THE Ministry of Finance and FBR have begun to burn the midnight oil to give final shape to the federal budget for 2014-15. By this time, most budget proposals from the chambers, the stock exchanges and the business forums have poured in.

Virtually year after year, the tax proposals are disjointed and contain too much focus on tinkering with tax rates for individual sectors, while, on the expenditure side, the government’s own proposals suffer from the same narrow focus. Hence, as an example, a major topic of discussion could be whether there is enough fiscal space to accommodate a 7pc increase in salaries of government employees, or 12pc. If a 12pc pay raise is opted for, then which other line allocation will need to be cut, to ensure that the overall fiscal deficit ceiling is not breached.

In doing so, the annual budget formulation is reduced to a number-crunching exercise, devoid of foresight or innovation. Ideally, a country’s (or a province’s, for that matter) budget should be the manifestation of an economic vision, and all its targets and allocations should reflect medium- to long-term aspirations. Hence, countries have introduced ‘rolling’ budgets which are embedded in a three-year framework. (Pakistan is also in the process of implementing a ‘medium-term budgetary framework’, which parliament needs to begin taking more seriously — like everything else relating to the economy!)

However, since the early 1990s at least, very few budgets in the case of Pakistan have articulated a longer-term economic vision and strategy. Among the few that stand out is the budget presented by the first PML-N government in 1992. Piloted by Mr Sartaj Aziz, it laid out a medium-term path for fundamental economic reform, by initiating major tax and tariff rationalisation, introducing deregulation and embarking on privatisation.

Another significant attempt at structural reform of the economy was undertaken in the 2003-2005 period under the stewardship of Shaukat Aziz, which included, among other measures, providing a medium-term path for a decline in corporate tax rates and customs duties. The budget presented by Hafeez Sheikh in 2012 articulated a vision for the tax scheme that went well beyond a routine re-ordering of tax slabs and import duties.

The inability of most governments to formulate budgets underpinned by a well thought-out longer-term vision is a function of two developments that have played out since the 1990s. First is the widening drift between the finance ministry and the Planning Commission, with the latter increasingly relegated to a secondary role under the dominance of the MOF. This has led to a near-complete divorce of the annual budget from the country’s five-year plan. The quarterly conditionality of IMF programmes with their unwavering emphasis on achieving a fiscal deficit outcome at the end of a three month-cycle, has further shortened the country’s planning horizon.

The second development that has reduced budget-making to an exercise in staying within a given fiscal deficit ceiling, with little room for long-term thinking or innovation, is a sharp deterioration of the fiscal position. If one statistic captures the worsening fiscal ‘squeeze’, it is this: without borrowing, the federal government has 16pc of net revenue left for running the state.

So if it were possible under these circumstances to formulate an economic vision, what should the ‘grand design’ be?

Clearly, the first and foremost objective should be to restore the confidence of the private sector to begin investing in the economy once again. For this the government will have to first recognise, and then address, the worsening business conditions — especially for the country’s large-scale formal sector. The trend of rising informalisation of the economy needs to be arrested and reversed.

To achieve this, the finance minister needs to ensure that FBR stops resorting to ‘predatory taxation’ — where it places increasing demands on existing large taxpayers. For this, ideally, the finance minister should reformulate FBR’s target: instead of an absolute rupee target for the year, FBR should be given a target defined in terms of bringing new taxpayers into the base, and a target to stop x% of the annual leakage from government revenue due to collusion and complicity of FBR staff.

It may not seem obvious at first, but increasing the confidence of existing taxpayers is extremely important, especially if the government wants to draw an investment response from the private sector. To this effect, the finance minister’s budget speech should contain an explicit policy commitment that ‘all income above the legal threshold, irrespective of source’ will be brought into the ambit of taxation within three years, subject to parliamentary approval. At the same time, a commitment to ‘progressive’ taxation should be made.

Other measures that should be taken include the provision of investment incentives (as in Shaukat Tarin’s budget in 2009), and solid measures to control smuggling and under-invoicing of imports.

On the expenditure side, a well thought-out budget will reflect proper prioritisation of spending to achieve desired outcomes, and sufficient allocation for the same. The budget process will ensure spending efficiency via monitoring and evaluation, budgetary reviews and concomitant processes such as a system of audits and pre-audits. It is imperative that budgetary spending is linked to outcomes.

Finally, what the budget should not contain is new projects. Projects will not make Pakistan prosperous — a stronger institutional framework will.

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

Published in Dawn, May 16th, 2014