The present government presented its fifth and final budget in a politically charged environment on June 1, 2012. The budgetary session of parliament is on and everything is being debated there except the budget itself. It is well known that the budget is not only an account of revenue and expenditure of the government but it also reflects its policy stance to address the challenges facing the economy.
Every year the government releases Pakistan’s Economic Survey – the state of the economy report, one day before the presentation of the budget. The survey highlights the achievements and documents the challenges facing the economy. These challenges are supposed to be addressed through the budget. Unfortunately, the survey in the case of this budget begins with a misleading and factually incorrect statement, stating that “the government remained focused on maintaining macroeconomic stability, growth, mobilising domestic resources and increasing exports”. Such statements widen the credibility gap.
Had the government remained committed to maintaining economic stability, promoting growth, mobilising domestic resources and increasing exports over the last five years, the state of Pakistan’s economy would have been totally different. The country would not have seen its economic growth hovering slightly above the population growth, investment rate plummeting to a new low, domestic saving and foreign investment vanishing, public debt more than doubling, inflation persisting at a double digit and the rupee witnessing a free fall.
Is the budget 2012-13 prepared to address the multi-dimensional economic challenges facing the economy? Before we answer this, it is pertinent to list economic challenges facing the country. The first and foremost challenge we face today is the sharp decline in investment to 12.5 percent of GDP – the lowest in six decades, in 2011-12 from as high as 22.5 percent in 2007 – a loss of 10 percentage point in five years. Has the budget taken measures to revive the investor’s confidence and create conducive environment for its acceleration? The answer is a big NO.
Investment is critical to growth. A sharp decline in investment is associated with slowing economic growth. Real GDP grew at an average rate of three percent per annum over the last five years. If we adjust the mysterious growth (Eight percent per annum) of social and community services, the real GDP has grown at an annual average rate of 2.4 percent in the last five years. Has the budget 2012-13 taken measures to revive economic growth? The answer is NO.
Slower economic growth is bound to create lesser jobs. Almost two million people are entering the job market every year. To provide jobs to all the new entrants, the economy must grow eight percent per annum. With economic growth averaging 2.5-3.0 percent per annum, hardly sic to seven hundred thousand jobs are created each year, thus adding 1.3-1.4 million new entrants to the pool of unemployed every year. Has the budget 2012-13 taken measures to create ‘gainful’ employment? The answer is NO. The budget did announce the creation of 100,000 internships with the Punjab government promising to provide 50,000 jobs. These are populist measures at best with little consequence for the economy.
Rise in unemployment is bound to push more people below the poverty line. Has the budget 2012-13 taken measures to reduce poverty? The answer is NO. The Benazir Income Support Program is not meant to reduce poverty. It only doles out resources to the ‘poor’ as part of the social protection strategy. Many questions have been raised about the transparency of the resources distributed to the intended ‘beneficiary’.
Fiscal indiscipline is one of the root causes of Pakistan’s economic meltdown. As in the previous four budgets, the present budget did not take any measures to capture the areas which remained out of the tax net or remained undertaxed. No measures have been taken to bring agricultural income under the direct tax net. Doctors, beauty parlours, lawyers, intercity bus services etc have remained out of the direct tax net. Little or no efforts have been made to minimise the gap between tax collected and tax deposited to government accounts (withholding tax). No efforts have been made to address the weaknesses of the NFC award.
On the expenditure side, no measures have been taken to address the issues pertaining to the rotten PSEs, circular debt etc. As in the past, revenue is overprojected and expenditure, particularly subsidy, is grossly understated, which is bound to create large slippages in budget deficit. In short, no credible measures have been taken to inject financial discipline in the country. Financial indiscipline will continue with the government continuing to borrow heavily from the banking system to finance fiscal deficit; hence inflationary pressure will continue to persist. Since this is an election year, the government is likely to further increase the support price of wheat sometime in late September or early October. Such measures are likely to further fuel inflationary pressure, creating severe hardship for the poor and fixed income group.
The energy crisis is another root cause of Pakistan’s economic meltdown. Budget 2012-13 did not take any credible measure to address it. Raising the electricity tariff has been the sole policy instrument of the government to address the issue. This alone has never been a solution and will not be a solution as we move forward. The energy sector needs reform and the present budget has failed to take any credible reforms.
Thus, the budget 2012-13 has remained invariant with respect to the economic challenges facing the country. It is a stand-alone budget with fragile numbers prepared in a casual manner. The general public and parliament have lost interest and no one is talking about the budget anymore. This is a sad affair.
The author is principal and dean of NUST Business School, Islamabad. Email: ahkhan@ nbs.edu.pk