Tax cuts leave governments little room for welfare spending, Pg11

Key Highlights:

• Corporate tax cuts in 2019, personal income tax changes in Union Budget 2025-26, and GST rationalization have constrained government finances.
• Estimated revenue loss from corporate tax cuts is approximately ₹1.45 lakh crore, and from income tax changes, around ₹1 lakh crore.
• The Centre's net tax revenues have slightly increased from 7.2% of GDP in 2014-15 to a budgeted 7.9% in 2025-26.
• PM-Kisan allocation decreased relatively from 0.30% of GDP in 2020-21 to 0.18% in 2025-26.

Detailed Insights:

• Lower tax regime driven by ideological, political, or economic factors has led to constrained budget allocations for both central and state governments.
• States are reducing spending in other sectors to accommodate cash transfer schemes, indicating financial constraints and limited fiscal space.
• Changes to MGNREGA (now V2-G RAM G) funding, requiring states to cover 40% of costs, will further limit states' fiscal flexibility.
• The long-term nature of these revenue constraints implies that both current and future governments will face limitations unless significant economic growth occurs.
• The 16th Finance Commission's recommendations and the Pay Commission award will further influence the division of resources and fixed government expenditures.

Key Concepts Involved:

• Fiscal Consolidation: Government strategy to reduce deficits and debt accumulation.
• Revenue Forgone: The amount of revenue a government loses due to tax exemptions, deductions, or lower tax rates.
• Competitive Populism: Political scenario where parties compete to offer populist schemes, potentially straining public finances.