Saturday September 18, 2021

Budget 2020-21

June 13, 2020

The economic hardship the country has been facing for the past two years called for a radical change in the approach to budget-making. Last year, the poor economic performance was blamed on the previous PML-N government, and the new government asked the people to tighten their belts, and the people did it because they had no other option. After two years of underwhelming steering of the economy, the Covid-19 crisis had presented the PTI government with an opportunity to show some vision and take over the reins of an economy that has gone from bad to the verge of collapse under its stewardship. Instead, the government has delivered another budget that showed little imagination, with little to cushion the population after IMF-enforced economic contractions. The Rs7.13 trillion tax-free budget announced by Federal Minister for Industries Hammad Azhar in the National Assembly seemed to have used Covid-19 more to cover up the problems of the Rs3.8 billion budget deficit, the largest in Pakistan’s history. There are also immediate predictions that the government will be issuing a mini budget within months, given the unrealistic revenue targets set. This was a time to announce a new economic stimulus package, and a time to announce an expanded health budget. Instead, what we saw was a National Assembly with placards reminding the government of the many broken promises, including: the failure to deliver economic recovery, the failure to build housing for the poor, and the failure to protect Pakistan Steel Mills workers. Let’s start with the revenue target which has been set at nearly Rs5 trillion. Just like the previous year’s target, this one too appears over ambitious keeping in mind the lackluster economic performance of the government during the past two years. Last year also the target had to be revised multiple times and if the past is any guide, the same is likely to happen in the coming fiscal too.

We must not forget that the current government is not alone in announcing mediocre budgets. It is hard to remember a budget that stirred much excitement in Pakistan’s IMF era. But it is harder to remember a budget that seemed so out of touch with the desperate state of the country’s economy. The government has announced a Rs70 billion Covid-19 relief programme, but the programme is part of the federal Public Sector Development Programme that stands at Rs650 billion. This effectively means that there is no economic stimulus programme – and that there is around a 20 percent decrease in the amount of economic activity the state generates in the next year through new or continuing public sector development projects. It is not that the money has been moved into economic incentives for industries, businesses, farmers or labourers; it has just disappeared while doing nothing to steady the tide of the growing fiscal deficit. Ironically, the simplest principle of increasing tax collection, to create a healthy economy, is the one that the current government continues to fail to understand in every attempt at ‘balancing the books.’ Headlines will be made around the announcement of ‘no new taxes’, but no new taxes does not mean no changes in existing taxes, which is what the budget speech went on to announce. Some taxes, such as on tobacco and sugary beverages, have been increased, while other duties, such as those on certain medical treatments and domestically produced mobile phones stand reduced. These seem more to be a part of an ordinary balancing act, rather than an emergency budget. Budget planners have, in an apparent effort to show a ‘soft’ budget, failed to tax even luxury vehicles or other items of a similar nature, meaning the FBR is unlikely to be able to meet its collection target of 4.95 trillion.

Perhaps the most disappointing aspect of the budget is the allocation for education and health. We have seen how the near neglect of these sectors over the past seven decades has left us with a nation that lacks basic understanding of health issues resulting from a poor education system, and even worse access to health or education facilities. The fight against Covid-19 should have taught us a lesson or two in terms of education and health. Despite our failing on both fronts, the new budget has allocated a meagre Rs83 billion for education and just Rs25 billion for health at the federal level (despite there having been a generous increase in some other areas of spending). As for the budget deficit, how it has been mushrooming under austerity is a question that the government has continued to fail to address, but it is clear that both foreign and domestic borrowing has gone through the roof. The government will get some relief after its surprise move, faced with the Covid-19 lockdown, to reduce domestic interest rates massively. Little has been said of the impact of its interest rate hike and the reasons for their reduction, but many economists have put the high budget deficits down to a simple factor: the government increased the rate at which it was funding its own fiscal deficit.

It has not been encouraging to see the government’s self-declared ‘corona budget’ fall so far short of what was needed to stem the economic distress in the economy that has engulfed industries, small businesses, farmers and labourers. Large-scale manufacturing and agriculture have both remained stagnant for a number of years, which severe losses expected due to the reduction in export demand for export industries, coupled with the ongoing locust swarms which are pushing farmers to the brink and which serve as a warning that a food crisis looms large. Mass unemployment has been reported across all sectors as Covid-19 has taken a toll on an already stressed economy. This was the time for a government to build a budget that listens to voices across sectors and finds a balance. Instead, we see little increase in funding for even the health sector, where doctors have been protesting the lack of protective equipment to treat Covid-19 patients. Finally, the growth rate of GDP is another cause of concern. The minister has promised that the government would pull out the economy from a 0.4 percent contraction to a budgeted growth rate of 2.1 percent in the GDP for the next fiscal. One hopes that the promise comes true, though one is tempted to take it without much faith, as we have seen a dizzying decline in growth even before the coronavirus was anywhere to be seen in the country. Essentially, Pakistan faces a major problem. It simply does not have enough revenue to meet its needs, with huge chunks going towards debt servicing, defence and administration. The reality is that we need substantial and holistic changes – which seem very far away at the moment.