Govt presents Budget 2018-19 today at twilight of its tenure

ISLAMABAD: Amid lingering controversy over the legality of federal budget 2018-19, the ruling PML-N government is going to unveil its sixth consecutive budget in the National Assembly today (Friday) at the twilight of its constitutional tenure.

The budget, which is likely to draw strong voices of disapproval from the opposition benches, will be an all-out effort to build a narrative for winning the next general election. All should be done but there is need to ensure that the policy of appeasement must not be executed at the cost of plunging the country into another trap of macroeconomic instability.

The biggest challenge facing the country in the next fiscal year will be arranging dollar inflows of $20 billion in the wake of rising current account deficit and meeting obligations of debt servicing.

Alone in first six months (July-Dec), Islamabad will have to pay back $6 billion, including $2 billion on maturity of Eurobond. In the wake of persistent lack of political consensus there may be chances of presenting three budgets in the next fiscal including the one by the outgoing regime, by the caretaker setup and finally by the incoming government.

Prime Minister’s Adviser on Finance Dr Miftah Ismail will deliver his budget speech with thrust on doling out packages, but he will have to suggest a path to avoid leading towards expansionary fiscal policies, possessing potential threat for emergence of a full-blown crisis on balance of payment front that could force Islamabad to knock at the IMF’s door as lender of last resort.

With expected outlay of budget close to Rs5.5 trillion for coming budget 2018-19, the government envisaged FBR’s target of Rs4.435 trillion and non-tax revenue target close to Rs1 trillion.

After transferring share to the provinces under the National Finance Commission (NFC) award in the range of Rs2.6 to Rs2.7 trillion, the center will be left with the option to meet expenditure of debt servicing and to some extent defense with its resource generation.

Pakistan’s budget in terms of expenditure revolves around three Ds including debt servicing, defense and development, and the largest ticket item on expenditure side remained related to debt servicing for which the outgoing regime earmarked Rs1.6 trillion in the coming fiscal year.

The rising debt burden coupled with recent devaluation has caused hike in debt servicing as public debt in rupee term went up. The second largest ticket item is defense requirement for which the government was going to allocate Rs1.1 trillion with additional Rs100 billion for the Armed Forces Development Program so total defense budget would be hovering around Rs1.2 trillion excluding pension payment of retired personnel as it’s now part of the civilian pension bill.

For development, there is still controversy over the size of Public Sector Development Program (PSDP) as the Ministry of Finance indicated budget ceiling of Rs800 billion for development but the Ministry of Planning jacked it up to Rs1,030 billion. Now the Finance Ministry wants to keep Rs230 billion as off-budget item and executed agencies should be assigned to generate resources through self- financing.

The pension bill has been proposed at Rs340 billion for coming budget against revised estimates of Rs320 billion for outgoing fiscal year. The subsidies allocation is going to get Rs180 billion.

For meeting all expenditures, the government opts the path of obtaining loans from internal and external avenues in the range of Rs2,000 billion to finance its budget deficit. Here the country plunges into debt trap because of its inability to generate the required resources by mobilising tax revenues and controlling yawning expenditures.

Over-optimism of budget forecasts has become a problem in Pakistan, as recent years have witnessed a strong tendency for the economic and budgetary forecasts presented in the budget to be over-optimistic. Revenue forecasts are routinely substantially over-optimistic, involving projected annual growth on higher side, when the reality is revenue growth of the order of 15 to 16 per cent. At the same time, the approved budget usually involves substantial under-estimation of important expenditure lines in the budget.

The result of over-optimistic budgeting, whether on the revenue side or on the expenditure side, is that the budget as approved cannot actually be implemented in full. Something must give: Either the government will increase the budget deficit over and above the target, leading to increased debt accumulation, or room will have to be found through cuts to the amounts provided in the approved budget.

The pattern emerging is that soon after the approval of the budget the Ministry of Finance announces cuts in implicit recognition that actually the budget was over-optimistic. These cuts are concentrated in two main areas: (i) the operations and maintenance budget lines of the recurrent budget, and (ii) the projects provided for in the development budget. These cuts have the effect of removing the possibility of accountability for service delivery by line ministries, departments and agencies. If these bodies do not receive their full budget they have a permanent excuse for failure to deliver planned services in full

Off-budget items: The main areas of under-estimation usually relate to the likely “contingent liabilities” which in all probability will arise during the budget year. These are liabilities which sometimes cannot be forecast accurately in advance, but which are highly likely to need to be met during the year.

The most important examples are the “circular debts” arising from operations in the energy and other sectors – e.g. commodity financing. The present practice is not to make provision in the approved budget for such expenditures.

The second type of off-budget items are the periodic expenditures required to support loss-making public sector enterprises (PSEs). Finally, renowned independent economist Dr Hafiz A Pasha said that in principle the outgoing government should not present next fiscal year budget.

He said the dole-out packages should not be given in an irresponsible manner causing macroeconomic instability for political gains. “The government has doled out Rs90 billion with reduction in income tax rates and if 10 percent pay raise was granted, there will be accumulative effect of Rs250 billion on the budget of center and provinces,” he added.

The increased fiscal deficit, he said, would push up burden on current account deficit owing to demands for imports so there were fears that the government was going to take opposite steps which were required at the moment to curtail the twin deficit but he reminded that it would possess recipe for disaster.

Dr Ashfaque Hassan Khan, reputed economist, said there was no moral, legal and ethical justification for the outgoing government to present full year budget. The budget, he said, was also presented on the backdrop of last year’s performance but this time the economic indicators were finalized on the basis of six to eight months data so the next budget would be extremely fragile.