The budgetary framework

Updated May 12, 2017


AS Pakistan heads into yet another budget season, it is important to step back and assess the budget process from an institutional prism. Budget formulation, as well as the post-budget analyses, is too focused on the short run as well as on inputs (rupee allocation) and outputs (number of schools or kilometres of new highways to be constructed) rather than on outcomes or on the quality of the process.

Budget-making takes place within an institutional framework that is supposed to govern the budgetary process, and the strength of that framework determines how successful a government’s fiscal policy is likely to be in achieving longer-term objectives.

How is the budget formulated? Who makes the budget? Who is it made for? What long-term goals and objectives, if any, are meant to be achieved and how does the budget fit into the overall scheme of things? How aligned is the budget with the country’s macroeconomic context and its socioeconomic development challenges? How fair and equitable is the country’s tax system, and how efficiently are taxes collected? Where and how is the money spent, and what institutional checks and balances are in place to ensure transparency and accountability? These are some of the questions that need to be examined to determine what weaknesses, if any, need to be addressed in the budgetary framework.

Budget-making in Pakistan lacks transparency, accountability and participation.

While Pakistan has introduced some reforms in public financial management such as the introduction of a medium-term budgetary framework (or MTBF), its overall framework falls short of best practice in a number of significant ways.

The inherent weaknesses within the budgetary process as it currently exists include the following:

There is little or no economic underpinning to budgetary plans and allocations, especially with the making redundant of the national planning framework as embodied in five-year and annual plans. It is unclear what has replaced this, and how it ties up with the annual budgetary allocations drawn up by the Ministry of Finance. In its current shape, the MTBF does not address this limitation, as it seeks to better link budget allocations to service delivery irrespective of the underlying economic rationale or imperative.

Parliament is completely bypassed in budget formulation. The standing committees on finance, and even the cabinet, are informed practically ex post facto of the government’s budgetary plans, where meaningful input from external experts can also be received. There is also an absence of ongoing engagement with the business community and relevant external experts. Only those budget proposals received from civil society are considered seriously that pertain to a positive revenue impact. The others are usually ignored.

Once the budget is presented in parliament, only two days are allowed for parliamentarians to read, understand and take input on, the copious documents and the tedious as well as specialised language of the finance bill. According to Pildat, on average, parliament has spent 34 hours debating the approximately $40 billion spending in the federal budget over the last 14 years. (In one particular year, the duration of the budget debate lasted a grand total of 9.5 hours!)

Amplifying the flaws in the budgetary process, are weaknesses in the overall institutional framework underpinning public financial management in the country. Article 84 of the Constitution allows the executive extraordinary powers to make ‘supplementary’ or ‘excess’ expenditures without prior approval of parliament. According to research by Pildat, Pakistan is one of only three countries that grants the executive the power to make expenditures without recourse to parliament (the others being Bangladesh and Denmark).

This power has been ‘misused’ to the hilt by successive governments. On average, the Ministry of Finance has been presenting for approval to parliament a supplementary budget each year that exceeds the original approved budget by around 20 per cent at the minimum. Parliament has no power to scrutinise, question or block these expenditures. The principal instrument for undertaking the supplementary or excess budgetary spending is the Economic Coordination Committee of the Cabinet, which, somewhat contrary to its implied function, deals mainly in approving individual transactions (grants, waivers, exemptions, approval to import) brought to it by the line ministries.

Compounding the limitations in overall public financial management is the weakness in the tax system (policy as well as administration). This perennial weakness has undermined the budget by leading to low tax revenue collection as well as by resorting to predatory taxation. Shortfalls in revenue targets lead to a resort to deficit financing, which then leads to increasing pre-emption of budgetary resources for debt servicing. Hence, budgetary targets and goals on service delivery or other expenditure priorities are undermined.

A related issue is that tax proposals put forward by the government are not scrutinised for their economic impact. The Federal Board of Revenue does not have the time or sufficient expertise to undertake this examination. A separate and permanent institutional arrangement should be in place to undertake this scrutiny on an ongoing basis, much like the Congressional Budget Office in the US or the Institute for Fiscal Studies in UK. For several years starting 2008, a Revenue Advisory Council working under the finance minister and consisting of senior FBR officials and external experts, including some of the country’s top economists, performed this function on an ad hoc basis.

In conclusion, success in achieving economic policy goals and budgetary outcomes depends on the institutional framework supporting overall public financial management in the country. A country’s budget-making process should be transparent, participatory, accountable and responsive to the needs of citizens and state. There is a need for wide-ranging institutional reforms to achieve these ends.

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

Published in Dawn, May 12th, 2017