you as a taxpayer demand more Budget allocation for NREGA or higher MSPs for farmers then be ready to be taxed more. It is crucial to note in this regard that just 1% of Indians pay income tax.

The other way for the government to raise funds is to sell (disinvest or privatise) its assets such as a public sector enterprise or a government-owned bank. But these assets, too, belong to the taxpayers; the government doesn’t really have any assets of its own.

There is a third way whereby the government can resort to deficit financing or, more simply, printing fresh cash to alleviate the current stress. But even this turns into a tax on the general public because it ends up raising inflation.

The other big problem in prioritising tackling inequalities over economic growth is that even if a government does so by taxing more, the result will be the economy getting stuck in a low-income equilibrium.

Yes, for a brief period, it would appear that inequalities have been reduced and poverty has declined. But this is not a sustainable path because the government would have ignored investing in building up productive assets in the economy — assets that could have boosted overall economic growth for a much longer period.

That is not to say that market forces alone can reduce widening inequalities — far from it.

But the crucial point is: unless there is fast economic growth there will be nothing to redistribute but poverty.

Fast economic growth is the necessary condition for reducing poverty and inequalities although it may not be a sufficient one.

Stay safe!

Udit

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