Budget and beyond budgeting

The PTI government has presented its first “pro-people” and “growth-oriented” federal budget in the National Assembly in the form of Finance Bill 2019-20. The proposed budget is being claimed to have prepared to achieve a macroeconomic stability in Pakistan. The government looks interested in reducing the budget deficit through adopting a strict fiscal consolidation strategy. So, it has set an ambitious and all-time high target for tax revenue in addition to taking a number of austerity measures. The government also intends to document the country’s black economy through introducing various taxation measures, especially in the real estate sector. Earlier in last month, it also introduced a so-called income and assets declaration scheme for the same purpose. The government has also allocated a handsome amount for infrastructural and social sector development in the budget.

The proposed budget essentially represents multiple macroeconomic compulsions and fiscal constraints faced by the incumbent government. It can certainly not ignore such compulsions and constraints while formulating its fiscal and monetary policies in the country. Noticeably, the annual federal budget is gradually losing its significance and relevance the country’s economic milieu. It has more become an annual balance sheet, undesirably prepared and presented by the federal government, merely as a mandatory constitutional requirement. Irrespective of the ‘facts and figures’ stated in the annual budget statement, there have been a number of macroeconomic factors which together shape the contours of federal budget as well as the economic outlook of the government. Essentially compelled by such factors, the federal government usually makes certain necessary fiscal readjustments in the budget in the form of a number of subsequent ‘supplementary budgets’ and periodical SRO’s, diminishing the utility and significance of the formal budgetary scheme.

The government generally sets some ambitious revenue and growth targets in the budget after exaggerating its economic performance. On the other hand, it modestly projects fiscal deficit in the country. Thus it artfully prepares a plausible annual balance sheet of the government’s expected revenues and expenditures. The annual budget statement made by the government minister has just become a hotchpotch of the federal government’s fiscal, monetary, trade and export policies. It also contains the micro-level details of its taxation measures and development plans. The government also boastfully compares its economic performance with that of the previous political regime. Such practice has given rise to a tradition of delivering a long budget speech in the National Assembly, resulting in complicating and rather confusing the entire scheme of the budget. In fact, the unnecessary and irrelevant facts stated in the budget speech just obscure the crux of the federal budget- the revenues and expenditure, and the gap between the two i.e. fiscal deficit.

Undoubtedly, fiscal deficit is one the most significant aspects of any government budget. Surely, the art of preparing a balanced budget includes keeping the fiscal deficit below its optimum threshold. Obviously such threshold varies from time to time, and, and from country to country. Each government generally endeavors to minimize its fiscal deficit by all means. In Pakistan, there has been observed a tendency of describing the fiscal deficit in terms of the relative volume of country’s GDP instead of the relative size of the budget. Such practice hardly portrays the exact picture and perspective of this phenomenon. In fact, analyzing Pakistan’s fiscal deficit vis-à-vis its GDP volume alone would be erratic and rather misleading. It is the country’s tax-to-GDP ratio which is all important, and which ultimately determines its capacity to manage its fiscal deficit as well as the accumulated public debt.

The total outlay of the proposed federal budget for FY 2019-20 is Rs7.022 trillion.  The ‘consolidated’ fiscal deficit has been projected at 7.1% of the GDP. The net federal revenues would be around Rs3462 billion after transferring the provincial share under the 7th NFC award. So, the fiscal deficit is expected around Rs3560. The government, however, has projected such deficit at Rs3137 after hoping to get Rs423 billion as provincial surplus. It is, indeed, a modest projection of the expected fiscal deficit. In reality, the actual fiscal deficit is likely to be even more than Rs3560 billion if the government doesn’t get the estimated provincial surplus, and fails to meet the ambitiously high Rs5550 billion tax revenue target. In that case, the fiscal deficit would simply be equivalent to about 50% of the total budget outlay. It is certainly an alarming situation. It is really hard for any government to manage an economy with a 50% budget deficit. In order to make both ends meet, the government will naturally have to opt for deficit-financing- which simply means more public borrowing.

 Earlier, the Economic Survey of Pakistan 2018-19 painted only a gloomy picture of the country’s economy. According to it, the provisional GDP growth rate is estimated at 3.3% while the inflation rate increased to 7.3%. Similarly, there has also been witnessed a significant increase in the accumulated public debt. On the other side, Pakistani rupee has been in free fall for the last few months. Therefore, analyzing the proposed deficit budget together with the prevailing economic conditions in the country would be quite disappointing and frustrating. And expecting a 35-40% tax revenue growth while the country is drifting towards stagflation would not only be unrealistic but also be disastrous for an ailing economy.

Pakistan has to carefully set its long and short term promising but pragmatic fiscal targets to step out of the current economic vicious cycle. Some effective fiscal and monetary tools of macroeconomics should diligently be employed to overcome the country’s pressing economic woes. Each sector of the economy has its sectorial role in boosting the economy. Therefore, the government should focus on the revival of each ailing sector of the economy separately. There should also be prudential regulatory measures to reduce enormous inflationary and recessionary pressures on the economy. Instead of naively treating the symptoms, the economic managers should try to cure the economy of its chronic maladies. There should be a focus on improving the general state of the economy through prudential fiscal regulation and structural reforms, rather than managing it on an ad-hoc basis. Pakistan seriously needs to improve its economic fundamentals. Pakistan also needs to introduce a progressive tax regime, a healthy tax culture and an efficient tax collection mechanism to successfully achieve its revenue targets.

 It is really worrisome that there is no serious resolve on the part of incumbent government to put the economy on the right track. It looks more interested in its corruption-related rhetoric against the opposition leaders. The political confrontation between the treasury and opposition members has reach to an extent that they can no longer sit together to properly discuss public affairs in the Parliament. Each session in the National Assembly starts with harsh sloganeering and ends in ruckus. This is what we saw during the presentation of recent money bill and subsequent sessions to discuss the proposed budget. One wonders how this premier elected public institution will play its role to steer the volatile economy out of crisis.

 While Pakistan’s economy is in disarray, the “joint opposition alliance” is flexing its muscles to launch a massive protest movement against the incumbent government. In fact, Pakistan has been in such agitation mode for many years which has almost destroyed the conducive environment for business and investment in the country. At this stage, the government should try to lower the rising political temperature in the country rather than adding fuel to the fire through its poisonous propaganda and divisive politics. The prevailing economic uncertainty and political turmoil would damage the country’s troubled economy beyond redemption.

The writer is a lawyer. He can be contacted at mohsinraza.malik@ymail.com. Follow him on Twitter

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