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Home > Business > Special

Budget hijacked by the rich

T N Ninan | February 08, 2003

Time was when the Republicans in the US were fiscally conservative, and the Democrats the profligate ones. But Democrat Clinton converted a budget deficit into a surplus, and now George W Bush has quickly re-converted that into a massive deficit.

Could this reversal of roles between the two main political parties have been influenced by the fact that the budgetary giveaways are now going to the richest in the land (mostly Republican voters), while the really poor people in the country (typically Democrats) no longer feature in the political debate?

The Democrats got typecast as people who believed in big government (the bigness defined by spending programmes for the poor), but the last attempt at a big spending programme was Hillary Clinton's aborted health care plan. And the Republicans achieve small government by giving up revenue, to the rich of course.

Is something similar happening in India? Time was when the focus of fiscal debate was on expenditure programmes: five-year plans, budgets for power, irrigation, industry, health, education, et al.

But the government has less and less money to spend on programmes, and there is in any case growing scepticism about the effectiveness of its spending.

On top of which, if someone were to do an assessment of how much the poorest 24 per cent of the people (those below the official poverty line) get out of the Budget, the answer would be very unflattering to finance ministers. Unlike the budgets in many developed economies, the central Budget in India is not an effective weapon for re-distributing incomes.

So it is no surprise that almost the entire debate in India in the run-up to this year's Budget has focused on revenue issues (the Planning Commission's battle to get more spending money for its Plan has been fought away from the headlines, and in any case has ended in defeat).

The focus on revenue may be a natural result of the Kelkar reports, but it is interesting to see how the debate has been hijacked by the 'middle class' agenda.

Tax breaks on large housing loans must be retained. The dividend tax should go. The interest rates on small savings should not be cut. The issue is not the merit of each of these items; for what should strike any observer is how none of these subjects has anything to do with the poor, or even people with low incomes.

Those who stand to gain the most from these measures are those in the top 1 per cent income bracket -- like its counterpart in the US which has benefited the most from Mr Bush's tax proposals.

That begs the question: who constitutes the 'middle class'? Surveys in the US have shown that those in the top 20 per cent income bracket believe they are in the top 1 per cent. And another 19 per cent think they will get there.

In other words, 39 per cent of the population actually wants benefits for those with the highest incomes, because they see themselves as belonging to that category, or getting there one day. And naturally, they are not interested in fiscal benefits for the poor. Ergo, the Republican party becomes fiscally profligate.

In India, we have a variant of this. Here the income tax-paying population is nominally 25 million, but those paying anything more than a nominal amount of tax number less than 10 million.

This is roughly equivalent to the people who either own a car or hope to have one before long, and this is the group that is the focus of all the tax breaks. But ask them if they think they constitute the top 1 per cent income category, and the answer is likely to be in the negative.

They feel poorer than they are (in relative terms), and therefore feel entitled to the fiscal breaks that are being debated. Their numbers are not significant in electoral terms, but the political parties have fallen for the numerical illusion, and now hold the 'middle class' banner aloft during budgetary battles.

Like those who vote for the Republicans in the US, the relatively affluent in India have hijacked the Budget. And both have done it in the name of incentives for growth and (believe it or not) equity.

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