Money Matters

Targeted solutions to control government spending

By Dr Muhammad Nadeem Sarwar
Mon, 07, 24

Pakistan’s chronic fiscal deficit recorded at 7.8 per cent of the GDP in 2023 demands immediate attention because of its significant implications for debt management, inflation, external sector and low productivity.

Targeted solutions to control government spending

Pakistan’s chronic fiscal deficit recorded at 7.8 per cent of the GDP in 2023 demands immediate attention because of its significant implications for debt management, inflation, external sector and low productivity.

Addressing the deficit needs focused efforts on both components: government expenditure and revenue collection. The former accounts for nearly 20 per cent of the GDP, which is not higher than our peer economies. However, what makes our expenditure unique is its rigidity.

A look at budgeted expenditure for FY2025 reveals that over 75 per cent of the expenditures are allocated to pre-committed areas such as domestic and foreign debt servicing, salaries and pensions, transfers to provinces and subsidies. Following an 14.5 per cent increase in defence expenditure from last year -- making it Rs2,122 billion in FY2025 -- there is little amount left for development expenditure.

Since inflation is expected to continue to decline, cuts in the policy rate will lead to reducing domestic debt servicing needs. However, controlling expenditures in other accounts requires targeted effects, including reducing the government footprint, putting an end to blanket subsidies and scrutinizing development expenditures.

The 18th Amendment diverted more resources to provinces along with assigning some critical responsibilities. However, the federal cabinet still has these portfolios leading to spending overlaps. As a result, instead of a substantial decrease, federal spending on devolved areas has, in fact, increased in real terms.

Ending these ministries and closing the allied departments will not only help control the fiscal deficit but also lead to improving efficiency in government affairs by eliminating duplication. The finance minister in his budget speech hinted on closing these ministries, but no timeline has been promised so far.

The next area of critical importance is state-owned enterprises (SOEs). The federal government alone owns more than 200 firms, including 88 commercial entities across various sectors, including energy, finance, manufacturing, infrastructure, transport and trade.

As per the finance ministry’s estimates, the net losses of these SOEs make 0.2 per cent of the GDP. Commercial SOEs in the power sector incurred Rs376 billion worth of losses in 2022 alone, followed by SOEs in the road infrastructure sector with Rs168 billion. The aviation sector and the railways collectively made a loss of Rs154 billion. High losses in the power sector, up to 0.5 per cent of the GDP, are due to electricity theft, transmission and distribution losses and lags in revising regulated consumer tariffs.

The triage exercise undertaken by the Ministry of Finance recommended privatizing most of the top 14 loss-making commercial SOEs and restructuring the remaining strategically important ones. At present, the privatization of PIA is under process, and the finance minister is keen to follow the same process at a higher speed for the remaining loss-making SOEs, without any distinction between strategic and non-strategic. This process should be continued with more transparency, will and speed.

As per the World Bank, around 40 per cent of Pakistanis live below the poverty line. This underscores the need for providing subsidies and social support to a large number of households. However, unfortunately, the existing system of subsidies in Pakistan has failed to make any meaningful impact towards reducing poverty and making the lives of the underprivileged easier. A review to improve the efficiency of the subsidies and end undue and inefficient subsidies should be carried out immediately.

Out of the Rs1,363 billion subsidies budgeted for FY2025 (27.3 per cent more than last year), over 87 per cent are directed towards energy, leading to some unintended consequences. Many households across Pakistan have installed multiple electric metres to stay within the protected slab and enjoy the subsidy. Additionally, despite agriculture being a provincial subject post the 18th Amendment, subsidies worth over Rs55 billion for this sector remain in the federal budget.

The blanket nature of these subsidies on fertilizer, tubewell tariff, and wheat procurement, among others, enables large landholders to enjoy more benefits. A system of targeted subsidies given to marginalized segments can be devised by using data analytics and digital technologies. This will not only help reduce government expenditures but also foster transparency and effectiveness, ultimately contributing to poverty reduction and improving the welfare of low earners.

Another expenditure head that needs immediate attention is the pension provision which has reached Rs1,014 billion. The finance czar, in his budget speech, has also committed to reforming this area based on the recommendations of a high-powered commission. However, the history of such commissions does not give us much hope. Moreover, a whopping 23.5 per cent year-on-year increase in this expenditure head also makes people sceptical about the seriousness of such reforms.

Instead, diverting 2-3 per cent out of the given rise in the salaries of public servants to the pension fund would have not only kickstarted the contributory pension system right from the start of FY2025 but also given good signals to people about the government’s commitment towards reining in this expenditure head.

On development spending, the Public Sector Development Programme (PSDP) also faces challenges. The allocation is fragmented across numerous projects with many of these getting insignificant amounts. This results in cost overrun and delayed completion of the project, leading to compromised returns.

Despite this, around 20 new projects have been added to the federal PSDP. The government should revisit this decision and no new project should be added for at least the next five years. Instead, the focus should be on the timely completion of the existing initiatives. For some critical new projects, public-private partnerships and build-operate-transfer (BOT) type models must be explored and encouraged.

Also, the evaluation of recently concluded PSDP projects can guide us towards programmes with high returns. This practice will eventually help pick and choose only critical projects with higher expenditure multipliers.

Last, monetizing the perks of public-sector employees and ending the practice of distributing subsidized plots to public office-holders help rein in public expenditure. Additionally, auctioning the state’s real estate can not only retire the loan but also increase the economic activity in the country by putting capital to more efficient use.

We must not forget that Pakistan stands at a critical juncture. Making informed decisions in the budget will set the course for future prosperity.

The writer holds a PhD in Economics from IBA Karachi and works as a senior research officer at the Overseas Investors Chamber of Commerce and Industry (OICCI).

Disclaimer: The views expressed do not represent the views of any institution, but of the writer only.