Can Tax Cuts Fight Away the Economic Slowdown?

Out of the many pieces of evidence for the economic slowdown, Nirmala Sitharaman recently announced the merger of 10 public sector banks. This move followed the announcement of reintroduction of Foreign Portfolio Investment (FPI) surcharge and the angel tax. This had given rise to a lot of friction among foreign investors and thousands of startups with the government.

Adding to the situation is the country’s GDP at 5% in the first quarter of the financial year 2019-20 (FY20). This is said to be the lowest in the past six years. Is it possible to fix all these issues if the tax rates are cut? How effective a solution can tax cuts be?

Tax cut—the sole solution?

Tax cuts can boost the current economic situation, provided that other conditions are also met. Narendra Modi had promised to cut corporate taxes in the first term of his government. If this promise can be realised, it makes the companies more competitive and leaves some extra money for reinvestment.

This will, definitely, give bandwidth to scale up the companies providing more employment opportunities; gives scope for building investors’ trust making investment a more competitive affair.

When individual tax rates are brought down, it leaves more money in the hands of taxpayers giving space for better consumption of goods and for savings. An increase in savings can give way to more resources available for investments.

Also Read: CLSA: GDP Growth in April-June Quarter Might Be Sluggish

The negative side of it

Cutting taxes can boost the revenue from tax collection in the long run, though it might be a tough decision for now. Since the estimated tax revenue was not met in FY19, the government had to borrow money to sponsor all its welfare programmes.

Similarly, if the government has to cut tax rates, it may have to borrow a lot more to make the ends meet. In order to balance it out, the expenditure for households and firms for consumption/investment may get a lot more expensive.

It makes sense to identify and eliminate unproductive expenditure for the government rather than to burden the citizens.

Need for a short-term solution

Tax cuts will not help in lifting the economy within a short span of time. A quick measure to bring the economy back to normal is to create demand by the way of restarting infrastructure projects such as affordable housing. This will give job opportunities and put some money into the people’s pockets.

Selling government shares held with the private sector can help raise some money for the government to meet its basic commitments mentioned in the budget. Currently, the government is short of money to fulfil its latest commitments. Also, there is a lot of government land which is not used; this land could be sold. The government may also have to filter out some non-merit subsidies.