WHAT ‘Grand Design’ will inform the formulation of next year’s budget? And what should that design be?

By the time final shape is given to the federal budget, it is clear that both, the country’s forex constraint as well as the government’s budget constraint, will have eased considerably. The first tranche of the largesse from the Gulf is expected to be followed by at least one more, while inflows from the 3G/4G spectrum licence auction and a sovereign Eurobond offering should be in place as well. On the back of the reverse capital flight triggered by recent moves, the forex market should continue to witness stability and strength.

The forex inflows, and resultant build-up of the country’s reserves, are more than likely to pave the way for the government to return to its ‘basic instinct’ of big-ticket infrastructure spending, loan hand-outs and generous tax incentive schemes — IMF concerns notwithstanding.

Should this occur, it would be the continuation of the same muddled thinking displayed by all governments in this country since the 1980s — that the economy can somehow grow sustainably on loans and tax incentives alone, without fundamental reform.

At the heart of the required reforms are two that are inter-related: fiscal reform and the restructuring of the civil service.

For reasons that are now known to all, Pakistan needs to introduce equity, fairness and transparency in its public finances. On the tax side, this means broadening the taxpayer base to include the millions who either do not pay at all, or who dishonestly pay a token amount — such as most parliamentarians — to be able to be counted as ‘honest’ taxpayers. The injection of equity and fairness into the tax system will increase the moral authority of the state to collect its dues, while allowing for a substantial reduction in the tax burden of honest companies and individuals.

In turn, this will unleash a virtuous spiral: the tax arbitrage between formal and informal businesses will narrow even further, reducing the incentive for companies in the formal economy to move over to ‘the other side’, and for businesses in the informal sector to stay undocumented. In addition, by lowering the tax burden on the formal economy, it will spur investment — creating jobs as well as new tax revenue for the government.

On expenditure reform, the government will have to go further than its somewhat half-hearted announcement of an across-the-board cut in non-salary expenditure of ministries and divisions. The bloated size of government/the public sector is showing up increasingly in two areas:

1) The size of the wage bill, which has increased 3.5 times (247pc) in just four years since 2009-10, to 2pc of GDP

2) The pension liability, which is completely unfunded, and which now accounts for 4.9pc of total expenditure (or 0.8pc of GDP).

Unfortunately, while the ‘liability’ side of the civil service is increasingly visible, the size of its pay and perks is not showing any positive correlation as yet to performance. This brings into sharp focus the urgent need for ‘big and bold’ moves on revamping the governance architecture of the public sector, with creating an effective, innovative and more responsive civil service the centre-piece of any reform effort.

Only when the government has put in place a viable institutional framework, with all the other cogs many of us have written about over the past few years, will it have laid the basis for sustainable growth that would be both jobs-creating and investment-inducing. Unfortunately, some recent actions of the government demonstrate that it has a fuzzy vision at best of how to put Pakistan onto a path of high, durable growth. So far, it has focused its efforts on arranging new loans rather than on resource mobilisation. On tax broadening, while the finance minister’s efforts at publishing the tax directory of parliamentarians is a commendable first step, listing them as tax-filers or payers on the basis of deduction at source of tax on their salary is a travesty. Public scrutiny of parliamentarians’ tax behaviour should be taken to its logical conclusion — the application of legal provisions and sanction for non-compliance.

On the civil service side, the prime minister has just lifted the ban on recruitment — a sure vote-getter, but a fiscal party-spoiler.

There are other areas where economic policymaking needs to be more coherent and coordinated. Take one of the flagship schemes of this government: distribution of laptops for students. Instead of relying on expensive, imported laptops for a select few, putting in place the incentives for local manufacture of cheap laptops for the benefit of thousands more would have created jobs and had other positive spill-overs.

At a secondary level, the government is borrowing heavily from long-term bonds — while telegraphing to the markets a declining inflation path, and hence, lower interest rates. At current yields and volumes, it will end up paying at least Rs 15-20 billion more in interest costs each year, for the next five to 10 years, than if it would have borrowed more smartly through short-term T-bills. As these examples demonstrate, there is room for potential saving, and better policy, in virtually every area the government operates in.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.