Has Covid-19 changed our budgetary ethos?

The dominant features of the budgetary culture stand exposed in the wake of emergencies and disasters


andemics, wars, famines, floods and earthquakes cause massive destruction of lives and livelihoods. Out of the ashes of these destroyers emerge opportunities to rethink the features of ethos or cultures of societies that would likely prepare them better for future risks and uncertainties. A critical element in this preparation is the mode of mobilisation and allocation of public resources to achieve social goals and create private incentives. As the common instrument here is the budget, the dominant features of the budgetary culture stand exposed in the wake of emergencies and disasters. Has the onset of Covid-19 challenged our budgetary ethos? What is the possibility of an appropriate response?

We ought to begin by specifying the characteristic features of the original normal. Oddly, budgeting in Pakistan starts from the side of resource mobilisation: what we can borrow, abroad and at home, and what we earn. The first port of call is beyond the borders of the state – multilateral donors, bilateral creditors and private lenders. Multilateral donors are the first love because of maximum concessionality, without appreciating that even these concessional loans eventually become burdensome. The predominance of programme and budget rather than project financing does not create any assets to pay off in future. Fungibility of this funding enables the government to use it in lieu of tax revenue. At a crunch time, the multilaterals do not, as a matter of policy, reschedule or restructure their loans, but are more than willing to lend further to repay the previous loans. Whether it leads to the classic debt trap is none of their headache. Among the bilaterals, the most preferred is the United States. Its conditions may be obnoxious, but the money can be outright grants. Bilateral debt too is amenable to relief. If the new loans from the multilaterals or the relief from bilaterals is not enough to service debts, high-cost private lenders come handy.

The run up to the federal budget 2020-21 started with the issuance of the Budget Call Letter in January this year. With an IMF programme in place, there was nothing much to do for the government until March. As the Covid-19 surfaced, Secretariat Blocs C, P and Q became hyperactive. The top authorities on the same page agreed to let the political branch issue a call for debt relief. Around $2 billion is the expected amount. Starting with the IMF’s corona emergency funding of $1.4 billion, the Asian Development Bank and the World Bank have acted swiftly to repurpose existing loans and arrange new lines of credit. Not to be left behind are the IDB and Infrastructure Development Bank. Any gap will be bridged from the commercial market to reach the highest ever external financing of about $15 billion.

Tax reform will be where it has always been, the back seat. Simplified, equitable taxation is not in our ethos.

This is only the gap in external financing. The second traditional normal is the borrowing at home. Domestic financing has a bigger gaping hole. It takes the form of classic note printing (now on hold, thanks to the IMF), treasury bills, bonds and household savings mopped up through National Savings schemes. Tax revenue, frozen in time as percentage of GDP compared to the rising share of external and domestic debt, is the last and the least important third conventional normal on the side of resource mobilisation. The revenue curve has been flattened, corona or no corona. To the delight of the elite, the curve will head south with little justification for any additional taxation in an economy headed in the same direction. Tax reform will be where it has always been, the back seat. Simplified, equitable taxation is not in our ethos.

On the expenditure side, the “old” normal is a 2-D affair, i.e. debt servicing and defence. In deference to the otherwise defunct Washington consensus, the coming budget will cut its coat according to the cloth. The back and the front of the coat will be consumed by debt servicing. Since 1985-86, it has been the largest claim on the public exchequer. It exceeded defence by two per cent that year. The excess was 82 per cent in 2018-19. In the first nine months of the current year, it was a staggering 134 per cent. Defence comes next, claiming collars and sleeves. Civil administration eyes the pockets, and has its way. Health and education are left to fight over the buttons and, post 18th Amendment, wait for the provincial budgets to give them their due.

In the Parliament, whoever makes the budget speech, will employ all of Aristotle's rhetorical appeals – ethos, pathos, and logos – to convince the House that the federal fiscal woes resulted from the over-generous 7th NFC Award and its underwriting by 18th Amendment. This was in 2010. But the “old” normal of debt-defence pre-emption of the federal budget started well before, in the mid-1980s as noted above. Taxation in Pakistan seems to have followed what in the early literature of development economics was called “Please Effect.” Stanley Please had hypothesized that taxation in developing countries did not lead to increased total saving for development; it only increased current expenditure.

Pakistan’s foremost need is to at least start doing something about the strangulating debt trap. This requires a paradigm shift in tax policy. In the guise of Covid-emergency, the government is borrowing right, left and centre. There is no appetite for tax reform. As livelihoods have been prioritised over life, the budget will perforce focus on stimulating the economy in the name of employing the unemployed. 

The writer is a former chief economist of the Planning Commission

Has Covid-19 changed our budgetary ethos?