All that glitters is not gold
The humorist and social commentator Will Rogers once declared the federal budget to be a mythical beanbag. In Rogers’ opinion, Congress voted mythical beans into the bag and expected to get real ones out of it. Although he talked from an American perspective, federal budget in Pakistan has surely been a mythical beanbag. Only if more “real” beans were put inside it over the course of time, we might have gotten some real results.
While it is human nature to object on everything, the annual budget in Pakistan surely comes in a digestible form. Certain provisions do raise hue and cry, but overall the commerce ministry does its best to present the best picture possible of a country, where economic planning is never meant to be for the masses.
Qaiser Bengali, advisor to Baloch government gave his insights on this issue. “The main problem is setting of unrealistic budgets year after year.” This was the reason observed by him. “Actually, for many years, ever since Mahbub ul Haq was the finance minister, there has been a trend to set a budget that is likable, in order to avoid criticism from the public. To give you a concrete example, I will quote the fact that revenue estimation has to be based on some activity in various sectors. However we in Pakistan look at the expenses first while budgeting, and then we compare what the IMF requirement for deficit rate is, and then we set the estimated revenue figure.”
Musing over the words of Mr Bengali, one comes to realise that the budget process is followed from the end to the start. This is funny and sad at the same time. These days all eyes are set on the federal budget 2015-16, and it is hoped that this budget will be different from the previous ones, because of certain opportunities in the economy that were not there earlier. But before that, past performance needs to be looked at and trends analysed. The glitz and glamour of the budget speech subsides that very instance and we are left to realise that all that glitters is not gold.
Race for stabilisation, budget deficits and missed targets year after year
The federal budget comes every year with promises of increased growth rate and sustainable development, but these estimates are later revised by the middle or the end of the financial year to show a more realistic picture. Sometimes, a glance into the mirror is very scary and this holds true when we as a nation realistically look into the economic mirror.
Sadly, four per cent is the lowest figure even in the announced figures. These deficit estimates are many times revised later, and needless to say this revision means higher deficit and not lower
Budget deficit has been a norm rather than an exception in Pakistan. A race for stabilisation and compensating for the damage already done is the trend in federal budgeting in Pakistan. If we look at the federal budget, from the fiscal period 2009-10 to 2014-15, all we can see is budget deficit, already expected while setting the budget. Given underneath is a trend line showing budget deficit as a part of GDP in each budget announcement starting from 2009-10, till 2014-15.
Sadly, four per cent is the lowest figure even in the announced figures. These deficit estimates are many times revised later, and needless to say this revision means higher deficit and not lower. The trend line, as per the World Bank data showing the cash deficits for 2009 to 2013 is shown below
Another major issue with the economy of Pakistan is the stagnant rate of GDP growth. It is sorrowful to see that we did not achieve five per cent growth in GDP for many years. The data on GDP growth, as mentioned on Pakistan Economics Survey on Ministry of Finance Website has been put in a graphical form below
It should be noted that budgeted estimates of GDP growth in all these years were generally higher. For instance, the target was 5.1 per cent for the year 2014-2015, and even after the drop in oil prices in the global market in the beginning of 2015, this opportunity could not be capitalised upon. This is one of the examples of missed targets that are very common in Pakistan.
One of the positive signs in our economy is the reduction of inflation from double digit figures in 2009-10 to 4.8 per cent in 2014-15. The following trend line exhibits this fact
However, this fact has not done much to reduce the pathos of the masses because of lack of visible growth in GDP and real wages. But why does this happen in the first place. For years now Pakistani budget rather than focusing on growth and how to move ahead focuses on compensating for the dismal issues of the past, and striving for stabilisation. Budgets in Pakistan are a sorry tale of retrospective compensation rather than futuristic goals.
Dr Ali Cheema, head of LUMS economics department, had very valuable insights on this issue. “The main issue with the federal budgeting in Pakistan since the mid-1990’s has been the focus of almost all budgets on stabilisation rather than growth, and ironically this much sought-after stabilisation has yet not been achieved. The need for stabilisation arises due to various situations; increase in budget deficit and pressure on exchange rates. These situations have their impact on various sectors of the economy, including current accounts and overall macroeconomic situation.”
Dr Cheema added. “The macroeconomic condition could have hardly been improved with the prevailing situations. Since taxation rate has been very stagnant; the growth rate has been very slow, we could do well neither in increase the revenue base nor in improving revenue collection.”
The burden of taxation: Who is accountable?
A major problem bone of contention among various stakeholders in Pakistan is that of taxation. Not only are the collection methods inefficient, but the mechanisms and the generation too raise considerable dissatisfaction among the masses.
We will get some idea if we have a glance at how various sectors of our economy are treated by our tax law. “GST is very high for manufacturing sector at 17 per cent. If we look at the tax-to-GDP ratio sector wise, then it is half a per cent for agriculture, and 29 per cent for manufacturing. This mars industrial activity, and hence exports,” Mr Bengali thoughtfully pointed out.
Dr Mohammad Zubair Khan, former commerce minister of Pakistan, talked about this from a totally different perspective.
“Sadly, the budgetary process in our country is more of a deception. It is just to show the people that planning is being done. For instance, the metro bus project for Rawalpindi-Islamabad amounting to $500 million was not in the budget in the first place. Now there should be enough accountability to ask the concerned individuals that through which law and which approval process was this project started? How the finances were allocated? Such irresponsible deeds result in the overwhelming burden of taxation on the masses,” he said.
“Similarly if you look at electricity, the circular debt is still increasing due to poor collection. And what are the consequences? The consequences are the ever-increasing tariffs to shift the burden to the masses. The issue is the lack of revenue base, and generally the compensatory actions that our government takes is cutting expenditures, and increasing tariffs.”
Revenue generation is very important for budget financing, and strict reforms are needed in this arena. A taxation principle states that taxes should be levied on those with “ability to pay”. However, such is the condition of our taxation laws and procedures that one is compelled to liken it with a family; where some of the children are the apple of the eyes, yet other are treated like stepchildren.
The opportunities ahead
However with the changing landscape of new economic horizons, it is expected that there will be new opportunities that have not been available to us for many years. One of the main factors is the landmark Chinese investment of $45 billion, which is huge by any standards. This huge inflow can have positive impact on the society.
Dr Cheema talked about this economic opportunity. “There is an opportunity to widen economic activity,” he explained the recent circumstances from an economic standpoint. “This is because of two major factors; drop in oil price which will result in relief on foreign accounts and local expenditures alike; and secondly this recent Chinese investment.”
This is by no means exaggerated, and there are stellar chances that we capitalise on these opportunities available, we might end up with a more realistic and more promising federal budget this time around.
What needs to be seen in this budget?
Given the past trends, but keeping the broadening economic horizon in perspective, this is a critical time for the finance ministry to tailor the budget in a Pakistan-friendly way.
Dr Cheema was all in for a shift to a growth-oriented mindset. “It is important that we see a shift in focus from stabilisation to growth-orientation. The budget can exhibit this shift either explicitly or there can be certain indications. We will have to assess the budgetary frameworks on planning, the trade frameworks and the solution to energy problem that the government presents is convincing enough or not. Resolution of energy crisis is an important thing in the short run to improve growth.”
Missed targets has been more of a norm now. However there are things that the government could do i.e., coordination with provinces, realistic targets, capitalisation of the economic opportunities, revenue generation and collection reforms, tax reforms
However, he was mindful of the implications of the 18th amendment. “The required productivity cannot be achieved unless opportunities are maximised by the alignment and the coordination of federal government with the provinces. After the eighteenth amendment, many key growth drivers and those that create human capital are with the provinces, for instance, education, health, law and order, rights of ownership. The Council of Common Interest (CCI) should ideally be resulting in coordination of federal and provincial governments with the inclusion of prime minister and the chief ministers. The planning commission is now a think tank of the CCI, and provinces should be on board when targets are set for achieving goals in the federal budget.”
Dr Cheema further gave some important tips to analyse the upcoming budget. “Three things need to be analysed in the upcoming budget; i) coordinated effort ii) Whether the government has the stomach for relevant taxation and institutional reforms, given that it has the economic space now, iii) Focus on redistribution, which has to be achieved until the government is able to increase real wages.”
Mr Bengali, on the other hand, was more concerned about the issue of indirect taxation. “I do not know what this budget is going to include, but some things need to be changed,” he commented before the announcement. “Indirect taxation over here needs to be lowered in order to boost industrial activities and exports, so that the basis for revenue collection is made. Manufacturing sector especially needs to be given some relief in order to ensure real improvements in the overall economy. We cannot burden manufacturing like this, and this change should be visible in the current budget.”
Dr Mohammad Zubair Khan was all in for improving accountability on public expenditure. “Now, our country is a democratic one. People vote and elect the government. And the masses have every right to question, as to why the people have to suffer the consequences of the inefficiencies. And the media needs to play a vital role in this regard; of awakening the people and of enhancing the accountability.”
To sum up, missed targets has been more of a norm now. However there are things that the government could do i.e., coordination with provinces, realistic targets, capitalisation of the economic opportunities, revenue generation and collection reforms, tax reforms, etc.