Public debt: boon or bane? - Part II

September 04,2018

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We now turn to the use of the proceeds of public debt. For this purpose, it is important to understand the system of fiscal management in the country. This is specified in several articles of the constitution.

Article 78 states: (1) All revenues received by the federal government, all loans raised by that government, and all moneys received by it in repayment of any loan, shall form part of the Federal Consolidated Fund (FCF). (2) All other moneys (a) received by or on behalf of the federal government; and (b) received by or deposited with the Supreme Court or any other court established under the authority of the federation; shall be credited to the public account (PA) of the federation.

It is the FCF that is of prime concern at present. Note that both revenues (such as taxes) and the proceeds of loans (public debt), together with repayment of loans, form part of the FCF. Furthermore, since the money is fungible, once these moneys are made part of the FCF, they are indistinguishable. So, a salary paid to a government employee cannot be identified if it is paid from revenues or from the proceeds of a loan. Generally, when expending moneys from the FCF, it is immaterial whether it is coming from loans or revenues.

Meanwhile, Article 79 states that the custody of the FCF and the PA, withdrawal from and payment therein, will be regulated in accordance with the law to be made by parliament and, until such time, by the rules made by the president.

Under Articles 80, 82 and 83, the constitution further states the manner in which moneys from the FCF should be expended. Article 80 requires the federal government to present an annual budget statement (ABS) every year which gives (a) estimates of receipts and expenditures (with a break-down between charged and voted expenditures) and (b) detailed demands for grants to be voted by the assembly. Article 82 specifies the procedure for voting on demands for grants. Finally, Article 83 requires that a schedule of authenticated expenditures, signed by the prime minister, should be presented in the assembly.

This, then, is the framework provided under the constitution for fiscal management. Note that the assembly approves demands for grants (expenditures) and not the level of resources to be mobilised by the government or the deficit that it can incur. For a given year, even though estimates of receipts are provided, approval is only sought for expenditures. Because we have standing revenues flowing into the treasury through previously-approved tax laws and a general authority to raise loans on the security of the FCF, only some new tax measures are approved in the form of a finance bill.

Almost an unbounded freedom to manage fiscal affairs, as it deems appropriate, is provided to the federal government by Article 84, which allows it to make supplementary grants and incur access expenditures relative to what was authorised by the assembly under Article 82. These supplementary grants and access expenditures are regularised through the same approval process as the original budget. But traditionally, it is done in the following year along with the approval of the new budget.

Various inferences can be drawn from the above framework. One, revenues and loans continuously flow into the FCF and are indistinguishable afterwards. Two, the assembly authorises expenditures from the FCF. Three, no limit on deficit is imposed by the assembly. Four, the federal government is authorised to incur expenditures beyond approved limits through supplementary grants and access spending, which are subsequently regularised by the assembly.

Evidently, loans are as much a part of financing government expenditures as revenues. A loan made part of the FCF, loses its identity and cannot be traced except in the books of accounts. During the last fiscal year, on a consolidated (federal and provincial) basis, revenues were about 15 percent of GDP and expenditures around 22 percent, leaving a gap of seven percent or around Rs2,400 billion (although it was budgeted at 4.1 percent or Rs1,480 billion).

This is the amount of borrowing that the government has done. Public debt, by definition, is the cumulative sum of annual fiscal deficits (plus the revaluation losses on foreign loans on account of depreciation). Accordingly, a proposition to terminate borrowing would call for eliminating the fiscal deficit, or better still, to have surplus budgets so that even the existing public debt can be retired. Both are unrealistic as the required austerity would be unbearable.

Some people might suggest limiting borrowing to finance development expenditure only. Even this would require a herculean effort. Last year, the development expenditure was 4.7 percent of GDP (or Rs1,622 billion), which was 2.3 percentage points (or Rs778 billion) higher than the fiscal deficit. This is a clear indication that the country is borrowing even to pay for current expenditures, such as the salaries of its employees.

To cut expenditures worth Rs778 billion is a painful exercise. But this, as we have argued previously, is essential to stabilise the economy. Unfortunately, more than half of this cut will come from the development side – as it is a discretionary expenditure – and not from current expenditure. To lessen the burden of current expenditure, only revenues will have to be increased.

We also note a major dichotomy in the above fiscal framework. There is no law, except the Fiscal Responsibility and Debt Limitation Act (FRDLA), 2005, that regulates fiscal affairs. Other than the constitutional provisions discussed above, a plethora of rules made under the president’s authority regulate fiscal affairs. These rules can be modified at any time under executive authority.

Meanwhile, the FRDLA lacks any bite. A new law on public financial management that comprehensively covers aspects such as budgeting, expenditure, sanctions, accounting, auditing and debt is an inescapable need to bring discipline in the country’s fiscal affairs.

Concluded

The writer is a former finance secretary. Email: waqarmkngmail.com


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