LET us begin by acknowledging that the budget has a sprinkling of good measures. The most prominent of these is the effort to incentivise the documentation of the economy — implicitly abandoning the much-publicised drive against non-filers. Owing to space limitations this article focuses on where views differ.

This writer has been a strong advocate of ‘indirect ways’ to raise tax revenues (learning from what has worked in the past). However, this route is proposed as a two- to three-year transition. During this time the government should develop the technological capability for data warehousing, analysis and data manipulation to identify tax-evaded income, thereby enabling a phasing out of the excessive reliance on withholding taxes.

This would require the articulation of a vision and a coherent, internally consistent framework in which the strategy and targets (say for revenue mobilisation, tackling electricity theft, downsizing of a bloated federal government following the 18th Amendment, etc.) would be anchored. Despite the government being one year in office all this is missing in the budget.

Historically, revenue and expenditure budget estimates have been overestimated and underestimated respectively and are so wide off eventual outcomes that it becomes difficult to take the budget seriously. Significant downward revisions in tax revenue estimates (especially with the higher evasion following enhancement in rates) and large supplementary demands for expenditures during the course of the year make a mockery of budget estimates.

The tragedy of the budgetary exercise is the preoccupation with the size of the deficit.

In this vein, it is difficult to fathom some of the tax proposals. To illustrate, take the government’s claim that one rupee spent on electricity generates sales of Rs9. If that is indeed so then why are we levying GST at 5pc of electricity bills? It defies logic if we are so sure about the accuracy of our formula. And how can Islamabad levy GST on retail outlets, a service industry, which is solely the prerogative of the provinces?

As a result of the above measures, the much lower income tax rate for new foreign investment, etc. the structure continues to be inequitable: similar levels of income from the same or different sources are being taxed at different rates.

Moreover, as the details of the tax initiatives are unveiled, expect powerful sectional interests to build up pressure against some measures and, true to tradition, succeed in either getting them reversed or their impact diluted significantly.

On the expenditure side of the equation, even before the ink of the budget documents dries up the Economic Coordination Committee will be approving additional spending. For example, last year’s expenditure budget was overrun by Rs83 billion. Add to this, the massive portfolio of glitzy signature projects (including highways and railway tracks to nowhere) and one would be disabused of any notion that spending priorities are becoming less skewed.

The tragedy of the budgetary exercise is the preoccupation with the size of the deficit. Creative accounting techniques have been harnessed into declaring a lower budget deficit for the current year, by not fully accounting for the subsidy bill for wheat, fertiliser, sugar and electricity and the losses of the Steel Mills, PIA and Railways.

And what good is the deficit number for next year that requires the provinces to save Rs289bn (after forking out Rs125bn for the salary and pension increase announced in the budget) so that Islamabad can spend this money. The provinces would be able to do this only by reducing their expenditure on education and health and water.

The International Monetary Fund (for global political reasons and its need to recover past loans) has been a silent if not an active partner in this massaging of numbers. So far, it does not appear to be in the mood to pull the plug on our life support system, providing the funds required to service past debts and the certificate enabling others to lend to us. But, for how long can this continue?

The obsession with the IMF-imposed budget deficit target has resulted in book balancing functions taking precedence over the much more critical requirement to redirect the economy to accelerate the growth process. And although fiscal correction is important the quality of correction is more important, as resources get increasingly absorbed in servicing a huge stock of debt and in maintaining state operations and not in the creation and maintenance of assets.

Even if we accept the government’s declaration of last year’s deficit, it was achieved through a drastic reduction in development expenditures, resulting in this spending being roughly 1pc of GDP in the first nine months of this year, the lowest in three decades, if not in our entire history. Macroeconomic stability cannot be an end in itself or the sole means of reviving growth and reducing poverty. Neither theory nor empirical evidence provides conclusive results that macroeconomic stability necessarily leads to economic growth.

In any case, Pakistan’s budget deficit is inherent in its dependence on aid. Commitments on aid imply that the government must spend more just to accommodate disbursements of external aid. Therefore, the size of the deficit is determined less by the budgetary management skills of the government and more by the actual disbursement of aid by donors. In fact, if procedures improve and aid utilisation becomes more effective, the deficit increases.

The generosity of external donors (and the remittances of overseas Pakistanis) has made it possible to postpone meaningful and sustainable structural reforms. We will have to rely heavily on these flows next year as well. Admittedly, countless years of poor economic management have brought things to such a pass. Correcting the lapses will take time and some doing. Regrettably, our style of governance is to perpetually look towards the international community for handouts to pay our bills, as if we have an open-ended licence to mismanage our affairs.

The writer is a former governor of the State Bank of Pakistan.

Published in Dawn, June 10th, 2014