AT this time of the year, Q block in the Pakistan Secretariat is the epicentre of budget activity (along with the FBR HQ).
Year after year, the budget exercise invariably follows a well-set routine: projected revenues are overestimated by a significant margin, expenditures are underestimated by an even wider margin, and some items on the spending side are best not recognised — even when they are staring budget-makers in the face.
The resulting flight of fancy is termed the federal budget for the upcoming year, both a historic reform budget as well as a pro-poor budget all at the same time, the bureaucracy collects its honorarium, and everyone prepares for another ‘business as usual’ year — 365 days of fire-fighting on a daily basis without an economic policy, reform vision or even a broad plan to stem the rot.
This year the annual flight-of-fancy exercise appears set to soar higher if the finance minister’s somewhat bizarre statements on the economy are anything to go by. On the day the Pakistan Bureau of Statistics (PBS) unveiled the confusing and controversial latest national accounts data, depicting a real GDP growth of 3.2 per cent for 2011-12 (or 2.8 per cent more accurately), the finance minister was issuing statements that economic growth will come in at around four per cent.
Expressing his satisfaction at the ‘strength’ of the economy, he cited the sharp increase in tax receipts and exports as further evidence of an economy that is on the mend. On a previous occasion, he referred to the decline in the public debt-to-GDP indicator as proof that the economy is not facing a rising debt burden.
Since macroeconomic data provides the context for budget-making and economic planning, it is critical for budget-makers to have access to up to date, credible and accurate data. It is equally important that policymakers analyse and report the data impartially and honestly. Clearly, if the finance minister believes there is nothing to worry about on the economic front, his budget is likely to reflect that.
For example, if the belief is that the public debt is not imposing a burden on the fiscal framework, one important implication would be that the size of the fiscal deficit is of little consequence. While this line of thinking could be used to justify an election-year budget with its likely heavy emphasis on salary increases for public servants, generous subsidy provisions (or non-provision, for all that it matters in the current scheme of things) and lack of emphasis on tax reform, it is clearly inappropriate for an economy deeply mired in a fiscal and economic morass that has worsened over the past three years.
The fact of the matter is that the finance minister is viewing the economy through rose-tinted, ‘jiyala’ glasses. The bitter truth is that he has presided over an economy whose condition has never been worse, in aggregate terms, in Pakistan’s history. Economic activity and growth in per capita income are anaemic at best, while investment has plummeted to historic lows. Exports, after benefiting from a spike in international commodity prices during which period they declined in quantity terms, have now reversed course sharply in line with global economic conditions. Inflation appears to have ‘reset’ to a new double-digit base, largely connected to the inaction of authorities on the fiscal front, spelling unending misery for millions. In terms of fiscal space, the budgetary squeeze is best exemplified by one statistic: total debt service payments as a percentage of net revenue (after transfers to provinces). For fiscal year 2010-11, this has ballooned to over 80 per cent, reflecting the effects of a generous NFC award. With only 20 per cent of the revenue available, the centre has to manage the largest expenditure items in the budget — debt servicing, defence, salaries and wages, pensions and subsidies.
While the seventh NFC Award is responsible for worsening the fiscal woes of the centre, placing the entire blame on its door is nothing short of self-serving. This is so for the simple reason that while the transfers to the provinces have increased sharply under a binding constitutional arrangement, there is nothing that should have prevented the finance minister and his team from focusing even more aggressively on broadening the tax base. In a three-year period, the tax-to-GDP ratio should have been raised from an abysmal 8.6 per cent of GDP to closer to 10 per cent with a more genuine effort, with the incremental revenues so raised used to finance the NFC transfers without placing a greater burden on the budget.
That is the other question the finance minister should be asking — but clearly is not: what is the source of the increase in tax receipts, and how sustainable is it? As noted by the Federal Tax Ombudsman’s office (FTO), the practice by FBR of withholding legitimate refunds to taxpayers in order to report larger tax collection has become increasingly more pervasive in the past three years.
The FTO has begun a welcome investigation into this practice, which also formed the basis of the alleged wilful fraud committed by the former FBR chairman in deliberately misreporting tax collection for the previous fiscal year (also under investigation). The FTO should widen the ambit of its investigation to include whether the finance minister was complicit in this farce or ‘just’ sleeping on his job, ignorant of what figures FBR was preparing to report publicly. The blame for FBR’s incompetence and/or wilful misreporting should rest with the head of the division — the finance minister.
In short, this is the difficult overall context the budget should be seeking to address. Going by the past three years’ budgets, however, that appears to be expecting too much.
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.