Forthcoming budget should be growth
oriented, pro-poor and investment friendly
Unfortunately, tax morality has not become 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

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 up-to expectations of the policy makers.

It is a well known fact that budgetary deficit is one of the major problems which the government is proposing to tackle trough appropriate fiscal and monetary policies. During fiscal year 2007-08 it reached the massive figure of Rs777.2 billion which was 7.4 per cent of Gross Domestic Product (GDP). The magnitude of this deficit was 95 per cent higher than the budgetary target of Rs377 billion (4.3 per cent of GDP). A sad feature of budgetary performance during FY 2007-08 was reduction in spending on public development programme from the allocated amount of Rs520 billion to Rs451 billion. Revenue receipts during this year declined to 14.3 per cent of GDP as compared with 14.9 per cent in 2006-07.

In the current fiscal years (2008-09) the fiscal deficit target is 4.7 per cent of GDP. On account of downward revision in the national growth rate to 2.15 per cent and lower than expected mobilisation of government revenues, the fiscal deficit will be higher than 4.7 per cent target of GDP.

It is crystal clear that Pakistan has to reduce the dimensions of the fiscal deficit if it wants to avoid destabilising 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 national savings at 13.3 per cent of GDP in FY 08 is one of the lowest compared with countries at the same stage of per capita income. Domestic savings in FY 08 were only 11.0 per cent of GDP. Our low tax (GDP) ratio (9.6 per cent in FY 08) has also contributed to fiscal deficits. Unfortunately, tax morality has not become 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 macroeconomic objectives such as low inflation and real economic growth which in our case should be at least 6 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 at least 20 per cent higher that the amount likely to be spent in this behalf in the current fiscal year.

Gross revenue receipts during FY 2009-10 of the federal government should approximate Rs2000 billion as compared with the budget estimate of Rs1679 billion in the current fiscal yeas. This should be quite feasible in view of the fact that the growth in real GDP is expected to be around 6 per cent in real terms and about 15 per cent in nominal 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 FY2009-10.

It is further recommended that in the budget for 2009-10, 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 social welfare.

In this regard it will be a great achievement if agricultural incomes are brought within the net of direct federal taxation. No doubt, at present under the 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 about 100,000 have been the biggest beneficiaries of development during the last 35 years. This has come about and is continuing to happen through a consistent policy of boosting income of the rural rich through a variety of 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 2009-10 is excessive monetisation of the fiscal deficit in view of the likely slippages in revenues 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 suggests 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 characterised by 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 with robust pro-poor growth.

These conditions include the following.

(a) Maintenance of law and order.

(b) A well functioning legal system as well as 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 banking systems 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 emphasised 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 simultaneously with those of stability and equity has been sharply emphasised in recent years. The federal budget for 2009-10 should provide a meaningful response to these complex and stirring challenges.