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June 11, 2019

Curtain Raiser: Budget 2019-2020 to test government’s will

Top Story

June 11, 2019

ISLAMABAD: The government is unveiling Budget 2019-20 in parliament today with an expected outlay of Rs6.6 trillion, demonstrating its political will to generate revenue and cut expenditure through the austerity drive for achieving economic stability under the IMF’s tight scrutiny.

Dr. Hafeez Pasha — Pakistan’s economic czar — will share a tough roadmap for economic stability under the 39-month IMF programme, with prescription of generating tax revenue in the shape of taking additional measures and improving administration as well as curtailing expenditures through the austerity drive with the help of all segments of society.

The government has estimated budget deficit slightly below 6 percent of GDP equivalent to Rs2.5 trillion. The government has accepted a challenging task to generate Rs5,550 billion revenue in the next budget against revised estimates of Rs4,150 billion, which requires over 35 percent growth. The non- tax revenue target has been envisaged at Rs1.2 trillion.

Pakistan’s expenditures revolve around three Ds including debt servicing, defence anddevelopment. Out of total revenue, more than Rs3 trillion will be transferred to the provinces under the National Finance Commission Award (NFC), while the remaining share of federal government amounting to Rs2.5 to 3 trillion could hardly meet the requirement of debt servicing in the next budget. With this kind of financial straits, the Centre is left with no option but to borrow to meet the requirements of defence, development, subsidies and running government affairs.

Former finance minister Dr Hafeez A Pasha told this reporter that the Ministry of Finance used to understate the budget deficit and they were doing the same in the revised budgetary estimates for the outgoing fiscal year 2018-19.

He said the revenue increase of Rs1,550 billion for achieving the annual target of Rs5,550 billion would be highly unfeasible. He said freeze on the defence expenditure at the level of outgoing fiscal year was a welcome move.

However, he said the overrun in expenditures could not be ruled out in the next budget as well. He said the government played a trick to show inflated figure of development programme by inserting Rs250 billion into the mode of public private partnership (PPP), adding that the provinces allocated Rs912 billion for annual development outlays out of which it would be hard to utilise Rs500 billion in the next fiscal year.

There has been a trend over the years towards the federal budget being unsustainable. There is a need to understand what do we mean by “unsustainable”. The budget is unsustainable when after meeting the unavoidable or legally required expenditures, there is little or no room left in the budget for other expenditures which, though not legally required, are very important to provide for public services and public investment.

These expenditures are called “discretionary”. In practice, there is no absolute distinction between “discretionary” and “non-discretionary” areas of expenditure. But for practical purposes, the non-discretionary areas of public spending should be considered to include: (i) the legally “charged” expenditures required to finance the constitutionally established bodies; (ii) debt service on domestic and external debt, (iii) transfers to the provinces under the National Finance Commission awards, (iv) spending on the security forces, and (v) meeting the salary costs of established public sector employees.

The problem of fiscal sustainability which the federal government is facing is that the amount of space in the budget remaining for “discretionary spending” after meeting the non-discretionary items, has been declining year after year. This has happened for several reasons: first, federal revenues have risen only modestly and from a base which is very low by international standards (as measured, for example, by the tax to GDP ratio); second, the share of the budget used to meet debt service obligations has risen at an alarming pace; third, the size of public sector workforce continues to grow, and this is in spite of provisions of the 18th Amendment, which in principle should have led to a reduced federal work-force, as important service delivery responsibilities of the federal government were transferred to the provinces.

The steady erosion of discretionary space in the federal government budget can be most clearly seen in reduction in the size of Public Sector Development Programme (PSDP) when measured as a share of GDP. This ratio has fallen over the years, as it used to range at 4.7% in 2006-07 but now it has nosedived to less than 2 percent of GDP in the outgoing fiscal year. It will further shrink in percentage of GDP in the next budget for 2019-20. However, it has also led to chronic pressure on the non-salary component of recurrent budget, and is reflected in divisions having inadequate operation budgets to provide quality services.

Clearly, it will not be easy to reverse the existing trend towards reduced fiscal space. Any solution will necessarily involve politically difficult policies aimed at addressing the underlying causes of the problem. Such policies include “right-sizing” of the federal public sector staffing in the light of 18th Amendment, more effective policies and administrative systems to increase federal revenues and/or several years of fiscal restraint to reduce the magnitude and growth of debt-service obligations.

There are many off-budget items and 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 be met during the year.

The most important examples are “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).

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