THE State Bank Report for the third quarter has come in the run-up to the budget and, amidst admissions of government extravagance, with a warning that that extravagance could upset the entire economy. The State Bank has also used the report to defend its own refusal to lower the interest rate, and has predicted that GDP growth for the entire year will be 4.1 percent, on the back of above-target growth in livestock, large-scale manufacturing and services. This claim of an economic recovery does not match the experience of the ordinary citizen, who finds more reflective of the economic realities of Pakistan, the letter of Intent sent to the IMF by PMs Finance Adviser Hafeez Sheikh and SBP Governor Saleem Raza, that the power tariff would be raised six percent with effect from April1, as one of the conditions for the release of the latest tranche in its programme. This was stressed again by Dr Sheikh in his comments confirming the imposition of the Value Added Tax. He confirmed that the loans taken by the government had doubled in the last two years. Information Minister Qamar Zaman Kaira also confirmed that the governments expenditures had cut into the development budget this fiscal year, as government expenditures had risen. There were signs aplenty before, but now it has been recognized abroad that the present government is borrowing well beyond its means, what with brokerage house Merill Lynch saying that Pakistan must change its means of paying its debts, both at home and abroad, as well as reduce the expenditures on government. In a recent report, it noted that Pakistan had to meet a budgetary gap of Rs 703 billion, of which it would meet Rs 521 billion locally through Rs 155 billion in bank borrowing, and Rs 366 billion in non-bank borrowing. This is recognition of Pakistans true problem, unrestrained spending. The reduction of expenses is not a priority for the government, which would do well to reduce expenses and balance the budget.