The mini-budget

The announcement of a mini-budget on Tuesday confirmed the PTI government’s commitment to austerity. Finance Minister Asad Umar confirmed as much before parliament, stating that ‘the warnings came long ago: we are now at the precipice of a crisis. While the PTI did its best to give it the appearance of a regular budget by announcing new subsidies and expanding the Insaf Sehat Card project, it would be more apt to consider it an emergency amputation. The highlights of the mini-budget are: the federal development programme has been slashed by over 25 percent while the tax relief granted by the PML-N to salaried persons has been revoked. There has also been an increase in excise duty on almost 5,000 luxury items and withholding tax on the bank transactions of non-tax filers. But this is a continuation of the policies of the PML-N, which announced similar amendments in its mini-budget last year. The objective of revoking the tax relief and imposing budget cuts is to bring the budget deficit down to 5.1 percent. Umar claimed that the budget deficit would have hit 7.2 percent without this.

How the mini-budget fulfils the two objectives of protecting the poor and supporting exporters is anyone’s guess. The finance minister claimed that the government was open to suggestions from parliament. Although this is a good signal, it remains to be seen whether any serious feedback will be incorporated. The feeling that the government has pressed the panic button unnecessarily is not comforting. While the budget deficit and current account deficits are certainly too high, one must question the wisdom of the federal development programme taking the biggest hit. Surely, there are more significant chunks, including the cost of running the government, debt-servicing, and defence, which could use more prudent spending. Public-sector spending is a crucial mechanism to create conditions to facilitate economic growth as long as it is used in the right place. The real question is whether the PTI will be able to correct the issues that the PML-N and the PPP failed to address. The current account deficit is a case in point. It is unlikely that the increased tariffs will bring the spiralling deficit in control. We need to be explained how the current account deficit increased from$2.5 billion in 2012-2013 to $18.1 billion in 2017-2018. Increasing import tariffs is one step in the right direction. But the measures taken are only expected to bring exports down by $1 billion. The real question is how the government plans to increase exports. Budget cuts might be necessary, but they will not create confidence in the economy or a way out of the crisis any time soon.