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Editorial | Austerity Is No Solution To Economic Difficulties

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The latest figures suggest that the Punjab government is lagging far behind fiscal goals set for this year. Despite slashing expenditures, revenue generation targets are far from being met. Tax collection in the province rose to Rs86.3 billion, but fall well short of the Rs294.9bn target.

It would be a mistake to blame the PTI-led administration alone for this situation. The dire fiscal situation is something that they inherited from the previous government. The real problem with the Punjab government’s floundering efforts to meet fiscal goals is its past rhetoric. Rather than emphasizing the structural nature of our fiscal woes – whether at a federal or provincial level – the current ruling party insisted on linking it to ill intent on the part of the previous administration.

The Punjab government will have to be mindful of two linked pitfalls as it proceeds forward from this point.

First is its much-publicized failure to increase tax revenues to the levels stipulated by its own targets. All the talk of “improved technology” to help with widening the tax net seems to have been a lot of hot air. The challenge is likely to be further exacerbated by reduced transfers to the provinces from the federal administration due to its own straitened circumstances.

The second pitfall is one where expenditure by the provincial government is reduced to a point where essential infrastructure and service delivery begins to fall apart – which would only deepen the existing economic slowdown.

It may seem intuitive to the layperson to slash all expenditure when facing immense deficits – and such, indeed, appears to be the wisdom that guides current economic planning in Pakistan. However, such cuts without a proper understanding of their impact on economic growth – especially their effect on costs of production and aggregate demand – can end up doing more harm than good.

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The problem, ultimately, is that austerity as a means of dealing with fiscal difficulties is a deeply flawed approach. Contrary to the claims of the Punjab government that this will be a “year of economic growth” after the “reforms” of last year, the fact is that austerity is not conducive to growth or prosperity.

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