Editorial

A Winner, A Loser

President Barack Obama has won his second term in the just concluded US election. Those who thought that market, that is, capital market all over the world would stabilise after the results are out now find their hopes belied. Obama's Democratic Party bears the symbol of donkey. Their donkey is actually crawling the fiscal cliff much to the dismay of Obama’s cheer leaders. At the beginning of his second term President Obama is obliged to suggest measures to be adopted to clear the fiscal deficit his first term in office had created and accumulated and the recommendations possibly will be placed before the beginning of the next calendar year. The amount of fiscal deficit is estimated at US$ 780 billion approximately. It is an uphill task and the time is short. In truth in the four years since the international financial crisis began China's economy has grown by 40 percent and the US economy by 1 percent. People across the globe are talking about ‘China Dream’, not ‘American Dream’.

The investment world is anxiously waiting to observe how the poor donkey scales the stiff climb up to the summit of the fiscal mountain and clears the debris of deficit. In the US, options are limited. Today they don’t have many choices. They have no exit either. If anything Obama's crisis managers have run out of time. Either the expenditures are to be drastically reduced to a level compatible to revenue earnings or revenue earnings are to be increased by more taxation and/or more borrowings in order to raise revenue to the level of public expenditure. Of these two options the government seems to be not keen to having resort to further borrowings as that may lead the US economy to a possible debt trap that will at the same time lower its sovereign rating. That leaves the US budget experts with the hard options of either more tax revenue or less expenditure. In the case of more tax on corporate income, if the burden falls heavily on capital gains and corporate profits, the investment multiplier at home will suffer and that will have cascading effects on the global investment market. The US economy is rich in Multi-National Corporations who may prefer to keep their offshore surpluses saved or invested overseas in order to avoid increased taxes at home. In this scenario revenue from additional taxes on personal income is expected and the burden of additional taxation may fall on the 1% super rich class in the US who collectively own 25% of National Income and 40% of GDP in the country. Tax revenue from corporate taxes may fall short of targeted yield. Again, in this scenario, the non-US global investment of US finance capital through Fll, FDI, or ECB (external commercial borrowing) channels is likely to increase to the detriment of the investment-employment-income linkage as well as budgetary target in the US itself. There is nothing in the US corporate laws to stem such tide of US investments away from the US soil. Nor is it harmful for US interest altogether since this type of flight of investments builds US assets overseas and brings higher returns in the long run. Regarding cut in expenditure option the Federal government is likely to set for itself a floor below which it will not prune expenditure any further, because government spending is the prime mover of the economy. Moreover the option of expenditure cut at home will not be politically prudent.

For one thing government spending expands market, and in the case of the US public expenditure, the global market as well. However the authorities may withdraw some avoidable conspicuous government spending at very high executive level coupled with levy of additional taxes on such expenditures at the corporate level. This measure will surely save some money and at the same time yield some revenue. There still remains the option of cut in grant of foreign loan and foreign 'aid' which option the Obama administration is likely to implement in the context of European bail out problem of PIIGS (Portugal-Ireland-ltaly-Greece-and-Spain) countries' financial crisis. Thus the fiscal measures likely to emerge is likely to be a combination of additional taxes at the high income level at home and expenditure cut at foreign ‘aid’ level. However the government is likely to tread cautiously on this path of expenditure cut as, a drastic cut may affect growth of the economy. And a slump in the US market is a cause of worry for the global market.

If one comparers fiscal deficit against US GDP with the same in India, India's fiscal deficit will be shown at higher level. Whereas in the US, fiscal measures only are searched for closing fiscal deficit, in India the easier monetary measures are searched and executed. Previously, that is, before liberalisation, the government in tandem with the Reserve Bank of India frequently had recourse to deficit financing, that is, to increasing the supply of money without augmenting reserve of gold, bullion or foreign exchange with the RBI, creating inflation internally and continual erosion of the value of Rupee externally. Nowadays at the behest of WTO and pressures from IMF-WB the government has done away with such cheap money policy and the only measure it finds convenient to bridge the gap of fiscal deficit is through sale of public assets built over the years by public sufferings through blood, sweat and expertise of Indian labour. These public assets are collectively known as Public Sector Units (PSUs). These public assets are on sale wherever the government's fiscal management fails. And the government fails every year on this front. Despite their tall claims, the government's actual revenue earnings can never reach its estimate in the budget. Also, the government's total non-plan expenditure overshoots its estimate every year. And the government's plan expenditures build assets, often faulty assets, after long delays coupled with leakages in the allocated fund thus entailing cost escalation and loss of social benefits.

Frontier
Vol. 45, No. 22, Dec 9-15, 2012

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