India should opt for income support so that pandemic does not turn into a financial crisis -Jahangir Aziz

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published Published on Sep 17, 2020   modified Modified on Sep 17, 2020

-The Indian Express

What is needed is ample income support for households and firms now so that the recovery is not hamstrung by excessively damaged balance sheets

Even a cursory reading of Brazil’s recent history will confirm that the adoption of the all-encompassing cap on government spending in late 2016 was critical in rescuing the economy from the crisis of 2014-16.

After riding the commodity boom of the 2000s, economic mismanagement and a series of corruption scandals pushed the country into an economic and political crisis in 2014-16, which ended the 14-year rule of the Workers Party (PT). During its rule, PT had implemented sweeping social programmes (such as Bolsa Familia) to reduce inequality and eradicate poverty. Although contested, most assessments suggest that these programmes helped in improving living conditions (income, health, and education) of the poor. But with the end of the commodity boom, Brazil’s growth faltered and funding these programmes strained macroeconomic management, widened the fiscal deficit, and raised public debt. While the 2013 Taper Tantrum was the trigger, the ensuing economic recession, weighed down by corruption scandals, turned into a political crisis ending PT’s rule. Inflation, unemployment, and the fiscal deficit all jumped to double-digits.

In an effort to regain policy credibility, the interim government proposed and passed a constitutional amendment in late 2016, which, starting from 2017, capped government expenditure — excluding interest payments but including capital spending — to its 2016 level adjusted each year for the previous year’s inflation. This law effectively set a ceiling on government spending at around 20 per cent of GDP that can only be reviewed in 2026. While stringent by the standards of international fiscal rules (that are mostly in the form of restraints on fiscal deficit and public debt), it is almost draconian in the case of Brazil as more than 90 per cent of its spending is mandated by law, leaving little room for even expenditure switching.

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The Indian Express, 17 September, 2020,

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