A Difficult Pill to Swallow: Why the Government is Squeezing the Economy
While infrastructure stalls and support for the vulnerable is slashed, spending on state payrolls and questionable SOEs continues to climb.
While digging through the latest weekly fiscal report from the Ministry of Finance, a clear and worrying pattern began to emerge. Based on the data as of July 31, it appears that the government is deliberately slowing down our economy.
What economists refer to as a "contractionary fiscal policy" is what they are doing. However, I don't think this is a calculated attempt to keep inflation stable. It's a move that will impact all of us, and I suspect it was made out of pure necessity.
To begin with, what exactly does that mean?
Let's quickly define a contractionary fiscal policy before getting into the specifics. To put it simply, it means that the government does two things:
Cuts back on its own expenditures.
Raises taxes.
Usually, the objective is to reduce inflation and cool an overheated economy. People have less money to spend when money is removed from the system, which lowers demand for goods and services. Prices usually follow a decline in demand.
But in this case, the "why" is important. Furthermore, I don't believe the government is acting in this way voluntarily.
Cornered by Debt
Our enormous debt is the true force behind this policy, not economic theory. The government now has significantly less money available to fund the budget than it initially promised, primarily because of the increasing debt repayment obligations and its failure to secure external funding.
The figures are striking. This year, our debt repayment has increased to MVR 6.1 billion. For comparison, the same period last year saw MVR 4.3 billion. That represents a staggering 43% increase in just one year, or nearly MVR 2 billion.
There must be a source of funding when debt payments soar like this. The truth is revealed by where the government chooses to make cuts and where it does not. The government is being forced to make cuts.
Projects and Infrastructure Are the First to Go
The Public Sector Investment Programme's (PSIP) slowdown is the most obvious indication of this squeeze. Only MVR 3.4 billion has been spent on the PSIP thus far, according to data from the Finance Ministry. That is only 27% of the budgeted amount.
This goes beyond a spreadsheet figure. It indicates that projects are being purposefully delayed. It indicates that bills are mounting and contractors are not being paid. They are stifling the economic engine of development and construction.
Safe Pockets: Political Expenditure Keeps Growing
However, some budgets are oddly immune to the cuts being made to infrastructure spending. Spending on government workers, particularly political appointees, keeps rising in what seems to be an effort to retain political support.
The salaries and benefits paid to state employees total MVR 7.1 billion. Compared to the previous year, that represents an increase of MVR 461 million. Long-term national projects are put on hold while the state's payroll grows, which is a difficult contrast to accept.
The Red Flag: The SOE Black Hole
Capital contributions to State-Owned Enterprises (SOEs) are another area where spending is not only increasing but also blowing out of control.
Here, expenses have reached MVR 1.1 billion. The amount allotted? Just 378.3 million MVR.
This is a serious warning sign. Every administration has employed party loyalists and, in the worst situations, embezzled public funds through SOEs for years. This enormous budget overrun demonstrates that the SOE reforms that were promised in the budget have not been implemented at all. Instead of being the effective companies they are supposed to be, it implies that these organisations still waste public funds.
The Human Cost: Subsidies Get the Axe
The final cuts are being made to subsidies, which is possibly the saddest aspect of this story. These are the funds that assist in reducing the cost of living for those who are most in need.
Subsidy costs have been reduced to MVR 5.3 billion, which is MVR 644.2 million less than the previous year. Ordinary families' finances are directly impacted by this cut, which makes it more difficult for them to pay for essentials.
A Difficult Pill, But Do We Have a Choice?
The picture becomes indisputable when all the pieces are put together. Our economy could dry up as a result of the government's contractionary policy. The vulnerable are losing support, contractors are having difficulty, and projects are stalling.
The country is having a hard time accepting this. We must all ask ourselves, however, given the mountain of debt we face: do we even have a choice?