Forthcoming budget should restore
macro-economic stability and
ensure robust pro-poor growth
By Aftab Ahmad Khan

The budget is the most effective instrument of public regulation of the economy. It is more than a balancing of public revenues and expenditures. It is an intricate process of coordinating the requirements of macro-economic management with exigencies of politics and of matching national visions with practical possibilities.

The budgetary policy can also be used for ensuring economic stability and for modifying the existing distribution of income and wealth, raising the level of employment and building up human resources. Budgetary operations, furthermore, have a profound impact on the price level, balance of payments, rate of national savings and the size and pattern of development. There is, as a matter of fact no aspect of economic activity which can escape being affected by budgetary policy, if budgetary policy is not consistent with other economic and social reforms, the outcome may not be upto the expectations of the policy makers.

It is a well known fact that currently budgetary imbalance is one of the major problems which the government is proposing to tackle through appropriate fiscal polices. In the current fiscal year (FY2007-08) according to the State Bank, key fiscal performance indicators deteriorated significantly during the first six months, as revenue growth stagnated, while expenditure continued to rise. Total revenue estimated at Rs 625.6 billion during H1-08 was only 1.8% higher as compared with Rs 614.8 billion mobilized during IH FY07. The lucklustre growth in revenue receipts stemmed from deceleration in tax revenues as well as actual decline in non-tax receipts.

Government borrowing for budgetary support during July-April 26, 2008 stood at Rs334.871 billion as compared with Rs170.987 billion in the corresponding period last year.

According to latest reassessment of current economic trends in the economy, fiscal deficit as a proportion of GDP many rise to 8 per cent by end-fiscal FY08 against the target of 4 per cent and actual 4.3 per cent last fiscal year (FY07). Money supply (M2) in the current fiscal year is now expected to increase by around 19 per cent, as against the target of 13.7 per cent mainly on account of increased governmental borrowing from banks.

GDP growth in FY08 is now projected at 6 per cent as against the target of 7.2 per cent. Inflation as measured by Consumer Prices Index (CPI) is now anticipated at 10 per cent against the target of 6.5 per cent and actual of 7.8 per cent last fiscal year.

In is crystal clear that Pakistan has to reduce the dimensions of the fiscal deficit of it wants to avoid de-stabilising inflationary pressures and ensure a respectable rate of growth in a stable economic milieu.

The budget deficits in recent years are an aspect of one of the chief weaknesses of our national economy i.e. the low rate of savings. Our rate of domestic savings at 16.1 per cent of GDP in FY07 is one of the lowest when compared with countries at the same stage of per capita income. National savings were, however, at a more respectable figure of 18 per cent on account of welcome inflow of net factor income from abroad.

Our low tax / GDP ratio (10.2 per cent in FY07) has also contributed to fiscal deficits. Unfortunately, tax morality has not become a part of our national culture. Generally, we look for the ways and means to evade taxes and simultaneously expect that the government should provide us with all sorts of benefits and facilities.

In the case of a developing country like Pakistan, the appropriateness of the magnitude of the fiscal deficit is to be judged with reference to what is sustainable in the medium and long term. A sustainable deficit can simply be defined as one that can be financed without imposing an excessive burden on the economy and without violating country’s macro-economic objectives such as low inflation and real economic growth which in our case should be at least 7 per cent per annum.

In the forthcoming budget, the Federal government must assign a high priority to quickening the pace of growth in the economy by increasing the dimensions of the development expenditure and by enhancing the effectiveness of government spending through improved governance. The size of Public Sector Development Programme (PSDP) should be Rs700 billion as compared with Rs543 billion in the current year’s budget.

Gross revenue receipts during 2008-09 of the federal government should approximate Rs1700 billion as compared with the budget estimate of Rs1368 billion in the current fiscal year. This should be quite feasible in view of the fact that the growth in GDP is expected to be around 7 per cent in real terms.

In the coming budget, the federal government must intensify its efforts aimed at increasing revenues by broadening the tax base, improving tax compliance and strengthening the tax administration. It should also take more effective steps to reduce losses of state owned enterprises which augment the contingent liabilities and increase budget deficit. It is also to be hoped that there would be no government borrowing for current expenditure during 2008-09.

It is further recommended that in the budget for 2008-09, the federal government should introduce necessary reforms for making the fiscal system more broad based, elastic and equitable with a view to enabling it to generate adequate resources for meeting the country’s growing demands in the fields of defence, development and welfare.

In this regard it will be a great achievement if agricultural incomes are brought within the net of direct fiscal taxation. No doubt, at present under our constitution, taxation of agricultural incomes is a provincial subject. This fiscal anomaly should, however, be rectified through an amendment of the constitution. It is an undoubted fact that the rural rich numbering abut 100,000 have been the biggest beneficiaries of development during the last 35 yeas. This has come about and is continuing to happen through a consistent policy of boosting incomes of rural rich through a variety of input subsidisation policies. This is creating large pools of liquidity stimulating the demand for luxury goods and contributing to fiscal deficits.

A temptation which should be avoided in 2008-09 is excessive monetization of the fiscal deficit in view of the likely slippage in revenue and capital receipts or higher than anticipated spending. This would inevitably lead to aggravation of inflationary pressures in the economy. The adverse impact of high inflation on resource allocation and income distribution is well known. The cross country analysis suggest; a negative correlation between inflation and growth. The negative correlation is strong in the case of an open economy like Pakistan, where maintaining export competitiveness and prevention of capital flight is not possible in a milieu characterized by a persistent rise in prices. Lord Keynes, the greatest economist of the 20th century, has warned us about the evil consequences of inflation in these words: “There is no subtler or surer means of over turning the existing basis of society than to debase the currency.”

It is further hoped that the government would succeed in creating the environmental conditions for ensuring macro-economic stability and robust pro-poor growth.

These conditions include the following:

(a) Maintenance of law and order.

(b) A well functioning legal system and well enforced legal rights.

(c) An infra-structure that ensures adequate and continuous supply of energy as well as low transportation and communication costs and thereby facilitates output growth and trade.

(d) Ample market information on prices, quantities and qualities of labour and products.

(e) Transparent capital markets and systems of credit and banking that enforce rules of re-payment.

(f) Pursuit of consistent policies for promoting efficiency in a competitive milieu.

(g) Clear identification of priorities.

In conclusion, it may be emphasized that the dominant challenge for the fiscal managers at present, aside from vigorous efforts at resource mobilisation is to strike an appropriate balance between output growth, equitable distribution, poverty reduction and structural change. The theme of achieving the goals of economic development and change simultaneously with those of stability and equity has been sharply emphasized in recent years. The federal budget for 2008-09 should provide a meaningful response to these complex and stirring challenges.