Wednesday, August 26, 2009

Taxes must rise

"In nearly all countries, the costs of the crisis have added to the fiscal burden, and higher taxation is inevitable".


writes IMF's Chief Economist Olivier Blanchard, on sustaining a global recovery.

Among all developing countries, the fiscal burden is nowhere more intense than in India. It is therefore only appropriate that corporate tax concessions made during the slowdown be rolled back, marginal tax rates be raised, and direct taxes rationalized.

Across the world too, the momentum in favor of raising taxes has been gathering. The Economix even started the Club Wagner (named after Adolf Wagner, a 19th-century German economist, who predicted that taxes would rise as societies became wealthier) of economists who acknowledge the basic economic reality that taxes in the US must rise! And its membership has been growing at an impressive pace.

Blanchard has more, and of relevance to India,

"Large deficits lead to rapid increases in debt, and, because debt levels were already high in many countries, such increases cannot go on for long. As large deficits continue debt sustainability comes increasingly into question. And with this comes the risk of higher long-term interest rates, both because of anticipated crowding out of private borrowers by government borrowers and because of a higher risk of default."

And true to this prediction, as the graphic below indicates, the yields on the benchmark 2019 G-Secs have been on a clear rising trend (it has risen by 206 basis points since start of this fiscal year) on the back of concerns about the massive government borrowings.

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