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Journalism of Courage
The finance minister has done well to scotch rumours that an additional cess would be introduced in order to help pay for the subsidy on petroleum products. This would have allowed petrol prices to be kept down, which is a bad idea. Making non-consumers pay for petrol is not going to bring down demand for petrol and will encourage excessive use. Instead, the government needs to raise the price of petroleum products. Further, cesses are a violation of first principles of public finance. They introduce rigidity into public finance, for the revenues of the cess can only be deployed for a particular purpose. It is far more effective to have a public finance system with exactly two taxes — the income tax and the general sales tax — and flexibility for the government on how tax revenues are to be spent. Depending on the priorities of the country at a point in time, expenditure patterns can and should shift between alternative public goods.
The second perspective is one of stability to the tax system. Taxes influence long-range planning — from long-dated investments in factories or infrastructure to the pension planning of a household. In order to enable long-range planning, the tax system must be stable. India needs to urgently get to the point of having a low income tax and a low GST rate, where this fiscal system is then held essentially unchanged for decades. A government that brings in cesses on a discretionary basis is one that is sending out a signal of instability of the tax system to all households and firms. Everyone is less confident about India, and less able to plan for the future, in a world where tax rates change owing to the addition or deletion of cesses.
The third perspective is one of a government that lives within its means. Sound public finance involves a government that earns a modest amount of money using a low income tax rate and a low GST rate, and utilises this money to deliver core public goods such as police and judiciary. We have a serious problem in India of a government that is persistently unable to live within its means, that is unable to respect the budget constraint of the revenues that it has. Irresponsible spending patterns are being undertaken despite knowing that the money to pay for these just does not exist. To the extent that a new cess helps perpetuate irresponsible expenditure patterns, it would be a mistake.
