Around the globe, a social contract binds the state and its citizens. The social contract comprises a mutually comprehensive and all-encompassing set of rights and obligations. The state has the primary responsibility of not only safeguarding fundamental rights but projecting the well-being of its citizens as well. Through a two-pronged approach, initially, policies are formulated for underlying the outlines of the objectives. And then those policies get on the bumpy road of implementation. For their realisation, the cited functions of state require financial means, which are specified in the budgetary allocations of governments. In a way, yearly budgets are the quintessence of the social contract.

Financial policies of a state determine how it intends to generate revenue and spend it – broadly termed as Public Financial Management (PFM). It is a combination of systems, laws, rules and procedures for disposing of the said purposes. A PFM cycle involves six different phases which are Policy, Budget Formulation, Budget Approval, Budget Execution, Accounting, and External Audit. Evident from the nomenclature of each phase, all of these play significant roles in their places. PFM for sure is an integral characteristic of institutional structure for a serviceable public policy. A sound model is the driving force behind the accomplishment of a government’s plan for public fortune.

As mentioned, PFM’s function aims to collect revenue and manage expenditure. One of the prime sources of revenue generation is taxation. In this domain, progressive taxation has a substantial contribution to achieving social justice. It is a system where lower taxes are levied on low-income earners and takes out a more significant percentage from the pockets of high-income earners. It naturally carries a direct impact on the reduction of income inequality. The policy gets more favourable if the revenue collected is used to fund social safety nets and transfer payments. Unfortunately, in Pakistan, the taxation policy in practice is indirect and mostly regressive. As a result, it is profoundly daunting the cause of social justice at the onset. Tax evasion, coupled with off-shoring by wealthy tycoons and large corporations, is further killing the purpose.

After revenue generation comes the critical aspect of spending. Here allocation and distribution are major indicators in determining the direction and priorities of a government. These are essential to be on the concept of justice to attain the looked-for objective. An elaborate framework that guarantees fiscal accountability and promotes public welfare stand-out to be a benchmark in this regard. It yields effective and equitable public service delivery, which has a close connection with poverty alleviation. However, what we observe in exercise here is merely contrary. The present PFM model that is being followed tends to be feloniously silent about the allocation and spending towards the projects of ensuring social justice. There are meagre funds reserved for measures of protecting fundamental rights enshrined in the Constitution of Pakistan. Thus, the human rights regime appears to suffer big time.

Acemoglu and Robinson, in their work “Why Nations Fail”, define two types of institutions – inclusive and extractive. They see them responsible for the course of a nation’s progress. They have linked inclusive institutions with prosperity while extractive ones have been said to cause poverty. They spawn virtuous and vicious cycles, respectively. Earlier mentioned attributes of a robust PFM system are necessary for building inclusive institutions. Regrettably, the system currently in place depicts features of those that are extractive. Revenue generating as well as spending mechanisms, both are skewed and benefit the privileged few at the cost of larger public interest.

Considering the current scenario, a composite debate on budget proposals and fiscal policy statements of the government with all the relevant stakeholders is inevitable. These entities include government, financial markets, international institutions, academia, media and civil society to name the prominent ones. Through its implementation, public opinion and aspirations are brought to light along with enabling a meaningful deliberation and contribution in decision making, thus materialising the dream of democratic administration. It will strengthen the writ of state besides harnessing balanced growth, even development, gender equality and poverty mitigation.

Spoilers in the form of corruption, nepotism, monopolies and cartels, barriers to entry, gender discrimination and other disapproving practices create a dent in the social contract that connects the state with its citizens. Such a disconnect breeds alienation that proves highly detrimental to the national cause. Extremism and terrorism also appear to be offshoots of it. Efforts for bringing accountability, merit-oriented opportunities, healthy competition, gender parity, and improving ease of doing business are required as a future plan of action. PFM occupy the core of a state’s governance system and reform in the PFM model is the starting point for these efforts. It surely demands political will, institutional capacity, a holistic approach and coordinated arrangements by all the organs of state.

Muhammad Azhar Khan
The author holds a degree in Economics from LUMS and is a serving Civil Servant.