Getting a bigger bang for our buck?
While the objective to keep the fiscal deficit in check would be a laudable one under most circumstances, this target is unlikely to be achievable and, in the abnormal situation in which the country finds itself, cannot be a goal worth pursuing
By Shahid Kardar
The fiscal deficit is essentially the excess of total government expenditures over its revenues from all sources. A large deficit produces four complications:

This is an economists' Special Report that ambitiously aims to tackle both macro and micro issues in the forthcoming budget. Much of it is familiar -- defence spending, debt servicing, lack of tax culture, lower revenues, bigger government, lesser development expenditure. It is difficult to get out of the rut.

It seemed only fair that we left the people out and focused on figures. Like every year, this time too there is talk of parliament's role in budget-making to ensure people's priorities got discussed and addressed. But like we said we are badly stuck. The parliament is perhaps going to be better informed about the defence budget this year but that's about it. It has no say in reallocating the available funds and nothing changes on the macro level.

Things look bad enough when they start getting worse. Terrorism and military operations are followed by more terrorism and more military operations. From counter-insurgency we move to a near-war situation and there comes the biggest issue for us -- IDPs. As if the battle for country's survival was not enough, we now have to face the relief and rehabilitation needs of millions of IDPs in our midst.

These issues are going to put a huge burden on Budget 2009-10. The familiar defence expenditure is estimated to be in the range of Rs400 billion next year. The cash grant to the IDPs for relief and rehabilitation may cost us Rs100 billion.

Again on a familiar note, development budget will suffer. Education will suffer and so will health. We are in crisis times. But aren't we always.

Share today, gone tomorrow

It is customary to classify public expenditure into current and developmental expenditure. The former is essential for running the day-to-day affairs of the government, while the latter is necessary for increasing the productive capacity of the economy. Each type of the expenditure has its opportunity cost. The funds which are pumped into some head of the current expenditure -- defence, for instance -- may well have been spent on some developmental activity and vice versa.

Every year, therefore, the government makes choices where to allocate larger and smaller shares of the pie. In FY09 budget, the federal government had allocated Rs 371 billion to developmental works -- 18.45 percent of the total envisaged expenditure of Rs 2.01 trillion -- which was later slashed to Rs 219 billion. Consolidated provincial budgetary allocation for development programmes was Rs 272.2 billion. The Punjab province allocated Rs 160 billion to development expenditure (38.36 percent of total expenditure of Rs 236 billion), Sindh Rs 55 billion (23.30 percent of total expenditure of Rs 236 billion), NWFP Rs 41.5 billion (38.14 percent of total expenditure of Rs 108.8 billion) and Balochistan allocated Rs 15.7 billion (24.84 percent of total expenditure of Rs 63.2 billion). Thus, as far as the share of development expenditure in total expenditure is concerned, Punjab ranked first followed by the NWFP, Balochistan and Sindh.

Punjab allocated Rs 47 billion (29.37 percent of total development expenditure) to social sector (education, health, water supply and sanitation) and Rs 32 billion to infrastructure development (20 percent of total development expenditure). In case of the NWFP, the sector-wise allocation of developmental spending under major subheads was this: education, Rs 5.49 billion; regional development, Rs 5.32 billion; health, Rs 3.93 billion; roads, 4.47 billion; and water supply, Rs 1.27 billion. Balochistan allocated 43 percent of total development expenditure to infrastructure development, 10 percent to poverty alleviation, 3.7 percent to education and only 1 percent to health.

According to the figures released by the ministry of finance, the total consolidated federal and provincial expenditure for first nine months of the current fiscal year (July-March FY09) was Rs 1.70 trillion including current expenditure of Rs 1.41 trillion and developmental expenditure of Rs 243.17 billion (14.30 of total expenditure). The consolidated federal and provincial expenditure accounted for 1.8 percent of GDP.

The total spending by the federal government during July-March FY09 was Rs 1.23 trillion including current expenditure of Rs 1.06 trillion and developmental expenditure of Rs 147.71 billion (12 percent of total expenditure). The total consolidated provincial expenditure was Rs 499.75 billion including current expenditure of Rs 390.57 billion and developmental expenditure of Rs 109.17 billion. The Punjab province spent total amount of Rs 264.57 billion including current expenditure of Rs 197.85 billion and development expenditure of Rs 66.72 billion (25 percent of total expenditure). In case of Sindh, out of total expenditure of Rs 140.36 billion, Rs 116 billion were spent on the current head and Rs 24.16 billion on developmental works (17 percent of total expenditure). The NWFP spent Rs 44.91 on current expenditure and Rs 11.66 billion on developmental expenditure (20 percent of total expenditure). The province of Balochistan spent 31.60 billion and Rs 6.62 billion on current and developmental expenditure respectively (17 percent of total expenditure). Thus, in case of all the four provinces, the share of developmental spending in total expenditure has fallen well short of the budgetary share in the first nine months of the current fiscal year. Does this mean development is a low priority area for the governments?

The decision to allocate additional funds under one head or curtail under another are determined by political and economic constraints within which every government works. In case of Pakistan, the three perennial constraints which governments have to face while budgeting are the massive public debt, the need to maintain a huge military establishment, and low tax-GDP ratio due to lack of tax culture. The first two constraints dictate that no matter what the state of the economy is and however paramount development needs are, a large portion of the public expenditure is allocated to debt servicing and defence, while the third constraint makes it difficult for the government to have enough funds to make substantial contributions to socio-economic development. The result is that the government is left with a very narrow fiscal space within which it can undertake developmental projects.

Federal and provincial budgets for FY10 are being prepared within the same constraints. The upward revision of fiscal deficit for FY10 from 3.4 percent to 4.6 percent of GDP is likely to give the government additional fiscal space of Rs 180 billion and development expenditure for the coming fiscal year is projected to be about Rs 595 billion: Rs 295 billion to be spent by the federal government and Rs 200 billion by the provincial governments. The federal government's development expenditure includes Rs 58 billion for water supply, Rs 32 billion for education, and Rs 26 billion for health.

However, these projections are based on certain assumptions: for example, that tax revenue of Rs 1.88 trillion will be collected; and that current expenditure, particularly defence expenditure and general public service expenditure, will not shoot up.

A developing country like Pakistan needs to spend a lot more on human capital development and creating and improving economic overheads. But this requires either increase in, or reallocation, of funds. Increase in revenue requires enhanced economic activity together with a tax culture, while reallocation of funds requires a fundamental shift in the country's political economy. Thus a substantial increase in developmental spending will not be coming through until economic activity gets momentum, tax culture is developed, or the country's political economy undergoes a decisive shift.

interview

Dr Pervez Tahir has served as Chief Economist in the Planning Commission of Pakistan and also held many other distinctions. He got his education from government schools. After doing his Masters in Economics from Government College, Lahore, he joined the institution as a lecturer. Next, he joined The Pakistan Times as a correspondent. This paved the way for his induction in the government. He did his PhD from Cambridge University in the early 1980s. He rose to fame after his refusal to endorse the Shaukat Aziz government's claims of reducing poverty, in his capacity as Chief Economist in the Planning Commission. After his retirement, he held the Mahbubul Haq Chair at Government College University, Lahore, quitting recently because of the administration's negative behaviour. It is difficult to find a person who could voice the concerns of the poor better than him. The News on Sunday interviews Dr Pervez Tahir recently with special focus on the forthcoming budget. Excerpts follow.

The News on Sunday: What are some of the major challenges for the government with regard to the formulation of the Budget 2009-10?

Dr Pervez Tahir: The major challenge for the budget makers is that they have some exceptional expenditures to make in the next fiscal year. First, defence expenditure, which is already overshooting by a wide margin, is expected to be in the range of Rs 400 billion next year. Second, the budget for public safety and law and order is likely to be twice this year. If provincial allocations are also taken into account, it is expected to exceed Rs 100 billion. This means that security would become the largest head in our budget in the place of debt servicing.

Third, a lot of resources and efforts would be required for the relief and rehabilitation of the internally displaced persons (IDPs), because neither is there enough support from abroad forthcoming nor does the Public Sector Development Programme (PSDP) inspire much confidence that it would be able to do much for them. The number of the IDPs is estimated to be 3 million. If the government provides Rs 100 per day to each one of them for three months, the figure comes to around Rs 27 billion. If the government provides Rs 25,000 to each one of them to move back to their areas, the figure comes to around Rs 75 billion. These are only immediate expenses and the rehabilitation expenditure would be many times more than this. In short, the IDPs will put a heavy burden on the Budget 2009-10 and talks of a larger development budget will not materialise. These are the three major challenges on the expenditure side.

TNS: What about the revenue side of the budget?

PT: As regards the revenue side of the budget, the next year's target has to be formulated in realistic terms. In the ongoing fiscal year, the revenue target had to be revised downwards many times and it appears that the government would fail to even meet the latest target of Rs 1.1 trillion. The solution offered is to bring more areas -- such as agriculture, services and real estate -- under the tax net. Every sane person would support this idea. However, experience shows that half-baked efforts towards this end create more problems that they solve. When participation and transparency are the name of the game, the government has to talk to all the stakeholders before making a decision; it cannot just tell them that you are liable to new taxes. If this could not be done in 10 years, how is it possible to do so in 10 days?

TNS: So what is the solution?

PT: The government, in the forthcoming budget, should announce draft legislation of what it plans to do regarding taxation. This should be discussed throughout the year and then placed before the Parliament. Only then the decision to impose new taxes should be made. This is the only way to ensure that the decision has not to be reversed later. Another reason for not imposing new taxes in the forthcoming budget is that the country's economy is in deep recession. In fact, incentives are needed to revive the economy. I suggest that the size of the Budget 2009-10 should be small. The government should be thinking ahead in a medium-term framework to bring about fundamental changes later; this year should only set the tone for what the economy would look like in the years to come.

TNS: Why the development budget is never fully utilised?

PT: First of all, it is important to understand that development is not only about spending money, but also about how this money is spent. Money not spent is better than money wrongly spent, because the former would ultimately be spent on the alternative option. Coming to your question, the major reason why the development budget is never fully utilised is that the Ministry of Finance does not have the capacity to evaluate development projects. Moreover, the Planning Commission's capacity to evaluate these projects has also become weak over the years. In fact, two types of appraisals are done for every development project: technical and economic. The technical appraisal is done by professionals. For example, in the area of education, specialists will look at the project and ask different questions, such as does it fit in the overall education policy, does it support objectives of the medium-term development and budgetary frameworks, does it have proper implementation capacity, etc. The economic appraisal looks at costs and benefits of development projects to tell about their financial rate of return. Economists calculate unit costs to compare different projects. The objective is to have projects that can not only be easily implemented, but can also pay back their loans. However, only following these criteria is not enough to ensure full utilisation, particularly in the case of development projects proposed by parliamentarians.

TNS: Is it true that the development budget is intentionally inflated to cater to needs of other sectors like defence and debt servicing?

PT: We should not forget that most development is carried out of borrowings; if the government cannot borrow, development has to suffer. Moreover, the government has no reason to inflate the development budget; if there is no money, it has the right to apply cuts. So the development budget can be inflated, but only at the level of a specific ministry that might over pitch expenditure under a certain head to re-appropriate it to some other head during the year.

TNS: What measures do you suggest to improve the utilisation of the development budget?

PT: Allocate enough and monitor regularly to take corrective actions during the life of a project. Though some efforts have been made in the recent past to make budget monitoring more effective, the way the PSDP has been utilised recently shows these changes are not enough.

TNS: Why does the federal component of the PSDP lag behind the provincial component when it comes to the utilisation of allocated funds?

PT: The provinces make their own development budgets because the federal government does not have the capacity to do so. In fact, the fiscal deficit target is used to arrive at a figure for the PSDP, of which the federal government executes its development projects and transfers the residual to the provinces. In the case of the provinces, however, this has nothing to do with actual development. The provinces also decide whatever they want to do with the resources they generate themselves. However, most of the major projects like ports have to be implemented by federal ministries because of the lack of capacity of their provincial counterparts. Nonetheless, in the case of some selected major projects like the Education Sector Reform Programme (ESRP), the implementation is done by provincial ministries. Though the provinces are in favour of implementing all development projects themselves, small ministries should not be entrusted with this responsibility, because they would not be able to maintain them. Most importantly, all development projects have to be transferred to the non-development budget (current or recurring expenditure) on completion. This adds to the fiscal burden of provinces. Thus, they should ideally be involved in implementation, except for that of major projects.

TNS: Why does the development budget always bear the brunt of shortage in revenue collection, while the non-development budget is always overspent?

PT: It is important to remember that current expenditure cannot be curtailed because most of it comprises salaries of government employees. It is also difficult to cut current expenditure because this entails a thorough review of spendings.

TNS: How true is the general perception that budget making in Pakistan is afflicted with the problem of figure fudging?

PT: When the Musharraf regime started and entered into an arrangement with the IMF, it accused the previous government of fudging the fiscal deficit figure and also had to pay a fine. It is quite interesting to note that some of the very people who had worked on the budget in the previous government continued to work with Shaukat Aziz as the finance minister. However, if there was some fudging, I think they were not very aware that it was fudging. They had been doing it always and had never been told by an expert that this is not enough. For the first time, they told the IMF everything, basically because they wanted to blame the parliamentarians for fudging. In the process, they also found out that figures had to be prepared in a different way. But why should budget figures be fudged? We should look at this question more carefully. Budget is always about future and you can always be wrong in a forecast. For example, if the government says it will spend so much on education and fails to do so, that is not fudging; that is bad forecasting. Fudging is done when you make an argument and manufacture data to support it. In general, revenues are under pitched because the revenue collectors want a cushion to be on the safe side. Expenditures, on the other hand, are over pitched to some extent. But fudging would be that if the government had said fiscal deficit would be that much and it does jugglery of figures to prove that it is that much. In short, if somebody wants to play with figures, it is possible, but to suspect that figures would always be wrong is probably not a fair comment.

TNS: Don't you think the introduction of a new budget accounting model during the Musharraf regime, with Shaukat Aziz as the finance minister, led to figure fudging, because it made comparisons with last years impossible and debt servicing was included under the head of current expenditure as a result of it?

PT: The Musharraf regime with Shaukat Aziz at the helm of economic affairs had been fudging with GDP growth data, poverty data, unemployment data, etc. It also fudged with wheat growth targets by saying there is a surplus of the crop while actually there was a deficit. It was fudging because the government had announced a GDP growth target that could only be achieved by showing a wheat surplus, so it said there was a surplus. That is fudging. If it would have just been a matter of government forecast, it could have been said the government failed to achieve the surplus for various reasons, but that happens in planning and budgeting. But if you know in April there is no surplus and yet you use that figure to boost the GDP growth rate, it is fudging. Now coming to accounting, you are actually talking about the project called PEFRA. First of all, we should all appreciate the fact that our budget making is quite traditional and needs a lot of modernisation. The purpose of PEFRA is to improve budgetary reporting and fill the gap that currently exists between the budget figures and the revised figures, and the preliminary accounts figures and the final accounts figures. This gap was there because of the difficulties of the old accounting system and because there was a time lag of five years before you could see final accounts of a budget. This also comprised accountability because by the time the Public Accounts Committee (PAC) looked at something, the whole system had changed, and those who made decisions had either left or moved on. There is another reform associated with PEFRA. Earlier, it was difficult to get budgetary figures during the year. Now, as a result of this project, you get quarterly figures. The advantage of this quarterly data -- now public -- is that the people can ask questions about the government's spending pattern; for example, why the government always manages to spend more in the last quarter of the fiscal year. So this change of system actually promotes transparency rather than fudging. Still, there are a lot of questions about the implementation of PEFRA. It is a never ending and slow moving project. To add to this, the implementation has been very slow.

TNS: Would you like to give us some insights into the charged expenditure that cannot be debated even in the Parliament?

PT: Against common perception, the biggest charged expenditure in the federal budget is debt servicing (though it is shown under the head of current expenditure); you cannot default on your external commitments. In addition, the expenditure of the Parliament and the Supreme Court are counted as charged expenditure. While the Supreme Court and the Parliament make their own budgets, the budgets of the President House and the Prime Minister's House are made normally.

TNS: How should the government deal with the burgeoning fiscal deficit?

PT: In the current year, the government has actually achieved its fiscal deficit target. The agreement with the IMF was of 4.2-4.3 percent of GDP and the government is likely to achieve that. What has the government done? It has simply cut development expenditure. The fiscal deficit target has been revised upwards for the next fiscal year. The government has argued with the IMF, and I think rightly that next year it will not be possible to have a fiscal deficit of 3.2 percent of GDP. I think there is now an agreement on much more and that is why the government is over pitching the federal government component of development expenditure at Rs 400 billion; because it is getting an extra cushion of Rs 100 billion through increase in the fiscal deficit target. But all this will be overtaken by the expenditure on national security and the IDPs. I have said it before and I say it again that the next year's budget will in essence be a national security budget. It will not be a development budget. There cannot be much relief for the people because there has to be a massive relief for the IDPs.

TNS: Why the government lays more emphasis on indirect taxes instead of direct taxes that burden only the rich?

PT: There are known principles of taxation. A tax has to be fair and the government has to ensure some consideration of equity. It also has to ensure a few other things, such as it does not keep burdening those who are already overburdened. In developing countries, since the capacity of governments to collect revenue is limited, they tend to impose taxes that may not exactly be fair but are easy to collect. Therefore, governments of developing countries keep on imposing indirect taxes more than direct taxes, because the former are easier to collect, though they burden the poor more. A not-so-perfect solution to this problem has also been found. Even in indirect taxes, there is the distinction of luxury items and common man's items, and governments tend to tax the latter lower than the former.

TNS: Would you like to tell us about the off-budget military expenditure?

PT: A few things are known and there are others that are not known. For example, it is known that military pensions were taken out of the defence budget a few years ago. What is not known are the ways in which the civilian budget has been picking up the expenditure that should better be shown under defence. For instance, many universities sponsored by the military have been claiming large chunks of funds from the Higher Education Commission (HEC). Similarly, cadet colleges were conceived as training/recruiting grounds for the military, but now they are all funded out of civilian budget. It is interesting to note that only a few graduates of these colleges now join the armed forces.

TNS: How can the Parliament's role in budget making be improved?

PT: Budget is presented in the parliament only because constitutionally a single penny cannot be spent without its approval. However, to bring the Parliament on board is very important. If people's priorities have to be ensured in the budget, then the parliament must fully debate it. The solution to this difficulty, not a problem, is that the budgets are made for three years, not one year. What I mean is a medium-term budgetary framework. It can be prepared in January and should be brought before the concerned parliamentary committees who should discuss it for three months. The budget session of the Parliament should start sometime in March to consider the reports of these committees and to be in the driver's seat to make the budget.

TNS: What are the major problems with the National Finance Commission (NFC)?

PT: Currently, the criterion of resource distribution among the provinces under the NFC is population which naturally favours Punjab. Moreover, the largest non-development budget of the federal government physically takes place in Punjab. The smaller provinces are mostly helped through the development budget, but even there Punjab gets a big share because it has the largest population among them. For example, a federal anti-malaria programme has to be a lot bigger for Punjab than Balochistan. These kinds of things favour Punjab. As a result, the other provinces have taken the position that the resource distribution formula should be changed. Historically, the formula has always supported the powerful. When Pakistan had two wings, Eastern and Western, the resource distribution formula was not based on population, but on the principle of parity: we are equal. This was because East Pakistan had more population than West Pakistan. The moment our ruling elite got rid of East Pakistan by following discriminatory policies like this, the then-PPP government introduced the resource distribution formula based on population. The then-Punjab Finance Minister Hanif Ramay, in particular, sang the song of population formula. The other provinces have done the same thing. Sindh thinks most taxes are collected in its territory, so collection should be on the basis of resource distribution among the provinces. Balochistan has the largest territory and thinks resources should be distributed on the basis of territory. The NWFP is backward, thus it wants a poverty-based criterion. Each province is saying what suits it and the NFC is a forum where they should have negotiated solutions. But if we look at the history of the NFCs, there are wide gaps. There should have been a new NFC every five years, but there have been only two since the 1970s: in 1991 and 1997. The federal/provincial resource distribution has been the bane of our politics. The federation has always been threatened by this question. In my view, the Constitution should be amended to abolish the NFC. According to my formula, every level of government should be given a major tax and it should be responsible for its own affairs. If the federal government wants to live constitutionally, it can have enough revenue from customs and income tax, including agricultural income tax. It should return the general sales tax (GST) to the provinces, which should fully return the property tax to the local governments. In this way, every level of government will have a major elastic tax and it should be able to plan for its own development. Let Pakistan be a case of happy brothers who live in their own houses autonomously, and whenever they meet it is for fun and not for fighting, because nobody owes anything to anyone. My formula also says the natural resources of the provinces should be returned to them. The NWFP should decide the rate of electricity. Similarly, Sindh and Balochistan should decide the rate of gas. Punjab decides the price if its wheat and sometimes bans its inter-provincial movement also, so the province already has its natural resources with it.

Getting a bigger bang for our buck?

The fiscal deficit is essentially the excess of total government expenditures over its revenues from all sources. A large deficit produces four complications:

a) The borrowing that is needed to meet this gap, unless it creates assets that can generate adequate revenues quickly to service this debt increases the debt servicing burden in future years, leaving less for essential spending on the social sectors or for investment in infrastructure like ports, roads, dams, railways, etc.

b) Excess demand for goods and services, thereby inducing inflationary pressures in the economy, which strains the purchasing power of the poor, who have no assets that can serve as a hedge against inflation. Furthermore, while affecting industrial competitiveness it also puts great stress on the exchange value of the rupee.

c) By borrowing from the banking system the government leaves less for the private sector (generally referred to as the "crowding out of the private sector") and also bids up the price of credit. The rise in the interest rate affects industry's capacity to compete.

d) It gets reflected (spilled over) in the worsening of the balance of payments situation. The current account deficit is widened (with the increase in the import bill) whose financing will become difficult in a global environment that is not likely to generate an increased demand for our exports any time soon.

The government can avoid such unfavourable impacts by either controlling its expenditures (particularly of the non-productive variety) and/or by raising revenues through a combination of improved collection efficiencies, widening the tax net and by raising the rates of existing taxes.

The elite of this country has failed to establish an equitable taxation structure in its own enlightened self-interest that would finance spending on infrastructure development and on the delivery of key social services. Pakistan's consolidated tax to GDP rate is less than 10 percent which is 6 to 8 percentage points lower than the ratio for countries similarly placed economically.

The main reasons for this low ratio are a) poor collections of levied taxes; b) the inelasticity of the tax structure; and c) the horizontal inequity of the tax system in that it either does not extend to certain sectors like wholesale and retail for GST and agriculture for income tax, gives preferential treatment to some sectors or activities -- especially non-productive and speculative -- like some sub-sectors under services for GST and real estate and trading in equities for capital gains and taxes partnerships and the rich lightly.

Unfortunately, however, taxing the above referred potential sources is easier said than done. We can, at best, expect to see a lukewarm attempt at taxing these sectors this year, more in the spirit of symbolism to assuage popular resentment at the continued exemption of some sources of incomes from taxation and a response to demands to broaden the tax base by bringing more sectors into the tax net rather than a serious effort to mobilise resources.

The current demand for taxing agricultural incomes stems from the principle that all incomes above a certain threshold, irrespective of source, should pay the same amount of tax. The justification for doing so at this time is provided by the price paid to the farmers for their wheat crop, which was way above its price internationally. However, this attempt, even if it is made, will not succeed since the political representatives in the provincial assemblies will just vote it out.

From the public pronouncements after the finalisation of the contours of the budget with the IMF in Dubai it appears that the plan is to levy a 4.5 percent sales tax (in non-GST mode i.e. with no adjustment for GST paid on inputs) on a handful of services. Whether the government will be able to impose and, thereafter, collect, such a tax from lawyers and doctors will be a real test of the government's resolve and its administrative capability.

Since the stock exchanges have been exempted from capital gains until July 2010, public pressure seems to have succeeded to force the government to levy a capital gains tax on transactions in real estate. This tax promises to be the most controversial in terms of equity and its implementation modalities. We should expect a fair amount of hue and cry and even litigation on how gifts and inheritances of property will be handled and how capital gains will be estimated in the case of old properties put up for sale.

However, much more important than tax revenues mobilised is the expenditure side of the equation, their utilisation. I vehemently disagree with many commentators who argue that while greater simplicity in the lifestyles of the President, the Prime Minister, ministers and heads of government agencies and the plethora of officers and their underlings and the associated perks of office -- cars, offices etc -- paid out of the public purse has critical symbolic value, there will not be much by way of savings from reductions in these areas. The reason why views such as these are misplaced is because we fail to ask ourselves three questions: a) why we have 41 divisions and departments while America, also a federation, with 100 million more people and 130 times the size of our economy has only 15/16; b) what 500 departments and government agencies financed from tax revenues are contributing to the functioning of the State; and c) the lack of transparency as a result of which there are no separate budget line items for appending on the security of VIPs, their foreign visits, etc.

By having such a large number of public representatives in good humour and public servants employed with little contribution to the economy and society a lot of resources also get earmarked for what is euphemistically labeled 'development projects' launched simply to keep these bodies alive unnecessarily.

The lack of transparency, when it comes to the defence budget, is even starker, leaving us unable to assess if we are getting value for money in terms of security, i.e. if we are "getting a bigger bang for our buck".

The discussion above has tried to argue that the waste of scarce resources is not just on the non-development side but also when it comes to development spending. Many of us without examining the content of the development programme merely romanticise and laud anything classified as such spending irrespective of its nature and content. Should a mess and a club for bureaucrats be labelled development spending? While the PM proudly announced Rs 500 million for the IDPs, the CDA was busy spending Rs 2,200 million on the interchange at zero point in Islamabad.

Similarly, take the city of Lahore. While there is no desire to ensure safe drinking water for its poor inhabitants or provide any subsidy for the public transport they use, a veritable jingle of flyovers, underpasses and roads as wide (resulting in the loss of prime commercial land to the economy) and as good quality as motorways are being built, subsidising rich motorists (who should have been the major contributors -- through property tax -- for financing such schemes) to enable them to reach their destinations quickly, and that too by depriving the poorer parts of the province from resources that could have been used for the development of their infrastructure.

Finally, the government has negotiated a fiscal deficit of 4.6 percent of the GDP -- implying borrowings (both internal and external) of roughly Rs 700 billion -- for the next year.

In my opinion, while the objective to keep the fiscal deficit in check would be a laudable one under most circumstances, this target is unlikely to be achievable and in the abnormal situation in which the country finds itself cannot be a goal worth pursuing irrespective of the cost to national unity and social harmony.

In view of the nature of crises confronting the state and the society, the budget deficit target is far too ambitious and needs to be revised upwards to at least 5 percent of the GDP. This would give due recognition to consideration of a) the battle going on for the country's survival; b) the relief and rehabilitation needs of the IDPs; c) the proposed increase in salaries of government servants (the burden of which will be far too heavy for the provinces to carry from the flows under the NFC Award without compromising other priority spending); d) the need to revive economic growth in general and industrial production in particular (industry requiring a downward adjustment in the price of diesel and a delayed, and also gradual, as opposed to a sudden large, increase in the electricity tariff to maintain its competitiveness) so as to absorb the growing army of uneducated youth (if only to minimise growing social tensions and the implications for the already fragile law and order situation); e) broadening the net of social protection (in the absence of a social security system) through the BISP and some kind of Employment Guarantee Scheme to provide immediate help to more than 9 million households below the poverty line; f) the need to address the grievances of the Baloch; g) the help the NWFP will need to rebuild the destroyed infrastructure of roads, bridges, schools, hospitals; and h) the unlikelihood of the government achieving the tax revenue target of Rs 1,406 billion in an economy that the government hopes will grow by 3.5 percent next year.

The role of international financial institutions such as the IMF and the World Bank in addressing the poverty situation in Pakistan commenced in the post-scenario of the United Nations Millennium Development Goals Summit in 2000.

The approach was formalised in the form of a Poverty Reduction Strategy Paper (PRSP) that was initiated in Nov 2001 and finalised in Dec 2003 as the PRSP-I. In the years leading up to 2006, the PRSP-I was geared to accelerate economic growth and poverty reduction via four pillars of sorts. Broadly speaking, they are (a)accelerating economic growth while maintaining macroeconomic stability; (b)improving governance; (c)investing in human capital; and (d)targeting the poor and the vulnerable. These in turn led to a reforms agenda that centred on financial sector, capital markets, tax administration and governance but, most importantly, Fiscal Responsibility and Debt Limitation Act (FRDLA) that was passed in 2005.

Whereas this Act was intended to integrate more discipline in government's debt strategies, the reforms package of the PRSP-I has been credited with achieving improvement in key economic indicators. These include the growth in real GDP from 3.1% to 9% (2003-2005) and reducing the overall poverty headcount from 34.5% to 22.3%. The rest of the indicators also paint a rosy picture, such as the literacy rate having gone up from 45 to 55% till 2006, 87% of households living in rigid or permanent units albeit around 7-10 individuals living in mostly one- or two-room dwellings. Unemployment was claimed to have come down from a little above 8% to around 5%.

Hence, an entire spectrum of economic indicators is projected to have undergone a positive change based on the PRSP expenditures during the years 2001-2008. These come to a grand total of around Rs 2.4 trillion with the last two years witnessing the greater bulk of spending. Furthermore, the largest chunk of this grand expenditure, nearly one-third, is attributed to education, with health and irrigation combined making up another third. Interestingly, the amounts spent upon Social Security and Welfare as well as Natural Calamities came to around 1-3% each year's spending. Even 2005 that witnessed one of the worst earthquakes to hit Pakistan had an outlay of only 5% of the annual PRSP expenditure.

The PRSP-II paper itself concedes that around 25% population is in need of social safety nets. The development of the second version of the PRSP was kicked off in 2005, in the concluding period of the scope of the PRSP-I and finalised in the start of this year.

In addition to the PRSPs, the IMF country report for Pakistan also discusses the outcome of the poverty reduction strategies recommended by the IFIs. It claims that all benchmarks under the structural adjustment programme as outlined by the PRSP-I were met as well as the conditionality for the World Bank's loan that shall target poverty and the ongoing economic crisis. However, this achievement has come at the cost of burdening the taxpayer by merging the income tax and sales tax departments and instituting a broad-based Value-Added Tax in place of the General Sales Tax. All these measures have been claimed to be part of the medium-term framework, along with the removal of various energy related subsidies such as the ones on fuel prices and electricity tariffs.

The fiscal year 2007-08 saw around Rs 19 billion being spent in this regard (5% of annual poverty alleviation spending). The major safety net is the much touted Benazir Income Support Programme (BISP) with an allocation of Rs 34 billion for the FY 2008-09 and plans to almost double it by the FY 2012-13. Yet, apart from this scheme, the allocation of funds towards social security and welfare in the projected PRSP budgetary expenditure for the next five years remains quite dismal.

Whilst the annual expense is projected to increase from just under Rs. 600 billion up to a whopping Rs 1600 billion, safety nets shall only see around 12% of that. The assistance towards natural calamities would take even a greater hit as they would just dwindle to around a thousandth of the entire PRSP-purported expense for the FY 2012-13. Even then the achievements against the outlined funds for social security and emergency relief would remain highly debatable and results dubious in the current environment of heightened financial risk for low-income families.

The ongoing round of talks between the IMF and the Pakistani officials since October last in Dubai has resulted in Pakistan pushing its borrowing limitations 5 times up to a loan demand of $7.6 billion. Apart from claiming that this panacea shall stabilise the country's economy, interestingly it shall also serve as a remedy for averting default disaster on the previous loans. The situation alarmingly begs the question as to how shall a further accumulation of such a gargantuan debt go towards reducing poverty when the collateral for such loans are the teeming poor themselves. Kudos to our financial wizards who have cast this spell upon our unsuspecting populace!

-- Aziz Omar