How so, Doctor?

The budget was the least of Dr Sheikh’s troubles. From increases in outlay, PSDP and expected revenue advances to tax and duty exemptions, the numbers betray encouraging realization of public sentiment. But failure to immediately detail just how the government machinery will mobilize to achieve these targets will tell whether they are received as ambitious or outrageous, especially when the relief-breakdown is contradictory.
The Rs2.7 trillion total outlay, which the good doctor first misquoted at the presentation, is 14 per cent larger than the outgoing fiscal’s. PSDP, at Rs730 billion, is 10 per cent in excess of last year’s Rs663 billion. Total tax and non-tax revenue is set at Rs2.463 trillion. The FBR will collect Rs1.952 trillion, 9.3 per cent of GDP, to enable increased government spending. Very welcome allotments, especially since they will bolster relief accompanying a one per cent GST decrease from 17 to 16 per cent, several duty exemptions and a 15 per cent increase in government employees’ salaries. Also, the fiscal deficit will be held at four per cent of GDP and inflation scaled down to 12 per cent.
All that glitters: Unfortunately, these numbers lose their luster almost as soon as they are presented. Chiefly, public apprehension owes to government inability to meet much lower targets and subsequent downward revision in the last year. And just how the government plans to increase revenue, expand the tax base, rein in red-zone deficits and balance the growth-inflation tradeoff is exactly what needs to be communicated with immediate effect.
Until the economy remains caught in stagflation – persistent low growth and high inflation – there is little chance of turning this year’s 2.4 per cent GDP growth rate to 4.2 in 2011-12 except by turning the numbers. The hawkish interest rate regime to control inflation has failed basically due to excessive government borrowing from the central bank. It diluted the tight monetary policy and triggered a vicious low-real-income, low consumer expenditure, low investment and low growth cycle. The only thing the high rates have achieved is crowding out of crucial private sector participation.
Forgotten lessons: This has made achieving the near two percentage point increase in expected GDP that much more difficult. Interest rates must now remain high while promised increase in expenditure must be ensured to create additional fiscal space. Infrastructure spending is the best of all pro-development expenditures, and the 55 per cent of PSDP allocated to social overhead spending in roads, bridges, etc, must be monitored very carefully. To enable so much as the first few steps on the path to sustained growth (seven per cent in the medium term), the ministry will need reminding of certain basic facts it seemingly lost sight of in the financial year just ended. The best a finance minister can do in times of high inflation is stick to his budget deficit target. This year’s target of four per cent of GDP is sensible. But if it is ritually compromised and the centre keeps knocking at the central bank and scrapping millions off the PSDP, the multiplier will never materialize.
Tax machinery: With increased expenditure and reduced taxes, all eyes will be on the FBR as it goes about materializing Dr Sheikh’s boast of finally broadening the tax base. The government’s inability to overcome political paralysis regarding RGST imposition means crucial documentation of the economy will once again be compromised along with additional revenue. The bureau must be credited for identifying high-profile tax evaders, though the exercise will be fruitless if not stretched to netting them very soon, and revenues start flowing within the ongoing fiscal. But even with the envisioned 9.3 per cent of GDP, it is doubtful if expenditure targets will be met. More reliance is obviously placed on external earnings with both exports and remittances having a historical transitory-trajectory.
In their defence: It is true that numerical comparisons with last year can be unfair. The economy was thrown badly off track by an estimated $10 billion loss due to the floods. They shaved two percentage points off the GDP and spiked already unbearable inflation. The security situation, too, was increasingly precarious. Besides burdening the exchequer, it drove away foreign investment when the private sector was already crowded out. However, the government’s response left a little to be desired. If it had not resorted to excessive debt monetization, private sector investment would’ve helped stimulate employment and encourage consumer spending, the crucial first step in rolling a stagnant economy.
Common man’s austerity: From all the reshuffling, what came the way of the common man was an inflation induced dip in real wages, reduced purchasing power and increasing austerity. This mix was the public’s biggest concern on the eve of the budget, since it eats away at middle class productivity.
Dr Sheikh has been prudent in spelling out numerical niceties. But the government’s has already fallen short of far more modest benchmarks with the same machinery. It cannot continue excusing its PSDP disrespect to floods and security imperatives. So far, it is not clear how this year’s high targets will move beyond rhetoric.
You have the mix right, doctor. The tax base needs urgent expansion. Public sector spending needs a sizeable jump. Deficits need trimming. But to explain how a proposed expansion in tax collection will enable a sizeable jump in development spending and manage deficits, your actions will have to speak louder than your words as they struggled to reach across the pandemonium during the budget session.