The other side of the coin

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To a lay man, the budget is a statement of annual revenue collection and expenditure by the government which one way or the other impacts the common man. To the economists, stakeholders in the growth process and those who understand its importance, it reflects the direction the economy is going and the policies adopted by the government to achieve desired goals and their likely repercussion for the future development. That is why the budget is keenly awaited by all the segments of the society.

The fifth budget presented by the PPP-led coalition was also keenly awaited. One of the major objections that the media, opposition and some economists have raised is that it is an election/ballot budget that includes measures to woo the voters. In my view, incumbent governments are entitled to indulge in this practice. All over the world, it is an accepted norm for the sitting governments to unfurl measures that in the election year that brighten up their prospects of re-election. What, however, matters is whether those steps are of temporary nature only to influence the election outcome or will have a spillover effect as well, benefiting the targeted segments of the society on a perennial basis.

The critics ostensibly are referring to the relief measures given in the budget like enhancement in the salaries of government servants and pensions, increase in BISP allocations from Rs 50 billion to Rs 70 billion, jacking up allocation for Benazir Tractor Scheme from Rs 917 million to Rs 2 billion, reduction in taxes on certain items, removal of FED on certain items, provision of cheaper medicines and enhancement in government subsidies from Rs 166.448 billion to Rs 208.5 billion.

I think the critics’ observations belie their lack of understanding of the impact of these measures. The reduction in taxes and FED will certainly improve the economic situation of the masses and so will the relief measures for the salaried class and the poverty reduction initiatives. The reduction of FED on cement will improve the investment climate in the industry and consequently create more jobs. This combined with the creation of one thousand more jobs in the public sector, through their multiplier effect, will create a chain reaction that will help in overall improvement in the job market. So these steps will have longer term benefits also.

True, the economy has under-performed. The GDP growth rate of 3.7 % achieved during the current year is below its target of 4.2 %. Foreign and domestic investments have declined and all other macroeconomic indicators, except for foreign remittances, show the same trend. Our industry – and consequently the employment situation – has been badly mauled by the energy crisis. However, viewed in the backdrop of the international economic environment, the growth rate of 3.7 % is not a bad performance at all. For countries like Pakistan, the rising prices of oil and food have also added to their economic woes and acted as a drag on their financial resources.

Another harsh criticism leveled against the government is that under its stewardship, public debt has ratcheted up. In absolute terms, nobody can contest this claim of the critics. But, nonetheless, qualifications need to be made. No government would resort to borrowing until and unless it is constrained to do so. We also have to look at the other side of the coin. Pakistan has sustained a loss of 68 billion dollars due to its participation in the war on terror, which was not the decision of the present government, but we have not been compensated adequately for it. Even the US has been withholding the CSF on one pretext or the other. The IMF cushion is also not available at the moment. Floods have wreaked a colossal damage on the infrastructure and it would require nearly Rs 162 billion to rebuild it. How could public debt not accumulate in such a situation?

Economists all over the world are unanimous in their view that to arrest the ill-effects of the burgeoning debt, the best possible solution lies in reducing expenditure and broadening the tax base. In our situation, both these proposition are very difficult to implement and the successive governments have avoided rectifying the situation fearing a political backlash. They have also shown irresistible propensity to go for prestige projects in complete disregard of economic realities and hence resort to borrowing from internal and external sources.

Another very big factor in increasing government spending and the government perforce resorting to borrowing has been meeting the defence requirements. Our military establishment, despite the failure of their chosen security paradigm, still insists on bankrolling their over-ambitious policy options of matching the strength of Indian army. Rs 545.386 billion allocated for defence in the current budget is almost half of our debt liabilities. Despite these constraints, presenting a budget with an outlay of Rs 2.96 trillion and setting a target of revenue collection at Rs 2381 million as compared to Rs.1950, with a view to increasing the tax-GDP ratio to 10.1 %, reflects the confidence of the government in the success of the tax generating measures introduced by it.

Unfortunately there is stiff resistance to government attempts to document the economy, imposition of GST and broadening the tax base, on the basis of narrow political consideration. The government initiative in this regard needs to be supported. In a population of 180 million, where only 3 million pay taxes, how can you expect the government to carry out the needed development besides footing the huge and unjustified defence expenditure. The government and the media will have to tell the truth to the people and tell them plainly that to change the prevailing economic situation, they will have to make sacrifices now. Drastic cuts in government spending including revisiting the defence needs and broadening the tax base are the only way out of this quagmire. We will have to create a tax culture where every earning individual pays tax.