'Why Social Spending is Not the Government's Best Remedy

chillibreeze writer — Atasi Das

In the long run, for every country, economic growth is just a means to an end called economic development. However, the engine of growth often precludes the distributional aspect of production. Herein comes the role of the government and social spending, which is closely related to the modern theme of ‘inclusive growth’ (which basically means growth for each one of a country’s population). While development without growth is nearly impossible, the reverse holds true for most developing nations.

The whole concept has attained an altogether critical dimension in the face of the ongoing global economic slowdown. Countries across the globe (even the developed nations) have realized that ‘laissez –faire’ on its own has failed to deliver; it needs a governmental support and monitoring mechanism to keep it on track and provide it with the much needed backup when it falters.

Just as profits need to be ploughed back into business to increase its vitality, similarly, resources need to be spent under the head of government-sponsored social spending to economically empower the masses, improve their standard of living, augment their productivity and in the process, give them enhanced purchasing power. Countries like India have toed this line of thought in its latest Union Budget 2009-10.

As the economically marginalized populace garners purchasing power, they augment an economy’s aggregate demand for goods and services. The recession-hit, demand-strapped economy, increases production to meet this hike in demand and the multiplier effect is set in motion to spread this impetus throughout the economy. Now what is the price of pursuing such a strategy?

It is like buying a costly medicine when you have too little money at your disposal or when you are already in debt. Recession-hit governments are mostly going for deficit financing to fund these social spending sprees on issues like education, health, guaranteed employment, provision of subsidized food to name a few. Foreign or domestic borrowing or printing of money is the usual way out for cash-strapped governments, who sponsor heightened government spending through fiscal deficits.

Though they can lead to external debt crisis, galloping interest rates or spiraling inflation (depending on which mode of deficit financing is chosen) governments have no choice but to opt for them, as empirical evidence shows that monetary policy on its own has been unable to push recession-hit economies out of the doldrums of stagnating income, unemployment and dwindling trade.

On the other hand, since social sector spending demands a huge volume of investment and yield returns only after a substantial time gap, private players shy away from such investments.
In conclusion, the success of the strategy depends largely on the monitoring and fine-tuning of fiscal and monetary policies and on the proper functioning of government- delivery mechanisms (which are notorious for their lapses in the corruption prone economies of the developing nations).

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Atasi says, "I am an Economist with expertise in quantitative subjects like Statistics, Econometrics, Resources and Environment. Spirituality and motherhood are the cornerstones of my existence."

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