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Budget notes

Updated June 07, 2015


The writer is a member of staff.
The writer is a member of staff.

Two years, three budgets, three-fifths of the way to go — it’s that time of the year, so may as well check in on the state of things. Spoiler alert: basically, more of the same (as if you hadn’t already heard).

Straight to the budget then. Numbers can be intimidating and obscure, but our moribund fiscal situation helps simplify the maths. It’s really the same thing every year: debt servicing + defence budget + civil administration + subsidies = direct + indirect taxes.

Read: Budget 2015: between push and pull

That’s right, four inescapable expenditures on the left side equals the total money the tax man collects each year. Which means every single rupee spent on everything else is borrowed money.

Hang on a minute, you’re thinking. You already spot the problem: subsidies! Those thieves in PIA, Railways and Steel Mills are sucking us dry. Privatise them!

Both the government and the IMF are just kidding around. Each side knows one incontrovertible truth about the other.

But 85pc of subsidies go to something called tariff differentials — that’s basically the difference between the cost of production of electricity and what the government allows the consumer to be charged.

That’s exactly the problem of the entire electricity sector reduced to one number and because no one knows how to fix the electricity sector, subsidies are now a baseline expenditure.

Also read: Budget rundown: The devil is in the details

But we digress. So, yes, if you want to spend anything on anything extra — say, those development expenditures that everyone rails about or anything else you want the government to do by way of basic services — it must come from borrowed money.

Here’s the first thing about borrowed money: our governments don’t really mind borrowing. And here’s the second thing about borrowed money: the Pakistani economy has the capacity to absorb much state debt. (It’s called the debt-to-GDP ratio and Pakistan is nowhere near an international outlier.)

Explore more: Budget 2015-16: What went up, what went down

But borrowing comes with a cost. The government could just print more money to finance the everything-else on the expenditure side that isn’t covered by taxes — except printing money is inflationary and tends to compound problems.

The other alternative is to borrow — from home or abroad. And that’s where the only story that matters about the budget plays out in cycles.

Governments here — all governments — borrow a chunk of money each year to pay for the stuff they can’t raise taxes to pay for. Eventually, that borrowing gets them in trouble because the regular, ho-hum borrowing is at some point buffeted by extraordinary borrowing.

Take a look: Ishaq Dar eyes 7pc growth by tenure end

Usually, it’s an external shock, say, a spike in petroleum or food prices drives up subsidies, though sometimes its internal pressure, say, financing some military operation somewhere or looking after a hundred thousand new IDPs.

Regular borrowing compounded by extraordinary borrowing tends to make private lenders, local and foreign, skittish and so they demand an extra pound of flesh. A pound that Pakistan cannot afford or doesn’t have or can’t borrow.

And then it happens — back to the IMF, the lender of last resort, who’ll give you cheap money to pay for some of the things you can’t afford to finance yourself, but then will tell you how much you can spend and what exactly you can spend it on.

Which, frankly, isn’t such a bad thing here — because we’ve yet to find a government that has its spending priorities right in terms of broad-based, deep and lasting social and economic change.

Also read: Defence budget raised by 11.6pc to Rs781 billion

But there’s a catch, as there always is with Pakistan. Both the government and the IMF are just kidding around. Each side knows one incontrovertible truth about the other.

The IMF knows the government — whichever government — is not really committed to restructuring the state’s finances. The government — whichever government — knows that the IMF will always rescue it for geopolitical reasons.

And so, among the experts’ yawns and the public’s quizzical looks, is buried the real secret of Pakistan’s finances: the whole bloody scheme is really quite sustainable.

Think of it as an elastic band, Pakistan at one end, the IMF at the other. When the going is good, the government’s spendthrift instinct is indulged by the finance ministry — why worry about a bit of red ink when the red light isn’t flashing?

Then, when the red light flashes, the finance ministry, hectored by the IMF, steps in and takes away some of the spendthrift government’s toys. That right there is the key: relative restraint.

No one here has ever gone all Greek on the economy. The IMF has never put us to the sword. That allows the elastic band to get pulled in one direction and then the other without ever breaking.

Right now, we’re at the midpoint of a familiar cycle. We spent too much and raised too little, so we had to go to the IMF to lend to us when no one else would. Because that money came with a catch, spending restraints, there’s now some appetite built up in the system for spending more.

In the year or two ahead — or maybe three or four — the appetite to spend will be indulged once again because the spending caps will have created the space to indulge the appetite to spend once again.

Neat, isn’t it? Or maybe not. More like the frustration of dealing with an errant schoolchild.

The child’s instinct is to do what he pleases — GoP: spend, spend, spend — but he’s still meek enough to be disciplined — IMF: go to the principal’s office! — leaving everyone tired and exhausted, but cataclysm averted.

Right now, we’re on our way out of the principal’s office and you can bet thoughts are already turning to the next mischief.

The writer is a member of staff.

Twitter: @cyalm

Published in Dawn, June 7th, 2015

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