Budget dilemma

Budget 2022 will determine the pace of post-pandemic economic recovery

The government will be presenting the annual budget in a couple of months with economic stability and economic recovery claims. The upcoming budget is important for at least three reasons:

One, this budget will shape the post-pandemic economic recovery after the Covid-19 hit Pakistan.

Two, the government will be under pressure to make its voter base happy, but it may face some constraints on account of the recently reinstated IMF programme.

Third, the government in general and the finance minister in particular will be presenting a budget in times of high political uncertainty.

The six-month term allowed for a non-elected member to serve as a minister under the Rules of Business, 1973, would expire on June 9. This may increase the government’s problems if the incumbent finance minister, who lost the Senate election, does not get elected to the parliament. This is important because the budget’s credibility may be compromised if people and businesses see the minister as somebody on his way out. If a new minister authors the budget, the priorities and policies may shift.

All these factors are significant and the government is facing some difficult choices. First, the claim of economic stability and recovery may entitle people and businesses who are hard hit by the pandemic and inflation to expect/demand some concessions such as tax breaks, salary raises and subsidies. The government, however, may have to go for raising taxes for three apparent reasons.

One, the taxes were not raised in the FY2021 budget. Two, the revenue target for FY2022 is expected to be more than Rs 6,000 billion. Three, the tax base has not expanded so that the revenue and deficit targets cannot be met without tax hikes.

Inflation has already started picking up, reaching 8.70 in February. Double-digit inflation in June 2021 will intensify the tax raise impact on people and businesses. Household incomes have already dipped. Raises in energy and petroleum prices have already inflated the cost of production and business for firms. A raise in taxes and a cut in expenditures are likely to pose economic and political costs. Pakistan has one of the slowest economic recoveries after the pandemic. This might get aggravated.

The opposite is expected on the expenditure side. To facilitate economic recovery, the government will need an expansion of the fiscal stimulus, focusing on increasing development expenditures. But the deficit targets may push the government to discontinue, at least not expand, fiscal stimulus. This may slow down and delay economic recovery.

An open and transparent fiscal account management in all sectors will help identify areas where resources can be diverted and reprioritised in times of crises.

The government, therefore, must persuade the IMF that it has to continue and expand fiscal stimulus to support economic recovery. A premature and abrupt ending of stimulus may compromise the gains from last year. This will require negotiations with the IMF to reconsider deficit targets and borrowing limits. Revenue targets must also be reconsidered — any target above Rs 5,000 billion will push the government to adopt unproductive extraction of revenues — the net loss to the economy.

Second, the government must remain vigilant on financial stability but must avoid deficit hawks. This is a time for spending. It must continue implementing and expanding fiscal stimulus, at least for the next two years. Given the resource constraints, efficiency in spending will be critical. The government must have a clear plan to support and spend in higher job elasticity sectors, such as the SMEs. Expanding economic activity will take care of the deficits later.

Third, budget 2022 must respond to new spending priorities such as the Covid-19 vaccine. While it is good to get vaccine gifts, the government must understand that gifts are not a policy. Budget 2022 must lay out a clear national road map for vaccination. Provinces will follow it. Corona vaccine is much more than a vaccine. It is key to reducing the stress on the healthcare system and promoting routine economic activity in the country.

Delay in vaccination may impose a higher cost of re-opening than otherwise. Successful vaccination is key to post-crisis employment. Returning to post-pandemic economic activity will increase engagement through re-hires and create new job opportunities. We must remember that the vaccine cost is for one time while the gains are for an extended period.

Government, therefore, must assess the costs and gains from a broader perspective. Present delay and laziness seem to have been guided by lower spread and lower human and economic loss from coronavirus than other countries. This is not logical for many reasons. Each human life is precious. The economy will keep operating below its potential. Third, fourth, and so many waves will keep coming until we have well designed and implemented vaccination policy.

Fourth, budget 2022 needs a fundamental shift in spending priorities. Preference must be given to investment in and protection of Pakistan’s most important resource – its people. People’s wellbeing and prosperity through human capital development and better social protection will consequently lead to economic gains. While there is a dire need for an economic boost to transition from a negative 0.4 percent growth rate to a positive trajectory, it must not come at the cost of people’s welfare.

Investment in social protection is a much more prudent decision than making ad hoc provisions of assistance. Findings from a UNESCAP (2020) study show that the economic costs of the response to Covid-19 are speculated to be lower for economies that have a robust social protection system.

Fifth, federal and provincial budgets need to be made flexible to be redirected towards priority social protection areas. This is critical to creating efficient and stronger mechanisms to respond to crisis and other urgent needs. An open and transparent fiscal account management in all sectors will help identify areas where resources can be diverted and reprioritised in times of crises.

For instance, in China, budget reallocation is an option under the 2018 budget law for tapping into contingency funds during emergencies. This allowed China to issue a budget notice on January 31, 2020, to make urgent funds available to respond to Covid-19. Similarly, in Indonesia, France, Italy and Germany, all non-urgent spending was reallocated to the relief package against Covid-19.

While the financial needs for Covid-19 response may be much greater than those financed by reallocations from different budget heads, such measures ensure that resources are made urgently available from within existing budgets on an urgent basis to save time while stimulus plans are put into action. This can only be possible if the budget management mechanism is transparent and allows quick-response adjustments that are easy to track.

The government must remember that these are not normal times. The austerity measures committed under the stabilisation programme must be re-negotiated. Once the pandemic slows down, corrective policies can be put in place. In this regard, the government must ensure a broad-based discussion of the upcoming budget. Civil society organisations need to promote debate on the priority agenda for the forthcoming budget.

The Writer is a Research Fellow and Heads Policy Solutions Lab at Sustainable Development Policy Institute (SDPI), Islamabad. He tweets at @sajidaminjaved

Budget dilemma