Amidst the most rowdy audience that the National Assembly has seen in decades, newly appointed Finance Minister Miftah Ismail presented the sixth-full term budget under the PML-N government. The Rs5,932.5bn budget represented a ten percent increase in spending from last year. In a distasteful attempt to unsettle Ismail by consistently disrupting his speech, the opposition also tore copies of the budget. Leader of the Opposition Khurshid Shah also questioned the mandate of the government to announce a full year budget, insisting that the government should have stuck to announcing a three-month budget. The PTI and PPP tried to make the most of the occasion without offering sound economic or political criticism of a budget that is both minimalist and populist. The contradiction can be explained away by pointing to different parts of the budget. The slashing of development spending has made this one of the least ambitious budgets in decades. However, the reduction in taxes is where the budget shows its populist part. There is a third aspect that is more alarming. While development spending has been reduced by 20 percent, spending on defence and current expenditures has been increased by 20 percent. This means that we will pay more money this year to ensure the function of a state that will do less to improve the lives of people.
It is this contradiction that must become the key focus of public debate on the budget. How can the federal government justify reducing federal Public Sector Development Spending from over Rs1 trillion this year to Rs800 billion next year when the overall budget is actually almost 10 percent higher than last year? There is no sound explanation that can be offered and one would hope that the opposition will raise such questions when the budget debate starts. The figures may not be astonishing but it is certainly worth asking why, in the name of fiscal prudence, it is only the development budget that gets a major cut. The same stinginess could have been applied to defence and current expenditures spending. The federal government has explained its reduction of the development budget in two ways that contradict each other. First, the federal government has insisted that the reduced development spending will allow the next government to set its developmental priorities on its own terms. Second, it has insisted that this is actually a remarkable achievable to bring the budget deficit down. The second of these arguments seems rather facetious if the overall picture of the budget is scrutinised. It is, perhaps, instead a case of making an accounting move that will allow it greater political and fiscal flexibility depending on whether the PML-N is reelected or not.
If reelected, the PML-N may have gotten away with pleasing Pakistan’s external lenders by showing it has reduced ‘non-essential’ spending. If another political party forms government and decides to increase development spending, the PML-N can criticise them for upsetting the so-called fiscal balance that it had managed to artificially create in its last budget. The issue of the reduced development budget is not going away so easily either. The question of where CPEC-related projects in Pakistan will be funded from still remains. CPEC spending seems not to appear on the country’s balance sheets. In his budget speech, Ismail claimed foreign investment in Pakistan only increased from $1.9 billion to $2.1 billion this year. The massive infrastructural spending being done under CPEC seems not to be showing up in either foreign investments or the PDSP. This is a slightly strange situation for economists. The economic engineering involved in presenting the current budget remains questionable. Another alarming figure is estimated bank borrowing: it will increase 2.6 times from last year. This suggests that the government will either use more domestic financing to cover deficits or is in deeper financial trouble than it is admitting to us.
This is why the budget speech started on a more positive note. Ismail began by detailing the government’s tax amnesty scheme. Major tax rates have been brought down considerably to encourage more people to pay taxes. Ismail called it a last chance to declare domestic assets or face prosecution. One must question how effective the announcement of a tax amnesty scheme by an outgoing government actually is. The government remains optimistic that tax collection will increase to Rs4,888.6 billion through the expansion of the tax base. The bold strategy of reducing direct taxes to encourage taxpayers to declare would require the same government to steer it through. If there is no continuity, the scheme could simply be dropped, causing a fiscal crisis for the next government. In this sense, the budget does not seem designed to make things easy for the next federal government and in this sense the concerns about an outgoing government deciding economic policies for the coming government are understandable.
Much of the optimism from the last five budgets announced by Ishaq Dar was tempered by the much more moderate presentation by Ismail. A more balanced assessment of the fiscal situation the federal government faced was clear from the contents of the budget – but this was certainly not admitted. Budget 2018-2019 is a tricky attempt to balance politics and economics, instead of designing a budget that would allow greater flexibility to the next government. These aspects are certain to come under criticism more as the onerous task of passing the budget through the National Assembly proceeds. Three provinces had already declared their hostility to the budget two days ago. Now the opposition parties in the National Assembly have done so. It would be good to see whether either comes up with sound economic criticism and points to a better economic plan for Pakistan’s future. That will tell us whether the PML-N’s economic strategy is the only path forward for the country.