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April 29, 2018

Inflated promises


April 29, 2018

The budget offers a political and fiscal opportunity for governments to set the agenda and direction of development. Countries have been largely dependent on such policy decisions.

The PML-N presented its sixth federal budget with an inflated total outlay of Rs5.9 trillion, with a 10 percent increase that is quite unrealistic. Since 2013, there hasn’t been a single year when the government was able to add that much into the national kitty.

Established democracies tend to hold lengthy discussions on development plans; economic performance over the past year; and allocations for the upcoming year. However, our governments have maintained a tradition of passing a finance bill in a hurry without a concrete debate. It would make sense if the Economic Survey is tabled in parliament for debate, followed by the budget bill. Only a day’s gap between the release of the Economic Survey and the budget doesn’t leave enough space for debate on critical issues of public policy. The tradition of denying adequate time to question the government’s past economic performance has persisted for yet another year. The approach of either praising or rejecting the plan rather than assessing economic performance is flawed.

The new budget will be examined not just in terms of its economic rationale but also in relation to its political dimensions. It is the first time in decades – probably after the 1973 constitution was introduced – that the provinces have refused to approve the National Economic Council (NEC)’s development proposals. Earlier this week, the chief ministers of Sindh, Balochistan and Khyber Pakhtunkhwa raised their objections over the development programmes, exposing the rift within the federating units over the distribution of resources by the centre – a practice that has not been questioned due to its political expediency.

The practice of ignoring provinces and their legitimate share in federal development plans has continued because of the bureaucratic structure; the managers of our economy; our human resources in the relevant ministries – including the federal planning and development ministry; and the lack of representation from smaller provinces despite assurances within the constitution. As a result, a biased budget in favour of one province is produced every year.

Ahsan Iqbal has argued that provinces don’t send their projects to be included in the federal PSDP. However, this explanation cannot be accepted because the question doesn’t just relate to provincial projects. The overarching federal ministries should set development goals by focusing on the entire geography of the country, not just GT Road.

Budget 2018-2019 was presented at a time when the PML-N has been marred with political uncertainty; intense tensions with rivals; and other challenges. The party and cabinet clearly did not have enough time to either put deep thought into future plans or review the development strategy.

Above all, the party presented the budget for a year, even though there is no guarantee that it will be voted in for a fourth tenure. It seems as though it is making plans for the next government.

The idea of making a block allocation of Rs100 billion for the next government to decide on spending doesn’t seem to be fair. Plans for the upcoming year should be left to the new government on a ratio of 60:40 by allocating 60 percent for ongoing development plans and leaving the rest of the development budget for the new government. This criticism from the opposition appears to be valid.

At a time when the economy is growing at a rate of 5.8 percent and the budget is estimated to increase by 10 percent, it makes no economic sense to slash development spendings. This speaks volumes about the government’s lack of capacity to plan and support sectors of the economy, such as the services industry and agriculture, to maintain the growth drive. With a 19 percent increase for defence needs (amounting to Rs1.1 trillion) – though after doing away with the Coalition Support Fund (CSF) by the Trump administration – there would be pressure on the defence budget. But the proposed raise is higher than what the budget can afford. There has been an increase of Rs400 billion in the defence budget over the last five years. In 2013, the budget was Rs600 billion.

Over the last five years, the PML-N has been successful in increasing tax collection by Rs16 trillion. In 2013, when the party assumed public office, it collected Rs2.5 trillion in taxes. However, the new budget target for tax collection of Rs4.8 trillion, with a highly exaggerated and unrealistic estimate of adding Rs700 billion in one year, is misleading. If the past five years serve as a gauge, this has never been achieved. From 2014 to 2017, the government was never able to achieve its tax-collection targets. On average, there has been a growth of Rs300 billion in tax collection and the deficit has been financed through borrowing.

Debt – both foreign and domestic – is eating away a major chunk of our resources. Between and 19 percent and 25 percent of the total budget will go into debt-servicing, amounting to Rs1.6 trillion. This is a liability that eats away our resources, leaving limited fiscal space to meet development needs.

Under the National Finance Commission (NFC) Award, revenues worth Rs2.5 trillion will be given to the provinces. The federal government is left with Rs2 trillion while defence and debt-servicing constitutes Rs2.7 trillion. This leads us to the crux of the problem: the federal government is run on borrowings – a vicious circle without any visible end. This remains the basic nature of Pakistan’s budget and reflects the fragile nature of our economic standing.

Regardless of who is at the helm in Islamabad, until the tax-to-GDP ratio reaches respectable levels that are in line with other economies of our size, Pakistan will continue to plunge deeper into a debt trap; the rupee will dwindle; and our financial managers will be engaged in damage control with global financial institutions.

The solution to our fiscal deficit could worsen as the political economy of our relations with Washington is in a deep quandary. The promises of self-reliance, which were televised on national television, and the chest-thumping of breaking the begging bowl, were all a matter of politics, not economics.

Email: [email protected]

Twitter: @mushrajpar

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