The ‘freebies’ debate

Source: The post is based on the article “The ‘freebies’ debate” published in the Business Standard on 13^th August 2022.

Syllabus: GS 2 – Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes.

Relevance: India’s freebies burden.

News: Recently, the Prime Minister said freebies were coming in the way of development. The debate over “freebies vs development expenditure” reflects a primary problem that economics is supposed to tackle.

About the development expenditure and freebies

Economists call few freebies positive externalities; i.e. they have a public utility that goes beyond the benefit to the individual user.

For instance, a) spending on Education, welfare payments, and highways all are called as positive externalities, b) Mid-day meals in schools improved school attendance and enhanced child health and reduced the birth rate dramatically. c) Other schemes and programs such as the construction of free lavatories, providing subsidised cooking gas.

What are the issues associated with freebies?

Constraints from other issues: The major issue is not the freebies themselves, but the constraint imposed by limited means. For instance, Delhi can give free power up to a consumption limit and also invest in schools but not Punjab with its high indebtedness cannot do the same.

The welfare state is unaffordable: In advanced economies, “transfer payments” through social security, and unemployment benefits dominate budgets. Thus leaving less and less money for infrastructure, research, and other “investments” for growth. For instance, in Britain, the National Health Service is near breakdown.

What needs to be done to provide a better welfare state?

Follow the principle of Singapore’s founder, the late Lee Kuan Yew: He mandated high personal savings with which Singaporeans could buy government-provided housing, and also mandated personal health funds to pay for medical emergencies. In return for people, he offered low taxes.

This has the following advantages, a) government spending does not leave behind a burden for future generations, b) The government would not spend the money it did not have. Thereby ratio of public debt to GDP will not increase.

Provide fiscal space to states: Creating a fiscal responsibility law will not achieve anything. Instead, the centre can increase the share of tax revenue to states, so that states can afford and plan their freebies.