June 01, 2008	Sunday	Jamadi-ul-Awwal 26, 1429

KARACHI, May 31: Dr Hafiz Pasha, a well-known economist, has proposed that subsidy on oil prices be phased out in the next two years and a well thought out strong social security and relief package be put in place in the federal budget for 2008-09 for the poor and needy who now constitute almost 33 per cent of the population.

Announcing for the first time a pre-budget package in the last seven years, Dr Pasha, who is the vice chairman of a leading private consultancy Social Policy and Development Centre (SPDC), presented at a press conference on Saturday the SPDC report on “Fiscal choices in budget 2008-09” that urges the government to achieve macro-economic adjustment in the next two years by bringing down fiscal and current account deficits to sustainable levels, minimise inflationary pressures, preserve growth momentum to the extent it is possible and strengthen the redistributive role of the fiscal policy.

“Strong social safety nets will have to be put in place to ensure that there is adjustment with a human face,” stressed the SPDC report as quoted by its vice chairman.

He warned of a possible public resistance if the government goes ahead with its macro-economic adjustment programme by bringing about parity in international and domestic prices of oil without caring for relief of the poor.

One of the key suggestions of the SPDC report is to apply a cut of at least Rs50 billion on defence spending in the next budget “following a process of normalisation in North.’’

He agreed with a questioner that a return to normalcy in North would cut down oil consumption and contribute towards containing the import bill.

He did not mince words to express his serious doubts on government’s assertion in the next year’s budget documents of bringing down inflation to single digit.

Based on extensive research of SPDC experts, he predicted a minimum inflation of 10 per cent next fiscal year.

Headline inflation in the current fiscal year is being estimated at 11 per cent.

Oil subsidy, the SPDC researchers estimate, would demand Rs300 billion in 2008-09 budget which after adjustment with sales tax revenue of Rs84 billion comes to Rs216 billion or roughly two per cent of the GDP. But it depends on stability of international oil prices and rupee exchange value in 2008-09. The subsidy on oil could increase further.

The SPDC report, Dr Pasha said, suggests the containment of budget deficit which could be achieved by higher level of fiscal effort in the form of broadening tax base by taxing the under- taxed and through restricting current expenditure.

He, however, said that the capital market be spared at least now from any taxation measure.

“The best time of capital gains tax on stock market was when it was booming a few years ago,’’ he replied to a question. Now the market is under stress.

For the current expenditure, the SPDC prescription is to restrict its growth to six per cent of the GDP in 2008-09 for which a three-point strategy is proposed.

The POL prices may be adjusted to high international oil prices in a timeframe of two years, (ii) bring down defence spending by Rs50 billion following a process of normalisation in North and (iii) non-salary expenditure of all government departments be kept constant in nominal terms at the 2007-08 level.

Relying on the SPDC research report, Dr Pasha observed that determination of appropriate level of petroleum products prices’ policies in response to a sharp jump in international oil prices during the next budget is one of the “most difficult policy choices.’’

He said that the international oil prices virtually doubled last year which led to a large increase in oil subsidy.

He quoted the former finance minister who put the total oil subsidy at Rs153.6 billion for which the budget for 2007-08 provided only Rs15 billion.

Since there is no clear policy of linking domestic oil prices with that of international oil prices, the implied subsidy has piled up and this issue is pregnant with fiscal policy implications as it would impact the entire price levels in economy.

“Therefore, the setting of domestic petroleum products prices is confronted with serious policy trade offs which have to be carefully considered by the government,” he quoted from the report.

The SPDC wants fiscal deficit to be contained to five to 5.5 per cent of the GDP and the current account imbalance should also be restricted to 5.5 per cent.

A five to 5.5 per cent growth in national economy with four per cent coming from agriculture is the prescription.

“This year’s budget is unique because of a number of factors,” the SPDC report begins and it points out that there are high expectations from the democratic government that has come after a gap of seven years.

The budget is coming at times when economy is in the midst of an unprecedented level of stress.