Social security, subsidies and reality By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

August 30, 2016 | Posted by bobbysrinivasan << back to blog

In this highly competitive world, countries which manage their resources efficiently achieve higher levels of growth. In this regard gross domestic savings and foreign direct investment play an important role in the growth of a country. Countries with budget surplus along with FDI have helped many countries achieve phenomenal economic success. Switzerland, Singapore and China are good examples. They have enviable economy with their GDP going up relentlessly. For example, the per capita GDP of Singapore is US $ 60000 far surpassing the US per capita.

On the other side of the coin, many countries have chosen to incur huge budget deficits to either provide for social security and or subsidy. Most of the Eurozone countries (19 of them) had entered into an agreement in the 1990’s to keep their budget deficit below 3% and budget debt not exceeding 60% of GDP. Practically every one of them has violated this and infact some countries like Greece has nearly 300% of GDP as debt.

What seems to be the reason? Poorly thought out social security schemes. When these schemes were introduced the world economic environment was different. On one end of the spectrum there are countries were people work 60 hours a week while the so called developed countries are working less than 40 hours. In the meanwhile the global productivity has increased multifold due to technological innovation and more efficient labour participation. Because of this many European countries have given up hope of future economic growth. Can they revisit their country’s economic policy and change to survive the global competition? At the moment it appears that it is not likely to happen.

A few countries in the world who do not offer any social security benefits to its citizens has adapted a subsidy scheme through which money reaches poorer section of the society. India for example, nearly spends 12-13% of its annual budget in this regard. The food, fertilizer and energy costs are subsidized and this amount of nearly Rs. 2.5 trillion of the budget money is used to defray the costs. This has promoted consumption but has failed and hence GDP to contribute to new development such as adding new infrastructures. The present government cannot touch this policy of subsidies as it will affect the election outcome. Besides poor people have gotten used to it and so there is no going back.

The latest Tamilnadu budget is a case in point. As of now the revenue deficit for FY 2016-17 is estimated to be Rs.9153 Crore and the fiscal deficit is projected to be Rs. 36740 Crore. The total size of the current annual budget is 1,61,159 Crore rupees. Of this 41.64% will go towards salaries, 13.22% on interest payments, while subsidies and grants is expected to take up Rs.62,382 Crore. The new elected government to office has announced a farm loan waiver of Rs.5780 Crore while the 100 unit free power will cost an additional Rs.1700 Crore. In summary social security, subsidy takes away a great chunk of the annual budget. This has led to the increase of debt which eventually will become the future tax payer’s problem. When you borrow and use it to train the people to acquire new skill it can be considered as a value enhancement but if it is used for day to day living, it is a luxury whose costs the future generation will have to bear.

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