“Fiscal Responsibility and Debt Limitation Ordinance 2003” that binds the government to seek prior permission of the parliament for excess expenditure, finally got Cabinet’s nod and is likely to be passed through the graduate assembly in the near future.

The draft law calls for complete elimination of government’s dis-saving i.e. revenue deficit (approximately Rs25 billion or 0.5 per cent of GDP) by end June 2007, and gradual reduction of the outstanding public debt from around 90 per cent to 60 per cent of GDP by end June, 2012 by reducing the outstanding public debt by at least 2.5 per cent of GDP every fiscal year, while ensuring that social and poverty related expenditures are not reduced below four per cent of GDP.

Now the question arises that whether a fiscally irresponsible government can be restrained and made fiscally responsible by the passing of fiscal responsibility legislation. If the answer is in affirmative then it is worth implementation at all levels of the governments. In answering this question, international experience can provide valuable insight. Two aspects have to be considered. First, in countries which have enacted such legislation and are considered success stories, what was the role played by legislation? Second, if legislation was the key to success in those countries, can it be applicable in Pakistan’s case?

New Zealand is the only country which is cited as a role model in implementation of the fiscal responsibility law. However, critics say that fiscal responsibility legislation leaves lot of room for the government of the day to choose the actual level of fiscal deficits.

In the words of an analyst of the legislation, “The definitions of ‘prudent’ level of debt, or risk management, a level of net worth that provides a ‘buffer against future events’ or a ‘reasonable’ degree of predictability are not specified in the legislation. It is left to the government of the day to interpret the relevant fiscal terms and to justify those interpretations to Parliament and the public. This is because there is no one level of debt, for example, that could be considered prudent at all times. What may be considered prudent in 1994 is influenced by the prevailing structure of the economy. These and other relevant factors are likely to change over time”.

New Zealand is fiscally responsible and does not need alegislation to stay on course but if it wants to do so, the law provides ample escape to do so. The legislation only requires that the government must specify its reasons for the departure from the principles and expected time frame of return to the principles. This recognizes the difficulty of attempting to anticipate all future events and therefore the need for some short-term policy flexibility. This flexibility always provides politicians opportunity for fiscal profligacy and politicians in Pakistan are accustomed to capitalize on flexibility of laws and rules of the game. The fiscal law in Pakistan has allowed the government to depart from various targets only on grounds of unforeseen demand on its resources due to national security or national calamity, which are to be determined by the National Assembly of Pakistan. Adherence to rules and commitment to fiscal discipline is evident from the fact that in the federal Budget 2003-04 an overspending of Rs75 billion in budgeted current expenditure went unnoticed in the national assembly during the entire budget session.

In the US, the first and very radical legislative attempt to put a ceiling on the deficit and then force the government to reduce it was an abject failure. This was largely because the cuts required to enforce the fiscal responsibility Act became impractical in the face of unavoidable increases in expenditure on mandatory items like social security. The Act was simply violated and the deficit continued to rise.

This gave rise to the Budget Enforcement Act (BEA) 1990, which does not impose any mandatory deficit target and distinguishes between mandatory expenditure (not subject to ceilings) and discretionary expenditure (subject to detailed and tight ceilings). Between 1990 and 1999, the US federal government reduced and then completely eliminated its fiscal deficit which re-surfaced since 2001. However, the elimination of the deficit cannot wholly or even mainly be attributed to the BEA.

The BEA was a ‘supporting factor’ that prevented discretionary spending from rising to match the revenue. This law also allows for the effect of the business cycle since there is no ceiling on the deficit itself. In a time of boom, tax revenues increase and the deficit will shrink; in times of recession tax revenues will decline; since there is no change in expenditure ceilings, the deficit will rise. The only check on the US administration is immense public pressure and awareness about fiscal responsibility which prevent any government from taking fiscally irresponsible route.

There is a world wide consensus about the pivotal role of prolongation of firm commitment to fiscal discipline via a rule-based fiscal policy in macroeconomic stability. The rising fiscal deficits for extended period of time and the so-called deficit bias of political governments, prompted many developing countries to formulate fiscal policy rules, enshrined in a fiscal responsibility law, as a means of exercising fiscal restraint.

Fiscal restraints are essential for achieving long-run fiscal sustainability, maintaining fiscal discipline, and preventing potential future increases in public indebtedness. It is an instrument that can be used for consolidating gains from discretionary adjustment and ensuring the credibility of government policy over time. This is especially true for countries with a track record characterized by wide swing periods of poor fiscal performance with serious fiscal adjustment followed by unsustainable spending even at the expense of huge fiscal deficit. A rule-based fiscal policy can help reduce or remove the influence of short-run political expediency that leads to deficit bias.

Fiscal responsibility represents the constraints and prevents government taking a fiscally irresponsible route. International experience suggests that countries that have adopted well- designed fiscal rules and implemented effective operational mechanism for enforcing them have made important credibility gains, reflected in their enhanced access to cheaper financial markets and greater electoral support. However, it entirely depends on the government of the day that how seriously it commits itself with fiscal discipline. No power on earth can restrain the government of the day from taking a fiscally irresponsible route, except firm commitment to fiscal rule. The government could use flexibility of the law to deviate from rules on one pretext or the other.

“Fiscal Responsibility and Debt Limitation Ordinance, (FRDLO), 2003” provides the government with tremendous flexibility, albeit with a requirement of transparency. But even the transparency is within the Government’s discretion: FRDLO allows for decisions, circumstances or statements to be withheld from disclosure if that disclosure is likely to prejudice the public interests. In a country where cronyism is rampant, Finance Minister would hardly need five minutes to come up with a plausible justification for deviating from fiscal rectitude or withholding a document. In the federal budget 2003-04, an amount of Rs57 billion is shown as unallocable which is worst example of fiscal disclosure and transparency. In short, fiscal responsibility legislation is unlikely, by itself, to provide a cure to Pakistan’s fiscal problems. In terms of enforceability it is unlikely to be more effective than, volumes of law books behind the shelf.

The effectiveness of fiscal rules crucially hinges on transparency in institutional structure and functions that is in the relations within the public sector, as well as the relations between the government and private sector entities. A slightest reference to this arrangement is missing in the draft law. Moreover, Pakistan’s record in implementation mechanism is not very good. Many good laws are shelved or stay only in cupboards of lawyers. The debt ceiling enforcement through the DPCO is too ambitious because the DPCO office is a part of the Finance Ministry without any sort of autonomy. Our Finance Ministry is habitual of deviating from rules, regulations and ceilings. The escape clause is too vague, especially, the watchdog in this respect is the National Assembly and it is everybody’s guess how effective is this forum on economic matters.

The only penalty suggested in our draft law was the suspension of pays of cabinet members which was omitted from the approved law. There are usually two types of sanctions in fiscal responsibility legislation in the world: the institutional sanctions set forth in the fiscal responsibility law of Brazil, such as personal sanctions, set forth in the statutory law concerning crimes of fiscal responsibility. According to the said Law, the officials may be held responsible and punished for their acts of fiscal crimes, for example, by being removed from their offices, prevented from occupying public offices, paying fines, and even going to prison. The penalties may be applied to all of the responsible persons of the three branches and in the three spheres of the government. It is worth mentioning that every citizen is a legitimate party to denounce the law.

The fiscal responsibility law is important because it represents a greater advance in the administration of the resources that the taxpayers make available for the officials. When the public sector spends more money than it has, the government has two alternatives to finance itself. One of them is to allow the inflation to return, printing more paper money and issuing more money.

The more it gets into debt, the higher is the probability of not being able to pay what it owes. Under the fiscal responsibility and debt limitation law, every stakeholder will have to observe the rules and the clear limits to administrate the finances transparently and responsibly. Otherwise, they should have been subjected to penalties which are not specified in the law. It is strange that voluntary compliance without any penalty is the linchpin of the law.

The fiscal responsibility law is crucially important because it strengthens the foundations of the sustainable economic development, without irresponsible modes of financing the uncontrolled expenses of the public sectors, without excessive indebtedness and without the creation of artifices to hide the deficiencies of a bad fiscal administration. The Fiscal Responsibility Law should be a code that governs the conduct of public administrators, who will have to observe the rules and limits therein set forth to administrate the finances, explaining how much and how they spend the society’s resources.

It tends to bring improvement in fiscal reporting, since all citizens will have access to the public accounts, thus being able to openly express their opinions and help to guarantee their good administration. The federal budget 2003-04 has more to conceal than to reveal. There should be more efforts to strengthen evaluation and monitoring mechanism of fiscal performance. While our FRDRO is devoid of any such explicit mechanism. FRDRO is unlikely to make any dent upon fiscal behaviour of the government. FRDRO should have specific restraints (ceiling) on fiscal deficit and borrowing. There should be specified penalties on responsible functionaries for not meeting targets.