THE World Bank says that heavy public debt bars us from allocating enough for development outlays and for the much-needed social sector development. The same goes for earmarking enough funds for the reduction of pervasive poverty. And that has been obvious to everyone who is concerned with the future of Pakistan and the battle against poverty.

Finance minister Shaukat Aziz now hopes that the heavy debt burden which has come down to 87.7 per cent of the GDP would drop down to 60 per cent of the GDP by the year 2012-ten years from now. And to achieve that he wants to reduce the total public debt by not less than 2.5 per cent of the GDP every year and prior to that the revenue deficit has to be eliminated by not later than June 2007 and the budget show an annual surplus thereafter.

This undoubtedly is a long hall and comes following the report of the National Debt Reduction Committee headed by Dr Pervez Hasan. To achieve that, fiscal responsibility and debt limitation ordinance is to be brought in to effect. The 60 per cent ceiling of the national debt inclusive of the domestic debt of Rs1,636 billion or (44 per cent of the GDP) and the external debt of $26 billion (or 43.7 per cent of the GDP) is at par with the limit set by the European Union for its members to enter the euro zone. The issue is, will the country be able to wipe out its budget deficit which stood at seven per cent of the GDP last year from 5.5 per cent of the GDP the year before, and against the target of 4.9 per cent of the GDP set? And will the country be able to stay by the deficit target of four per cent of the GDP this year?

The fact is that the deficit in monetary terms for the current year is as large as Rs162.5 billion and shrinking that fast enough by 2007 is a tough task. But the government is trying to do that in several ways. It has reduced the external debt by $2 billion rescheduled much of the rest for repayment over a long period of time and negotiated swapping part of the aid from Canada and Britain for use exclusively for social sector development. It is also avoiding incurring new highly expensive commercial debt and it has reduced the interest rate on public debt by almost a third and intends to do more of that in the coming years.

Such steps are essential when debt servicing claims, as it will do this year Rs346 billion of the total tax revenues of Rs460 billion, which in reality may be significantly less despite the CBR’s optimism and when the interest on domestic debt alone will cost this year Rs192 billion the government is forced to take steps to reduce that amount by lowering the interest rate on public debt, however upsetting that is to the depositors and small savers.

The fact is that the budget deficit goes on mounting as the revenue figures are usually underestimated, while actual collection falls short of that. Last year the estimated tax revenues were Rs458 billion while the actual revenues were Rs 403 billion which swelled the deficit by Rs 53 billion. In the year 2000-01 the expected revenue inclusive of the petroleum surcharge was Rs474 billion but the actual was Rs 440 billion a deficit of Rs33 billion. So that mean that apart from the budgeted deficit there is an additional deficit each year. So this situation can be remedied if the government budgets for a lower revenue target than it usually does or actually collects the revenues targeted. But the usual argument advanced by the government is that it is better to dangle a high revenue target before the CBR and drive its officials hard to achieve that. That technique has not paid real dividends so far and needs to be revised to reduce the gap between the target and the actual revenue collection.

The government can of course achieve a balanced budget by cutting down essential expenditure particularly the development outlays. But a new debt reduction strategy says that while the government should reduce the debt by 2.5 per cent until the total debt comes down to sixty per cent of the GDP the social and poverty related expenditure should not be reduced to blow four per cent of the GDP. The donors particularly the World Bank and the IMF which is funding the poverty reduction and growth facility are keen on that. That is tough for a government that spent only 3.5 per cent of its GDP on the over all development this year and 2.2 per cent the year before.

The new expenditure pattern would need a great deal of expenditure all round and the over all development expenditure inclusive of social sector outlay and poverty reduction expenditure has to rise to 7-8 per cent of the GDP as in the 1980’s, the immediate area where the expenditure cut can come is from debt servicing which last year consumed 7.3 per cent of the GDP. It cannot come out of the defence expenditure as long as the military confrontation with India continues. Will the leaders to come after the election achieve that. It is a tough task, but it has to begin with cutting the expenditure at the top and then coming down particularly cutting down their own expenditure which has increased enormously in recent times as the findings of the ad hoc public accounts committee testify.

The World Bank wants to reduce the deficit by increasing the revenues and increasing the tax gap ratio for above the current 12-13 per cent. But how can the tax revenues increase rapidly when the IMF and the World Trade Organization insist on lowering the customs tariff by 10 per cent in two years. In addition the government has been increasing the spread of the sales tax vigorously and expects to collect Rs206billion in the current year which is almost 50 per cent more than the revenues from income tax which is to be Rs143 billion this year. You cannot over tax a sagging or stagnant economy with 40 per cent people living below the poverty line and many of them unemployed. You need a more vibrant economy and a lower level of taxation and less number of taxes for the people to be able pay more revenues.

When the food which the poor people eat, over a 100 million of them is classified as gross domestic product, it will not result in larger revenues or higher revenues, more so when families are large and the dependents on the wage earner too many. We need higher economic growth and a larger number people employed and higher pay scales to be able to collect more revenues. Until then the people in authority have to reduce their own expenditure, particularly the top people.