Mian Nawaz Sharif, in a recent statement, suggested that one way oaf getting out of the current economic problems is through balancing the federal budget. The deficits we are running are causing crowding out, inflationary pressures, and putting excessive pressure on the financial and fiscal system of the state. The deficits are also forcing the State Bank to print too much money, at the behest of the government, and in the process the integrity/autonomy of the State Bank, as an independent institution, is being undermined.
Large deficits erode trust in the government, if there is any left to be eroded. It gives the signal that the government is financially irresponsible, incompetent and possibly corrupt: all things that opposition parties in Pakistan have accused the government of being. When it comes to implementing reforms and making them credible, all of the above lower the probability of success.
The government does need to take control of the deficit. But this does not simply mean balanced budgets: we are a long way away from that and the desirability of balanced budgets is questionable even if we were in a position to have one.
Pakistan needs growth, employment generation, and income generation. Unless these happen having stability will remain a pipe dream. If we are not able to raise sufficient revenues domestically for ensuring growth and job creation, we have to raise the finance internationally (borrow). There are no two ways about it. Trying to reduce expenditure, by reducing development expenditure, is a bad option.
Theoretically the government could balance the budget anytime it wanted to. All it has to do is to reduce expenditure to the level of its revenue expectations. If Pakistan is raising 8 percent of its GDP as tax and government revenue, it could balance the budget by bringing all its commitments to that level of expenditure. But easier said than done. Pakistan spends a fairly large amount on defence, directly and indirectly. And given the perceived position of the defence establishment in Pakistan, it is unlikely any government will have the backbone to suggest cuts, even when warranted.
Similarly, we have accumulated a lot of debts, as a nation, though the irony is that a lot of these debts were signed by governments that might not have been too representative, but still we are obligated to honour our debts and hence have to put away a hefty amount for debt servicing (interest payments and return of principal) every year. This too cannot be done away with.
And then there is regular government expenditure, on running the government, as well as development expenditure, to ensure needed investments in important areas that might not be targeted by the private sector (large infrastructure, schools, health facilities for the poor, etc.).
It is true that a lot of this expenditure has significant corruption in it, a significant proportion of waste is also there, but even if one adds all of that and gives it a heavy proportion of overall expenditure in these areas, it is still a fairly small sum. So even if all waste is eliminated, it is not going to solve the problem completely. Though there are good independent reasons for eliminating waste and corruption: resources are scarce and what we have should be used well, and eliminating waste strengthens government credibility when it asks for more resources through additional taxation. But it will not be enough to give us a balanced budget.
There is a more important reason for not cutting development expenditure when thinking of balancing the budget. If government development expenditure is a good correlate to growth in the economy, and job creation, we need the development expenditure. Government is supposed to take on projects that might be too large for private sector to do, or where there are strong positive externalities for the society which the private sector providers are not able to capture in order to price these goods (education and health facilities for the poor, road infrastructure, etc.), government investments become very important. And cutting them will have a large impact on development and growth objectives as well as potential.
In the wake of the floods, when millions of people need to reconstruct houses and other infrastructure, have their livelihoods restored, cutting government development expenditure makes even less sense.
What is needed is not a path to balanced budgets but a path to high growth with job creation and income growth for the poor while budgets are managed so that the growth trajectory (with equity goals) is achieved and maintained. What is needed is a reorientation in thinking where budgets, instead of being an end in themselves, become a means for achieving the growth and/or development goals that the state/society has. For example, if the flood devastation needs to be taken care of on priority basis, which it does, if it means running larger deficits for a couple of years, so be it. But we have to get the flood affectees back on their feet. We just have to ensure that the money is spent well otherwise we will have more debt and nothing to show for it.
What Pakistan needs are real growth/development plans which have the buy-in from all major stakeholders and then the commitment of the state to deliver on them efficiently. If we have these, deficit issue just becomes a means to the larger ends. If we do not have these agreed upon plans, it does not matter whether we have a balanced budget or not, we are going to botch up the macro situation anyway.
The writer is an Associate Professor of Economics at LUMS (currently on leave) and a Senior Advisor at Open Society Foundation (OSF). He can be reached at [email protected].
