- Manika Premsingh
In a unique move, the US government has actually started shutting itself down, failing resolution on the budget for the financial year starting October 1, 2013. A shut down of the US government means that all but the most essential services will be stopped till such time that the impasse is resolved. A US government shutdown will of course have multiple ripple effects for the US economy, stemming from a decline in government expenditure, which will ultimately impact growth in the economy, depending on how long the shutdown lasts.
However, not all impacts of a government shut-down are negative. The fiscal deficit, for instance, will be positively impacted, even if it is not the most desirable manner of achieving a reduction in deficit. Now this might not be a possible solution for the Government of India, but that does not keep us from asking: What if? What if the centre actually shut down for a period of time? Will its fiscal deficit woes be resolved? In an article we first wrote for IndiaSpend, we look at the fiscal impact of a GoI shutdown. Read on.
The centre’s latest monthly
finances statement doesn’t look pretty. Fiscal deficit for the first 5 months
of the current financial year are already at 75% of the
total budgeted amount. If this trend continues into the rest of the year, we
are essentially looking at fiscal deficit that is almost double of that
estimated in Budget 2013-14. For a country that has waged a long battle against
inflation, often at the cost of economic growth, and continues to do so, this
does not augur well. High inflation, essentially keeps interest rates propped
up, and a high government deficit means more borrowings which also exerts
upward pressure on interest rates, besides being inflationary.
While the government will likely
resort to expenditure trimming in the next few months, the US government has an
unintentional and definitely not the most desirable, but an out of the box
solution to the problem. In a unique move, the US government has actually
started shutting itself down, failing resolution on the budget for the
financial year starting October 1, 2013. A shut down of the US government means
that all but the most essential services will be stopped till such time that
the impasse is resolved. These essential services cover defence services and
social security. The services that will be affected include updates on crucial
macro-data like the payroll numbers.
A US government shutdown will of
course have multiple ripple effects for the US economy, stemming from a decline
in government expenditure, which will ultimately impact growth in the economy,
depending on how long the shutdown lasts. According to estimates by research
firm IHS, quoted by a BBC
report, the US government shutdown is costing it around US $ 300 million
per day. The same report also points out to a Goldman Sachs estimate of a 0.9%
reduction in GDP in this quarter on account of a shut down.
However, not all impacts of a
government shut-down are negative. The fiscal deficit, for instance, will be
positively impacted, even if it is not the most desirable manner of achieving a
reduction in deficit. Now this might not be a possible solution for the
Government of India, but that does not keep us from asking: What if? What if
the centre actually shut down for a period of time? Will its fiscal deficit
woes be resolved? Let us check.
In the past, the US government
has shut down twice, once for six days in 1995 and then for 21 days in 1996.
Based on this information, we build four scenarios for an Indian government
shutdown – a shutdown of one day (the minimum), six days, twenty one days and
30 days (an entire working month).
Based on the number of working
days in one year excluding weekends and gazetted holidays, we estimate the
daily expenditure of the GoI. The number of working days that the government
shuts down results in that much cut back in overall annual expenditure, is an
assumption we make for the sake of simplicity. In the real world, there is a
chance that some expenditures will have to be incurred at a later date even if
they get postponed in the event of a shutdown.
The results from our estimations show
that there can actually be pretty dramatic results resulting from a shutting
down in the government. Needless to say, the longer the period of time we
consider the shutdown, the deeper the impact because expenditure is not made
for that many days more.
A 30 day or total of one month
working day shutdown in the centre would result in as much as a 31% reduction
of fiscal deficit from the amount estimated in the budget of 2013-14, with a
10% decrease in expenditure. In absolute terms, this means that the fiscal
deficit will reduce by Rs 1,66,981 crore and will end the year at Rs 3,75,517
crore. This compares with a Budget Estimate (BE) of Rs 5,42,498 crore of fiscal
deficit for 2013-14. A 21 day shutdown shaves fiscal deficit by over 21%.
This decline in fiscal deficit is
due to a commensurate decline in expenditure, which is not made for all
services except essential services. Like in the case of the US shutdown, we
consider a continuation in expenditure on essential services, namely, defence
and social-security related services. If there was a shutdown in total
expenditure, the results would be even more drastic.
Even if we consider the shutdown
for one day, it will result in a 1% reduction in fiscal deficit from the BE,
and a 0.3% decrease in government expenditure. Similarly, if there is a
shutdown of 6 days, there is a 6% decrease in fiscal deficit, and a 2% decline
in expenditure.
Note that these estimates are
only indicative, and not an exact amount of impact that will potentially take
place if a shutdown were to happen. The greater the detail that we go into, the
more precise the estimates can get. Also, we have considered only the first
round impact of a potential shut down on the economy. Namely, the impact on
expenditure and through that on fiscal deficit. In actual fact, though, there
would be a second round impact of a shutdown. This is because, limited
government expenditure impacts earnings of the individuals employed by the
government. This in turn will potentially impact the demand for goods and
services in the economy in a negative way as well and thus depress overall GDP
growth. The actual second round impact will depend on the multiplier effect of
government spending on the economy as well as the length of time for which such
a shutdown takes place.
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Methodology: In order to arrive at the estimates for saving in
expenditure over the 3 time periods under consideration we first estimated two
figures:
(i)
Central
Govt. Expenditure ex-essential services expenditure: We worked with
Budget Estimates of 2013-14. In the context of the US essential expenditure
is that on social security and defence services. We used this description
in the Indian context on the basis of heads that explicitly cover these
expenditures. Defence services, is a clear head under the centre’s
expenditure. For social-security we used figures for pensions where
available under various ministries’ expenditures. The sum of defence services and pensions
is the essential expenditure, which is subtracted from the total
expenditure to arrive at the number for Central Govt. Expenditure
ex-essential services.
(ii)
Number
of working days: These are estimated from the total number of days in
one year less weekends, which is Saturdays and Sundays and Gazetted
Holidays that do not fall on any of the weekends. The total number of days
in the year less the total holidays gives us the total working days of 251.
Estimating cutback in central govt. expenditure ex-essential
services
We divide the central govt.
expenditure ex-essential services by the number of working days to arrive
at the per day figure for the same. The per day figure is multiplied by the
number of working days in a week and in a month to ascertain the cut back
in central govt. expenditure ex-essential services on account of a
potential shutdown.
We subtract the cutback from
total expenditure budgeted for the year to assess the (i) actual decrease
in expenditure and (ii) the impact on fiscal deficit. From here, we can
determine the percentage impact as compared with the budget estimates.
Read what Business Standard has to add to the article here.
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