Stealing from the unborn

That's what budget deficits often are, in my opinion. Often, but not always. I was delighted to see this graph in this week's "The Economist".

(Source: Stimulating, The Economist, Feb 19th 2009)

How refreshing to see vertical bars rising above the zero level in a fiscal deficit graph! The article quotes the Chilean finance minister Mr Velasco as saying, "being a Keynesian means being one in both parts of the cycle." Since Chile has prudently saved money in the boom years of 2003-08, reducing public debt to an incredible 4% of GDP by Dec 2008 (India's stood well above 60% in March 2008, even before this year's massive deficit), it can now responsibly run deficits for a number of years without excessively burdening future generations.

Contrast the prudency of Chile to the profligacy of India. India's leaders seem to have forgotten that in addition to being representatives of current citizens, they are also guardians of the nation-state and are trustees for future generations. For the past 15 years (and probably longer than that), not a single year has gone by when the Indian government spent less than it earned. This borrowed money will have to be repaid by future citizens in the form of higher taxes (or a bout of significant inflation, hurting the poorest most). I understand that for a underdeveloped country like ours, governments may borrow to invest in socially and economically productive projects whose returns to future generations will offset the costs of debt servicing (Building a school or a road, say). But we have been borrowing money to spend on current consumption, subsidising fuel and fertiliser prices, to take the most egrerious examples.

Consider a scenario. A man begets a child. He immediately rushes out and buys a Mercedes, pledging to pay the carmaker the first five years of his daughter's future earnings. Would you consider this man as responsible? India has been doing exactly this, writing out IOUs on behalf of her future generations and using the cash to buy cheaper fuel and fertilisers.

India's GDP grew by 8-9% from FY04 through FY08. Yet the budget deficits never disappeared. This year (FY09), growth of 6.5-7% is expected. The deficit is expected to balloon to as much as 11% (centre + states). In 2007, Chile grew by less than 6%. Yet it managed a surplus of almost 9% (Copper-boom related revenues played a part obviously, but the restraint in spending is still commendable). How very frugal is India being, probably because we have simply borrowed this money from our children :(