Budget relevant for life, too

Fiscal management is not rocket science. It’s simple common sense

The nation, like it always happens around this time every year, is engrossed in debating the Union Budget that was presented to the Parliament by the Union Finance Minister, Arun Jaitley.

The intricacies and niceties of the debate over the budget proposals provide us with interesting lessons that we can apply in our day-to-day activities. Fiscal prudence and sound fiscal management are not only essential for a nation or State’s economy but, in fact, more necessary for the common man, who has limited fiscal maneuverability due to the inelastic nature of revenue mobilisation, a luxury that the government of the day enjoys.

Economists, business lobbies and even politicians belonging to the ruling party are overly obsessed with fiscal deficit. The Finance Minister is under immense pressure to reign in fiscal deficit.

Fiscal deficit by definition is the difference between total revenue and total expenditure. Fiscal austerity regime is suggested as a means to control fiscal deficit. The Fiscal Responsibility and Budget Management (FRBM) Act legally mandates the governments to adhere to this fiscal virtue.

But, how far the principle of controlling fiscal deficit is advisable in daily lives, leave alone governments, remains a billion-dollar question. Living beyond one’s means is never advisable. This would land oneself in debt that could only worsen the economic parameters. Expenditure should normally be within the permissible limits, which in this case is based on the monthly earnings. The revenue or income of an individual or a household defines the contours of this permissibility. But, this fiscal discipline need not be blindly and indiscriminately followed.

Imagine that there are two set of parents whose children are exceptionally brilliant and get seats in IIT. But, both of them belong to low-income families. Their parental income prohibits spending such expenditure on education.

Let me tell you how each parent addressed the issue.

The first parent tells his child, “I believe in fiscal responsibility. I cannot spend beyond my income. My economic status does not permit me to get you educated.” The child settles down in a small job.

The second parent instead says, “I don’t give a damn to what fiscal prudence teaches. My son will achieve what he wishes for.”

This child completed his studies from IIT and settled down in a well-paying job.

The first parent is fiscally responsible but socially irresponsible, where as the second parent sounds fiscally irresponsible, but is socially responsible.

In a developing economy, deficit financing is not always bad in the life of a family or government. The quality of expenditure matters more than whether or not it exceeds revenue or income.

However, the need to balance between income and expenditure remains the fiscal priority, though with reasonable exceptions.

Let’s also discuss one such exception. For instance, expenditure is normally classified as capital and revenue expenditure. Revenue expenditure is a recurring expenditure while capital expenditure is spent on assets, which generate income. Therefore, when you spend, you should introspect whether that spending yields income or increases the burden of recurring expenditure. An individual or a family should always endeavour to limit revenue expenditure and focus more on income-generating and asset-creating expenditure to bolster fiscal health.

What you spend is just not enough; the outcome of the spending determines the efficacy of expenditure. In simple terms, outcomes are more important than outlays. Thus the performance appraisal called performance budget is a right evaluation.

In our lives too, we should engage ourselves in a constant appraisal of the efficacy of what we spend. The cost effectiveness of expenditure is the key attribute of sound fiscal management.

Conservative thinking discourages raising loans to meet expenditure. The wisdom it propagates is to live within one’s means. But, taking a loan itself is neither good nor bad. Answers to several questions qualify whether or not one should take a loan. The national economy looks at debt to GDP ratio as one key indicator, implying proportion of the debt in total income. This theory works well for families too. The income determines one’s debt raising ability and debt absorbing capacity. What is the debt servicing burden when compared to the earnings? Finally, what do you do with the loan that has been availed of? In economics, this is called debt to capital expenditure ratio. If you take a loan and go on an economically non-productive holiday, you will return with lifetime of sweet memories but the burden of loan will be bitter.

But, if you take a loan for children’s education or buying an asset like land that yields income and appreciation, it’s nothing wrong. Rather, it makes economic sense. If your loan repayment is spread over a longer period, it reduces the debt burden.

Thus fiscal management is not rocket science. It’s simple common sense. An individual, a family and a nation should follow certain basic principles of healthy fiscal management to prosper in life.