Fiscal trouble

Despite the PTI government’s claims that it is cleaning up house on fiscal spending, the actual figures show the current government in a much poorer light. Questions must be asked about the austerity mantra of the current government when the fiscal deficit has crossed 2.7 percent of GDP in the first half of the fiscal year alone. This is the highest half term budget deficit that has been witnessed in the last eight years. Under the current government, almost all major fiscal indicators in terms of both expenditure and revenue have shown deterioration in its first months in power. The fiscal deficit for July-December 2018 has amounted to Rs1.029 trillion, which is 30 percent higher than the same period last year. This is also strange given that Finance Minister Asad Umar has claimed that the PML-N government overspent in preparation for election year. With the election firmly behind us, the one answer available for why the spending has increased is the rupee devaluation. But given that the PTI government has firmly backed the decision to devalue the rupee under the logic that it would help improve Pakistan’s fiscal situation, this evidence suggests that the measure alone could set Pakistan back a decade in terms of its fiscal deficit.

The finance ministry will need to answer why there is such a disconnect between its claims of financial austerity and its actual practice. It should be recalled that the current government announced a 36 percent cut in development spending, which leaves a question over where the increase in spending lies. The answer lies in the increase in mark-up payments and defence, which each posting a 32 percent and 22 percent increase respectively. The increase in mark-up has much to do with the SBP’s decision to increase the base interest rate, which was supposed to be designed to reduce government lending. The situation is proof that cutting down development spending will not be enough to balance the budget. Government borrowing will need to be reined in and the defence sector will need to play its part too.

The current situation, where the cost of keeping the state running is going higher, while the spending on improving the lives of its citizens is going down, is not sustainable. Interest payments alone increased from Rs751 billion last year to Rs877 billion this year. Public-sector development spending in contrast fell from Rs520 billion last year to Rs328 billion this year. This situation would be okay if it were offset by an increase in revenue collection, but revenue collection has also fallen in relation to the total GDP. There is no question that the current situation is an alarming one, but it should be clear that it cannot be all blamed on the previous government anymore. The current government is failing to deliver on its own mandate to rein in government spending. It will need to revise some of its earlier decisions and demand more from other sectors.