On March 18, the federal government took several measures to reduce the cost of foreign trips, instructing officials to opt for cost-effective alternatives, such as teleconferencing. Moreover, conferences that can be handled by Pakistan missions abroad should be identified, and proper intimation should be sent to the concerned missions.

According to analysts, such austerity measures “appear to be more about show than actual substance” in the face of “a troubling lack of commitment to governance and fiscal responsibility”.

To reduce expenses, Pakistan has also informed the International Monetary Fund (IMF) staff that it will start implementing the Pension Reforms plan in FY25. However, it has reportedly been indicated to the Fund that implementation of the plan may face hiccups. A sum of Rs801 billion was budgeted in the current fiscal year for pensions — including Rs563bn for personnel of armed forces.

Earlier, the government had set up a committee to identify austerity measures. The committee was tasked with capturing all the progress made so far in downsizing the federal government, preparing a strategy, and implementing a plan for all remaining recommendations along with timelines. The past record of performance in this regard was dismal, as indicated by the current state of affairs.

“Authorities should contain recurring spending growth, and not cut capital spending,” says IMF Deputy Director Middle East and Central Asia, Alfred Kammer. He notes that fiscal policy is important in curbing inflation.

It is unclear whether the evolving austerity measures will help reduce fiscal deficits or create fiscal space

Despite declining federal development spending, the government spent Rs4.7 trillion on interest payments during the first seven months of this fiscal year — a sum larger than the federal government’s net revenue during the same period. The government recently announced that it would seek foreign aid only for projects accorded priority.

Last week, the State Bank policy rate was kept at a record 22 per cent for the sixth time, says an analyst, with elevated inflation haunting policymakers, expecting a moderate recovery. Ultimately, the solution lies in increasing productivity to meet domestic demand and create export surpluses.

Stimulated by economic growth, privatisation could save taxpayers’ money spent on bleeding state enterprises. It is high economic growth which spurs private sector investment and creates jobs.

Defence spending and mark-up payments consume nearly two-thirds of the total federal budget. Earlier, there were suggestions to reduce non-combatant military spending.

It would be prudent to rationalise the taxation system to boost revenues, including devolution to levels where the outcome would be most productive

Currently, the economy cannot sustain growth in defence spending. The country’s best defence lies in a strong economy. Broad-based prosperity would discourage militancy, insurgency and the culture of violence. For that, geo-economics should be effectively prioritised.

Pakistan’s average GDP growth over the last four years has stagnated at 2.5pc aligned with the population increase, according to former finance minister Dr Hafeez Pasha. He lamented, “The rise in unemployment from 7pc to 10.5pc coupled with an increase in the poverty rate from 33pc to 45pc is leaving 20 million educated youths jobless.”

Here, the issue of empowering the people to fend for their livelihood assumes critical importance. To quote analyst Ali Hassan Bangwar, “Public empowerment is both a crucial cause and a hallmark of progressive societies.”

Owing to the specifics in Pakistan’s case, the austerity committee was tasked with making recommendations relating to federal development spending and recurring expenditures. The authorities have been considering devolving provincial development spending and ministries of subjects falling under the jurisdiction of the sub-federations for some time.

It is not clear at the moment whether the evolving austerity measures would only help reduce fiscal deficits or create fiscal space for economic growth and development and to what extent. Hence, it would be prudent to rationalise the taxation system simultaneously to boost revenues. That includes devolution of tax collection to levels where the outcome would be most productive.

“Since the 7th National Finance Commission Award (NFC) Award, FBR taxes have remained stagnant in the range of 9pc of the GDP, whereas provincial taxes have increased from 0.3pc to over 1pc of the GDP,” says a PPP leader.

The transfers under the NFC make up around 90pc of the total provincial income, as the federation retains all rich revenue-yielding taxes.

For example, the centre is unwilling to transfer goods and services tax (GST) — a provincial subject — to the sub-federations, where, according to the Sindh government, the GST could be better collected. The sales tax on services has increased rapidly since it was devolved. Sindh also pledged not to disturb the current NFC distribution formula with respect to devolved GST on goods.

The federal government is also appropriating all revenues from the petroleum levy instead of sharing the proceeds with the provinces as they are collected through the GST mechanism.

In the case of provinces, it cannot be denied that farm income with huge revenue potential needs to be tapped, and there is still room for raising sales tax collection on services.

There is also a growing view that farmers could be encouraged to pay agriculture income tax if it is collected by the district government.

The provinces can strengthen their legislative, administrative, and political autonomy by taking more seriously the responsibility linked to their sub-federal rights.

Published in Dawn, The Business and Finance Weekly, March 25th, 2024