The UK or Korea: What is the ideal benchmark for the size of India’s govts?

Source: This post is based on the article “The UK or Korea: What is the ideal benchmark for the size of India’s govts?” published in the Business Standard on 28th October 2022.

Syllabus: GS3 – Indian Economy

Relevance: About government expenditure and low taxes.

News: The last UK PM has given the “low taxes, high growth” framework a bad name. This shows that there is no clear relationship between income-tax rates and economic growth. However, lower taxes might result in smaller welfare budgets (such as a lower health service budget) which will reduce the popularity of the existing government.

What is the average tax rate of global economies?

In general, the advanced economies have higher tax rates than the rising economies of East Asia, where tax rates peak around the 35 per cent level. This is because of their ambitious welfare programmes. Britain’s peak income-tax rate of 45 per cent is not very different from the average for the euro area.

Among the advanced economies (leaving out places like Singapore), only Canada has a markedly lower peak rate (33 per cent). The higher-income countries in East Asia (South Korea and Taiwan) have peak rates closer to the euro average.

What is the government expenditure status of middle-income economies?

Rising economies without comparable social-safety nets have smaller government expenditure in relation to GDP. The successful middle-income economies of East Asia tends to have smaller budgets and lower levels of a deficit than other economies.

Even the super-successful South Korea has government expenditure that is equal to only a quarter of GDP (for instance, France has it over 60 per cent), and a deficit of just 2.8 per cent. Malaysia, Thailand, the Philippines, and Vietnam reflect broadly the South Korean example.

What is the government expenditure status of India?

India’s government expenditure is about a third of GDP, with much higher deficits (about 10 per cent for the Centre and states combined). South Korea’s debt is less than half its GDP, whereas for India it is over 85 per cent.

India’s government sector is large, relative to GDP when compared to East Asia (excluding Japan and China). Yet, India has poor-quality public services in every direction and under-spending on defence.

What India needs to do?

Some of the most problem-ridden middle-income economies have big governments, big deficits, high levels of debt, and large-scale corruption. Two prominent examples are Brazil and South Africa. So, India has to avoid that path.

The finance ministry or NITI Aayog must look into ways to improve and expand services, save money, provide more roles to private sector, and others.