May 26, 2003	Monday	Rabi-ul-Awwal 23,1424

Like the five-year plans earlier, the significance of the national budget in recent years has somewhat diminished in public perception as the penultimate statement of economic policy. The umpteen number of reviews with donors leading up to the budget reveal it all, making the pre-budget debates intellectually more entertaining than the budget itself.

What is left in the budget then is a set of numbers evolving as budgetary promises, revised promises during the year (the so-called budget and revised estimates), provisional actuals after the year and actuals eventually. These evolving number in the budget may, however, be overshadowed by the pre-budget policy debates only at the cost of understanding the progress of these very policies.

The military government inherited the budget for 1999-2000, as the take-over in October 1999 was a post- and not a pre-budget affair. In the words of the then, and the continuing economic adviser of the finance division, the fiscal year 1998-99 witnessed economic managers travelling on “roads not taken before”. (Quotes as well as emphasis in original, p.vii of Economic Survey 1998-99).

While implementing the budget for 1999-2000, these “roads not taken before” were declared as roads to nowhere by the new economic managers, hence by the old economic adviser. Fiscal deficit was now seen as the mother of all evils. The aids of evil consisted of trigger-happy government spending, a lax tax collection and an easy ride on the debt cycle.

In this approach, the most important promise that is made in the budget is the budget estimate or target of the fiscal deficit. Table 1 tracks the deficit figure as it evolves through successive Economic Surveys and its statistical supplements. After the completion of a fiscal year on 30 June, the budget estimate given on the preceding 1 July, is replaced by a revised estimate.

There was a time when this revised estimate persisted for a long time and the final reconciliation of the accounts could take years. Now the provisional actuals replace revised estimates in the third year, with the actuals following in the fourth year. Reform of the government accounting systems continues and this time lag between the budget estimates and final reporting will shorten further. A striking feature of the information in Table 1 is the consistent departure of revised estimates from the fiscal deficits promised in the budgets. No economic projection ever comes true precisely. It is the margin of error that is of relevance. The revised estimates have exceeded the budget estimates by 0.4 per cent of GDP in 1997-98 to as much as 2.5 per cent of GDP in 1999-00. The divergence keeps increasing as we move to the next stages of provisional actuals and actuals. Thus the range for the aforementioned years eventually shot up to 2.7 per cent of GDP and 3.3 per cent of GDP.

As the fiscal deficit as a ratio of GDP can increase if GDP declines even if the absolute amount of deficit is on target, Table 1 gives the absolute rupee amounts of the two to show, in the last column, that though the GDP denominator was lower in all cases, it was nothing compared to the numerator which rose between 25.1 per cent and 83.3 per cent.

This excess of 83.3 per cent of actual estimate over the budgetary promise occurred in 1999-00, with the actual fiscal deficit recorded at twice the level that was budgeted. A budgetary promise of 3.3 per cent actually turned out to be a deficit of 6.6 per cent of GDP.

In fact, the discovery of this unusually wide swing forced the upward modification of the next year’s budgetary promise from 4.6 per cent of GDP to 5.3 per cent. The same had to be done for 2001-02. Again, the data had to be adjusted for years preceding 1999-00, such that the fiscal deficit in 1997-98 turned out to be 7.7 per cent, the highest since 1990-91.

What is amiss here? Poor forecasting capability? A tendency to fudge. Too much uncertainty or severe shocks? To find out an answer, a closer look is required at Table 2. Out of the addition of Rs94.1 billion to the fiscal deficit,Rs 35.3 billion were contributed by current expenditure, with a slippage in tax revenue of the order of Rs37.6 billion forcing a rise of 162 per cent in domestic borrowing to finance the deficit. In the process, development expenditure was reduced by 17.8 per cent, which only serves to undermine the future repayment capacity.

It is obvious that underpitched current expenditure and overpitched tax revenue lead to the gap between the promise and performance. The resulting shrinkage of the fiscal space for development tells adversely on growth prospects by depressing the opportunities to crowd in the private investment.

With the economy having reasonably stabilised in the past three years, the micro foundations of macroeconomics have become important for a smooth transition to higher economic growth for poverty reduction as well as employment generation.

Structural reform, in essence, is about microeconomic efficiencies, regulation, restructuring and, most important, optimal investment decisions. In the turning point from stabilisation to growth, public investment financed by new fiscal space can play a critical role.

In its annual report for 2001-02, the State Bank has presented an interesting analysis of the sources of non-fulfilment of the budgetary promises. It will be seen in Table 3 that between 1990-91 and 2001-02, on the average, revenues and development expenditures have been overpitched in the budgets and the current expenditure has been underpitched.

Small wonder, the average current expenditure as percent of GDP has been 19.3 per cent, way above the average of 16.9 per cent for revenues. So a significant proportion of current expenditure and all of development expenditure was financed by borrowing. Any fiscal space created by the improving debt profile, is quickly taken up by the rigid current expenditure, as was the case in the current year.

In 2001-02, total debt servicing at Rs417.6 billion exceeded the budget estimate of Rs400.8 billion. The budget estimate for 2002-03 is lower than this i.e. Rs343.4 billion. According to the SBP debt servicing in 2001-02 consumed 86.5 per cent of tax revenue, 65.4 per cent of total revenues, 47.2 per cent of total expenditure and 57.5 per cent of current expenditure.

Thus the fiscal space created by rationalization of external and internal debt will be necessary but not sufficient to pave the turning point from stablization to growth. There are signs of peace breaking out in the region, but its dividend cannot be expected to be round the corner even under most optimistic assumptions.

While it is a bit early to talk of a take-off into self-sustained growth, the best medium-term insurance for a turning point towards growth, for the time being, is the relentless reform of the CBR. A lot has already happened. In 2001-02, the budgeted target for the CBR was Rs457.7 billion. It was brought down to Rs 414.2 billion after three revisions; yet the actual collection was Rs 403.9 billion.

In terms of Table 3, the collections followed the historical pattern and did not deviate much from the average. But the results of July-March period of 2002-03 suggest that the CBR is likely to fulfil the budgetary promise for the first time. During these nine months, the net collection was Rs 310.3 billion against the target of Rs310.1 billion, a 15 per cent increase over the comparable period last year and there has been no revision of the original budget target of Rs460.6 billion.

(The writer of the article is the Chief Economist of the Planning Commission.)