EAG urges for efficiency, growth as pillars in upcoming budget

ISLAMABAD: The independent Economic Advisory Group (EAG) has urged the federal government to use the upcoming budget as an opportunity to demonstrate its economic priorities rather than merely presenting it as an accounting exercise.

According to the EAG, when the government announces the budget in June, it is important to lay the foundations of private sector led growth and efficient governance, through appropriate budgetary allocations.

Elaborating its vision for the budget, members of the EAG pointed out the criticality of significant reduction in blanket subsidies, renewal of privatisation proceeds, and prioritisation of development sector spending as key operational pillars of the new budget.

The EAG noted that in the recent past, the federal government has not received a single rupee in privatisation proceeds, which indicates that the process is effectively stalled. “Reviving privatisation is not only important from a fiscal perspective, but also from the standpoint of reducing the government’s footprint in the economy,” the EAG said.

“The EAG welcomes the government’s commitment to the state-owned enterprises (SOEs) Triage Plan (a review of SOEs to categorise them into retention, privatisation and liquidation groups), which rationalises operational losses.”

It urged the government not to sink any further resources in sustaining SOEs, and instead adopt policies that focus on providing a conducive environment that ensures a level playing field, and boosts investment in businesses that create private sector employment.

The EAG was of the view that while targeted subsidies or direct cash transfers were needed as social protection measures, general or blanket subsidies induced inefficiencies in the economy and sent wrong economic signals.

The Ministry of Finance has estimated that close to Rs400 billion were spent on such blanket subsidies, which the EAG recommends should be rationalised.

Commenting on the sanctity of the budget, the EAG appreciated that no supplementary grant has been approved by the government in the past two years, and hoped that this practice would continue.

The government should avoid the temptation of introducing mini budgets that bring instability and arbitrariness to economic governance.

Observing the general tendency of the government, especially in recent months, to not pass-through utility tariff hikes or petroleum price increases, the EAG cautioned that such practices in the past had caused the circular debt in the power sector to accumulate to an extent that it has now become the Achilles Heel in one of the most critical sectors of the country.

The EAG has advised the government to not use fiscal policy to absorb commodity prices and tariff hikes in the future, and let consumers bear the burden, even though such decisions might be unpopular.

The budget has often been used as an opportunity by various industry groups and lobbies to garner benefits through SROs and other relief measures. The EAG believes that such policies result in distortive incentives in the economy that help inefficient industries to survive.

It is imperative to ensure that poorly performing businesses that require support from the government exit, while better performing businesses that involve relatively efficient means of production and improve economic welfare are encouraged.

As such, the government should not use the budget to grant favours and protection to selected sectors. Growth must be earned.

The government should focus on improving efficiencies through reforms within various sectors, rather than provide concessions to specific sectors through subsidies and handouts, the EAG said.

The EAG noted that this government has to its credit taken some tough decisions to bring back stability during the first half of its tenure; “it should now not succumb to pressures to stimulate a temporary spurt in growth through borrowed resources or printing money”.

Sustainable growth should come from a better incentivised private sector, which could be strengthened by reduction and rationalisation of the tax burden and by making it a partner in economic activities through a transparent and robust privatisation programme.

The group urged the government to simplify the tax regime and reduce rates to improve competitiveness of businesses, while at the same time improving compliance and enforcement capacity of the tax machinery in order to enlarge the tax base.

The EAG is an independent group of individuals drawn from economics, policy and the private sector that deliberates regularly on economic developments and shares its views with the government and the public. It is supported by PRIME, an independent think tank.