A shadow budget

Updated May 26, 2017

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WITH the finance minister due to present the federal budget for 2017-18 later today, a relevant question is: what should the budget look like? Clearly, and ideally, the budget should reflect a higher purpose and a grand design; it should be part of a medium-term response to the country’s macroeconomic context and its socioeconomic challenges. However, this beautiful theory clashes with the ugly reality of a constrained resource envelope. But since scarcity is at the heart of economic choice, managing it is precisely what policymakers have to grapple with.

The resource constraint can be resolved in a number of ways relative to competing expenditure requirements. The budget can be set in a medium-term framework rather than be reduced to a mere annual accounting exercise. More importantly, budgeting needs to be complemented with other policies and measures that support the overall objectives and outcomes set by policymakers (elaborated later). A stronger institutional framework, such as informed and active oversight by parliament, for example, can help lead to better decisions, including in setting expenditure priorities. In this manner, the trade-offs inherent in the budget can be better managed.

Some bold thinking is required on the economic policy front

But what should the grand design be? In Pakistan’s case, the following interrelated goals and objectives present themselves as priority areas:

— Promote long-run growth led by private-sector investment

— Improve the international competitiveness of the economy

— Absorb the youth bulge into productive employment

— Redress institutional weaknesses in economic governance

To achieve these ends, some key interventions will need to be made, complemented by a wider framework of economic policies. Some of the required interventions are as follows:

— Reducing the cost of doing business in the economy

— Reducing the burden of taxation on businesses

— Increasing productivity-enhancing investments (spending on the right type of physical infrastructure, on skills development, on easing technology absorption by businesses, facilitating new IT start-ups etc.)

Allocating funds in the budget alone will not achieve results. A set of complementary policies and measures will be needed to make progress towards the stated objectives. Hence, for example, a wide-ranging and comprehensive restructuring of the Federal Board of Revenue will be required, underpinned by a comprehensive organisational development programme. Modernising FBR’s IT platform and upgrading its related infrastructure is also essential. While both these steps will require significant budgetary allocation, there will be other measures and steps needed outside of the budget to successfully complete the reform process.

Once these measures have been put in place, it will induce taxpayer confidence in FBR, while improving its capacity to work in an independent, impartial, transparent, accountable and professional fashion — all fundamental building blocks of a modern, effective and efficient tax administration. This set of actions can then lead to an increase in tax collection in a fair and equitable manner.

Another example of necessary action outside the budget is a high-powered review of government expenditures, and a separate, specific examination of the portfolio of projects under the public sector development programme. The objective would be to make savings in government spending, introduce transparency and realign development expenditure to the most efficient, long-run, growth-enhancing areas.

Broadly, this is the grand design and framework that was used to help PTI prepare its maiden shadow budget in 2015. Over a three-year period, it was envisaged that the standard national sales tax rate would be brought down to 12.5 per cent, while the headline corporate tax rate would be slashed to 20pc — aiming to be the lowest in the region. These measures, in combination with investment incentives and import tariff reform, would cost a sizeable amount of money (estimated at almost a trillion rupees over a three-year period).

This amount would represent a revenue loss that would be compensated from the following sources: higher tax revenues generated from growth and investment in the economy, as well as from the restructuring of FBR; a proper utilisation of the Nadra list of 3.2 million potential taxpayers; rationalisation of some taxes; savings from the expenditure review and realignment; and, savings from reducing leakages in public-sector expenditure.

Despite these measures, in the first two years, it was estimated that the fiscal deficit would rise by around 0.4pc. This was on account of the fact that many of the measures requiring structural changes or institutional reform would have back-loaded pay-offs. However, in a well-thought-out scheme of things, a moderate rise in the fiscal deficit owing to large-scale, fundamental reform should be perfectly acceptable.

Such a set of economic policies and medium-term budgetary measures would generate investment, growth and jobs creation, while at the same time also yielding additional tax revenue by widening the tax net.

Tailpiece

While the PTI did not continue with the practice of producing a shadow budget, in line with the best traditions of parliamentary democracy, for reasons best known to itself, this year the PPP has presented one. This effort on the part of PPP complements the long-standing and fairly serious effort by the MQM each year. It would be useful for the opposition political parties to engage more broadly, frequently as well as intensely with external experts and technocrats to get the necessary insights into their budgetary recommendations, especially with regard to the implications of any tax proposals.

Buttressing the different parties’ shadow budget should be a white paper critiquing the economic policies and performance of the government. A process of citizen engagement would be a step towards having an informed electorate. In this regard, a missing piece in Pakistan’s institutional set-up is a specialised office or agency that helps parliament understand the revenue as well as economic implications of the various tax proposals put forward, like the Congressional Budget Office in the US or the Institute for Fiscal Studies in the UK.

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

Published in Dawn, May 26th, 2017