The challenge of the tough budget

If declared targets are met, the economy can improve

There are two major perspectives on the new federal budget. One perspective emphasizes the election promises and the other perspective judges the budget in view of the faltering economy that requires tough economic decisions. There is a third perspective which focuses on the declining notion of citizenship in Pakistan.

The budget is a clear negation of the promises made by the PML-N leaders in the course of the election campaign. The major PML-N argument was that the economy was in trouble and there was no economic relief to the common people because the PPP federal government was corrupt, incompetent and inefficient. If the people knock out this government the PML-N will turn around their fortunes. The PML-N leadership vowed to work for ending loadshedding completely in three years, provide economic relief to the common man and fix the minimum wage at Rs15,000 per month.

These promises were made despite the fact that all economists were frank in telling everybody that Pakistan’s economy suffered from so many structural problems that it could not be easily turned around. The PPP government’s misdeeds were not the only factor causing economic slide down. The political leaders did not pay much heed to their grim warnings because they wanted to sell dreams of a better future to the common people in order to win the elections.

The strong economic pressures have been built on the common people due to proposals for the increased GST, enhancement of some other tax and duties and imposition of duties and GST on more goods and services. This came as a major shock to the people who expected that the PML-N would work towards easing economic pressure, especially price hike of essential kitchen items. The net effect is that the price of everything of daily use, especially grocery items, has gone up more than the rate of new taxes. If tax has been raised from one to five percent the rise in prices of food items and goods of daily use has gone up by 10 to 15 percent.

However, if we examine the budget keeping in view Pakistan’s troubled economy, it seems appropriate to suggest tough economic measures, especially enhancement of taxes and the planned reduction in the administrative expenditure of the federal government. The current trend of printing new currency notes and offering financial subsidies on utilities and irresponsible expenditure by the highups in political and administrative positions cannot be allowed to go unchecked.

Given the troubled state of the economy a budget of economic concession could not be given. However, the PML-N should acknowledge its promises during and before the election campaign were unrealistic. Now, after assuming power it faces an uphill task to convince the voters that it cannot quickly deliver on its promises.

The success of the budget in improving the economy depends on the capacity of the government to enforce its decision in letter and spirit. This is going to be difficult because different strata of the society, especially the labour and government officials, now quite used to going on strike and disrupting life in urban centers, launched street protest in different cities in order to extract material benefits from the government. The federal government yielded to public pressure and on June 15 by announcing a salary raise of 10 percent to federal employees. The minimum wage was raised from Rs8000 to Rs10000 per month. Some other adjustments have also been made in the budget.

The federal government will have to implement the promised cutback on expenses of state machinery without compromising on performance. Can the Prime Minister House and other key officials make their expenditure cost-effective? Can the people in high offices give up their ‘royal’ style? How would the government reduce the liabilities of state enterprises and appoint professionals to top management slots without giving them ‘hefty’ salaries and facilities?

The key question is the capacity of the Federal Board of Revenue to collect taxes, especially from those who are not in the tax net. This requires an efficient tax management and collection system which is transparent and the Income tax officials should not be allowed to harass the taxpayers in the name of collecting more taxes. Tax collection should be increased through consultative process with the business and trading communities; talk to them for respectable ways to pay the tax to the state rather than giving bribing officials to escape the net.

There is a heavy reliance on foreign assistance and domestic borrowing. External receipts have been shown as Rs169 billion while Rs975 billion are to be obtained from domestic bank borrowing. The main sources of external funding are the Coalition Support Fund and the Kerry-Lugar-Berman Law. Not much may be available under Coalition Support Fund and the United States has become somewhat stringent on allocations to different project from KLB Law funding. Bank borrowing may give immediate relief to the government but it adds to the overall debt burden and reduces the funds available for private sector borrowing.

On the one hand the federal government wants to reduce budget deficit from over eight percent to little over six percent. On the other hand it has made huge allocation for development programme (Rs1.15 trillion: federal share Rs540 billion, provincial Rs615 billion) including projection oriented programmes like distribution of laptop to students, youth training and skill programme, micro finance and small business loans, tuition fee project, housing finance scheme and higher education commission funding. All these are praiseworthy commitments in their individual capacity. However, given the policy of tightening on expenditure, reduction of budget deficit and the dubious capacity to collect the projected revenue the state may not have enough resources to pull through development programmes.

There is no possibility of reduction on three items on the expenditure side: interest repayments (Rs1,154 billion), declared defence expenditure (Rs627 billion) and military and civilian pensions (Rs171 billion). Traditionally the defence expenditure shoots beyond the projected amount.

It is a challenging task to implement this budget. The economy can show some signs of improvement if the federal government shows enough determination and capacity to pursue the declared budgetary targets. If the traditional political exigencies are allowed to enter the implementation process Pakistan will face a bigger economic crisis before the end of the financial year.

The writer is an independent political and defence analyst.