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The budget THERE are no surprises in the federal budget for the next year (2003-04). As expected, the finance minister has continued to press on with his ‘reform’ agenda as insisted on by the multilateral donors and initiated through the one-year Standby Arrangement (SBA) of 2000-01 and since carried forward under the three year Poverty Reduction and Growth Facility (PRGF) signed in 2001. The emphasis still seems to be on achieving a budgetary deficit target of four per cent of the GDP while making tentative efforts to do something about investment and employment. The various taxation measures contained in the next year’s budget do provide the local investor the needed fiscal space to take investment risks. But this space was available to the local investors all through the last three years. But the private sector has continued to cling to the wait and watch mode. It is perhaps still waiting for the return of the days when its profit margin used to be assured even before it had made any investment of its own money. So, to expect the private sector to take advantage of all the generous taxation measures proposed in the next budget and start investing in a big way, is like expecting a toddler to start running the minute he learns to walk. Both the official economic managers and their mentors in the multilateral donor agencies, however, seem to have great faith in Pakistan’s private sector. That is why perhaps both are continuing to adhere to the course year after year through the annual budgets over the last three years. From day one, their emphasis has been on keeping a tight leash on public sector spending to keep the budgetary deficit under control. The purpose is to achieve the so-called macroeconomic stability which they believe would create the enabling circumstances for the private sector to come and start investing in all activities, including the social sectors. In this single-inded pursuit of macroeconomic stability they have missed the wood for the trees because, while they were keeping a tight lid on spending on social and infrastructure sectors, the private sector did not come out its shell. On the other hand, Wapda and the KESC kept draining billions of budgetary resources because even after having remained under the management of the military for nearly five years, Wapda still remains one of the most inefficient and corrupt organizations and the KESC is not very different either. No serious efforts have so far been made to reform and divide up Wapda into manageable units of generation, transmission, distribution and billing. The case of the KESC is even more pathetic because with the passing of each day it is becoming an ever increasing burden on the exchequer while those consumers who get their power from the Corporation continue to suffer frequent loadshedings and trippings. Both these public utilities are keeping their heads above the water by means of strong budgetary injections of subsidies as well as by frequent tariff increases. The fiscal space that the government has been able to secure as a result of a growth rate of 5.1 per cent in the outgoing year because of an unusually high growth in the agriculture sector in 2002-03 as a result of a significant improvement in the weather conditions seems to have allowed the official planners to find increased resources to the extent of 30 per cent more for Public Sector Development Projects (PSDP) for the next year. This generous allocation is good and necessary. This is, indeed, a commendable step and one hopes that when the IMF review mission comes to Pakistan next month to take a closer look at the budget books for the outgoing as well as the incoming years, it does not link these budgetary allocations for development of infrastructure and poverty alleviation to some more restrictive and impossible- to-meet conditionalities. Also the allocations made have to be spent efficiently and in time. Last year, the defence budget was revised upward twice and brought up to Rs. 160 billion from the original allocation of Rs. 146 billion in order to meet the extraordinary situation on our borders with India. This situation is no longer there; in fact, there is a visible movement towards normalization of relations between the two countries. Under these circumstances, the defence budget for the next year could have easily been revised downward to the level originally fixed in the 2002-03 budget instead of keeping it at the level of Rs. 160 billion. The generous Paris Club debt rescheduling concessions of December 2001 has had a welcome and salutary impact on debt servicing as the amount required to meet this obligation on a yearly basis is coming down significantly, thereby releasing more money for other pressing needs. In the outgoing year the debt servicing head was originally allocated Rs. 289.7 billion, but by the year and it has come down to Rs. 257.4 billion. This is perhaps the reason why for the next year the debt servicing head has received Rs. 256 billion, almost the same as for the outgoing year. It is possible that this amount too would be revised downwards by the year end. The government has claimed that it has not imposed any new tax in the next budget. In the first place, there is no room for any new taxes to be imposed. What is needed is rationalization of the tax rates. On this score the government is moving rather slowly. Secondly, since most of the prices have been liberated from government control, the room needed for a mini-budget mid-way through the year, has disappeared. Now the government rakes in its share from additional incomes from price increases by the private sector and public utilities in the shape of increased surcharges and taxes every time they go up, without having to resort to mini-budgets. However, despite the claims of a turnaround in the economy, the authors of the budget have proposed new taxation measures in such a way that the total additional taxation impact on the population is as high as 1.16 per cent of GDP. Any additional tax burden which is beyond one per cent of the GDP is considered regressive and is likely to make the life of poorer sections much worse as the trickle-down effect of the taxation measures reaches them rather more quickly than the fruits of growth. The incentives offered in the housing sector deserve to be welcome. At least about 12 industries are directly linked to this sector. As a result, activity in these sub-sectors would also get a fillip. In addition, the slashing of central excise duty on cement would certainly give the needed boost to construction activity which is expected to start in a big way in Gwadar and the neighbouring Afghanistan. In most of the stable economies it is the housing sector which normally leads the growth of the overall economy. In fact, even in developed countries in times of stagnation, a boost is given to the housing industry to reactivate the economy. Also, the decision to increase the salaries and pensions of government servants by 15 per cent is timely because, though the official rate of inflation has remained subdued over a longish period, the 4-5 per cent price increases have started eating into the incomes of the middle and lower middle classes. The government should encourage the private sector to follow suit and increase the salaries of their employees too. Please Visit our Sponsor (Ads open in separate window)
