Thread from Twitter, with a few ILR comments
If our economy were entirely composed of households, half of which fried pakoras for a living, and the other half brewed chai, which they exchanged with each other, we could say a 20% tax-to-GDP ratio would give Govt 1/5th of all the chai-pani & pakoras produced annually.
That, even by our lax standards, would be too high a proportion of GDP to take as chai-pani-pakoras from the poor. But it can be justified by noting that, historically, excluding the periodic pillage & loot by raiders from Afghanistan, a despot’s take was usually of that order.
ILR note: this is a good time to remember that the State is nothing but institutionalised raiders and looters. “Democracy” is just the new con in this game.
Beyond 20%, the law of diminishing returns sets in. As history notes, the earliest Aryans very nearly took over almost 100% of our hearths & homes. In fact they claim to be the original owners today. The later arrivals took progressively less & less.
ILR note : See the Laffer curve
You may think that almost sinks all your plans to give your voters the bright future that you promised them. That is correct. But I have even more grim news for you. Your predecessor governments have been borrowing from the wealth of future generations – wealth that doesn’t exit.
You may have heard of fiscal deficits. It is a polite way of spending money you don’t have; usually allowed only to governments. This fiscal deficit is about 4% of our GDP. Over and about this, about 2% has been borrowed by Govt. through some very creative accounting.
Furthermore, the States have their own deficits. The combined deficit of all States is rumoured to be about 5 to 6% of out GDP. If you total up all of the deficits, official + hidden + States, the number adds up to something between 10 to 12% of GDP.
Now here is the crucial maths for us to understand which no economist or babu in our civil service will explain to you. But it is something you must never forget. The government takes in about 20% of GDP by way of taxes but spends – actually spends – 30%+ of GDP. Let that sink in.
Of everything thing that India produces in an year – every chai, every pakora – the Govt. takes away 20% or one-fifth. That is bad enough because in a growing economy, the number should be less – say 10% – leaving more money with people to spend & invest.
But, Govt. takes in 20% and SPENDS 30%. A full one-third of everything we produce in the economy in an year is actually gobbled up by Govt. We may call this 30% spend by Govt. as “extraction” which is made up of 2 parts – taxes 20% + forced borrowings 10%.
ILR note : yes, the banking system permits this evil of “forced borrowings”. It also allows government to turn tyrannical because it has more money than taxation by representation would have allowed it to have. It violates the rule of no taxation without representation.
For perspective, please note that barring pillage & plunder by Afghan raiders, the total “extraction” in India under despots of all sorts from Mad Tuglaq, through Moguls to the British, never reached 30% of GDP, even when land revenue was one-third of farm produce.
I realize you may have some questions about the 10% forced borrowings that I have added to taxes to arrive at the total extraction. Clever babus will tell you there is no forced borrowings but only legitimate loans taken from citizens. This is baloney.
Banks, public and private, have to hold Govt. debt as a statutory requirement. This ratio over time has been around 30% of all bank liabilities. citizens put savings in bank, government forces banks to lend to government, and babus pretend there is no forced borrowing.
ILR note: This is why the need of the hour is not to increase banking access, but to UNBANK THE BANKED. See our article here.
Repayment is impossible
There are 2 things to note here you. Firstly, government’s total extraction, by of taxes & forced borrowings, is way too high to permit people to actually save & and invest anything on their own. Second, government has no way of repaying what it borrows. Sorry, if you fell off the chair.
Government has no way of repaying what it borrows. We pretend it does but what it repays on bonds comes from more borrowings. The only income that a government has is taxes. Since taxes cannot exceed 20% of GDP, the extra 10% of GDP that the government borrows will never be repaid.
ILR note: FYI, here’s the current state of the government’s debt:
But that is an issue which is intractable & so must be put aside for the moment because we have an even more urgent problem to contend with. The money that the government borrows to spend annually, the extra 10% of GDP, has to come from financial savings of households & others.
ILR note: This is not exactly true. In theory the government can issue bonds which are directly or indirectly bought by the RBI. This increases money supply and creates inflation. It’s the money printer method. Inflation is a hidden tax which the public has not consented to.
A bulk of the savings in the economy come from households. We put that number at about 15% of GDP. Corporate business add another 10% of GDP to the kitty. So total saving – financial and non-financial – add up to about 25% of GDP.
Corporates need to invest. In a growing economy they would invest far more than they save. So government shouldn’t count on them to finance its spending. That leaves households who save about 60% of their savings in financial assets and 40% in fixed assets such as Gold & housing.
ILR note: Again, corporates would only leverage up in a debt-based economy where inflation is the norm. Deflation (decrease in the money supply) would require corporates to be very careful with debt. See this lecture.
So households can typically give the government the maximum – if they did nothing else but buy government bonds – of 9 to 10% of GDP as the pool of savings that government can borrow from, one way or the other – through banks or debt mutual funds.
So here is the equation PM @Vidyut ji which your Babus & tycoons & politicians with grubby hands will never ever tell you in plain words. The Govt. needs to borrow 10 to 12 % of GDP annually, while the total pool of savings is only 9 to 10% of GDP.
Daboo ledu. There is no more money to borrow. The government has for all practical purposes borrowed every penny that is available as savings in the economy – and a bit more by starving corporates, especially PSUs. That’s why it finds virtue in borrowing abroad now.
But as I said earlier, the government’s income is only 20% of GDP. No more extortion in taxes has ever proved feasible. Its extra 10% of GDP borrowing can never be repaid. But thereby hangs an important difference that you must grasp.
Everybody in the domestic economy “knows” government borrowings will never be repaid. But nobody can demand repayment as long as government owns all the tanks. And if they did, Govt. has the nuclear option of printing as much currency as required to repay.
But government tanks, backed by printing presses, are of no use when it comes to borrowing abroad – say via sovereign bonds as some babus have been shoving at you. Foreigners can & do demand repayment, and that too usually when the economy is in trouble.
Since you income is limited to 20% of GDP, and on top of that you are already borrowing another unsustainable 10% of GDP, and on top of that you wanna borrow another 2% of GDP as sovereign bonds, how can you repay foreign borrowings if ever asked 2 do so?
The “as a going concern argument” doesn’t apply to foreign borrowings. The world is littered with debris of economies who were sold that argument by clever investment bankers who offered to sell sovereign bonds for no fees with a green shoe option. Be very wary.
I will sum up this note here by simply saying you are the first unfortunate PM who has no money to spend, either by extorting or borrowing, though there is no difference between the two. Daboo ledu. Let that be your abiding mantra.
All is not lost however. There are plenty of ways to save from current expenses to have money to spend on things that really benefit people & build for the future. I shall revert to you with them shortly. Meanwhile please meet every request to spend more with “Daboo ledu.”