Careful what you wish for!

During times of crisis such as the one we are currently facing, people’s expectations from the government tend to rise. The government is viewed as the monolithic entity which can help overcome the crisis and get everyone back to pre-crisis normalcy. This expectation from the people provides additional impetus to already expanding government, further steepening the slope of the government expenditure trajectory. People expect a huge stimulus package from the government so that their jobs and businesses would have an external shield. 

However, owing to the crippled economy, the government also faces severe resource constraints as tax revenue declines. Thus, the government might resort to borrowing to the level never preceded before. With the liability of added debt burden and for sustaining increased expenditure in subsequent years, we can expect tax rates to rise after the economy resumes. Hence, as an end result we will be seeing expansion in the size of government with respect to the size of the economy. A major chunk of what the private sector produces will be leaked as taxes paid to the government. We will receive money at present at a low cost but will have to bear higher cost when we have to repay it in the form of taxes in the future. If we compare inter-temporal gain, we will be at net loss.

Therefore, we should be aware of what we ask of the government. Being short-sighted and asking for relief packages would only mean that we will have to face an added tax burden in the future which would be way higher than what we receive at present. Instead, we should ask for a reduction of tax rates that applies to businesses and individuals. We should ask the government to relax various regulations which both new and old businesses have to comply with, such as easing up the business registration process, making tax filing easy which would reduce cost and time of doing business. We should ask the government to make trading across borders easy, reducing the time and cost of compliance of cross-border trade. We should also ask the government to prioritize and optimize its spending which is constrained by limited revenue. All these measures will reduce the cost of doing business and facilitate businesses without direct financial intervention from the government. This way, the government does not have to run on additional debt and we won’t have to bear a huge burden of taxes in the future. 

Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.


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