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Cyclic austerity to fix twin deficits

Updated September 03, 2018


WITHIN days of assuming power, the Pakistan Tehreek-i-Insaf (PTI) government has initiated an austerity drive to tackle the growing fiscal and current account deficits.

In its second cabinet meeting on Aug 24, the PTI decided to ban the use of discretionary funds of the president, the prime minister and the members of the National Assembly, and economise spending on domestic and foreign travel by important state functionaries.

The discretionary funds — stated to be grants — were used by prime ministers and MNAs for development of the electoral constituencies they represented. According to the federal minister for information, Rs21 billion were earmarked for the prime minister and Rs30bn for MNAs in the final year of the PML-N government’s tenure.

Owing to the temporary relief it provides, the cyclic austerity process so far adopted to address the financial crises has failed to subdue the stubborn twin deficits

The PTI leadership is mulling to turn the Prime Minister House into a university offering international standards of education. The cabinet also decided to abolish the superfluous Capital Administration and Development Division ministry whose employees are to be sent to relevant government departments.

Similarly, the governor houses in the provincial capitals are proposed to be put to better public use. The Sindh government has tentatively decided to convert the governor house in Karachi, owned by the provincial government, into a museum.

By deciding to live in staff quarters of the Prime Minister House, Imran Khan has sent a message to both the government and the nation to observe austerity. All these proposals and decisions underline the need for a cost-benefit analysis of every government institution, programme and policy to move from periphery austerity to tackling pivotal problems that keep the government’s balance-sheet in the red.

It has to be a step-by-step process with set priorities. That includes possible access to the International Monetary Fund (IMF) programme which, this time, according to a credit agency, would involve pruning of the China-Pakistan Economic Corridor projects. In the past, too, from time to time federal as well as provincial governments, including the PTI-run KP government, had taken austerity measures.

Restrictions had been placed on foreign travels and bans were imposed on medical treatment abroad for officials. In the previous fiscal year, the Punjab government had set up a 7-member austerity committee and developed a template for target-based cost-efficient use of public funds. The committee was empowered to relax curbs in exceptional cases.

After coming to power in 2013, the PML-N government had announced to cut expenditure of ministries and divisions by 30 per cent and PM house by 45pc. In fiscal year 2013-14 it claimed to have saved Rs40bn through austerity measures.

The country has also witnessed several IMF-led austerity programmes which were focused on raising taxes without equity and cutting government expenditure with very little rationale to justify.

The austerity programmes designed had often resulted in slashing of pro-poor programmes including health and education spending that depressed the potential productivity of the teeming millions. And when the economy took a downturn, it became more difficult to raise tax revenue needed to pay off foreign debts.

To ease external pressures and minimise the impact of the external shocks on the domestic economy, the country needs a new model of economic growth with well-defined programmes, policies, strategies and a plan of action backed by a strong national consensus.

Well-thought out steps at measured pace and sequence are needed to integrate the national economy with the global market. Copying economic models from other countries with total disregard to Pakistan’s cultural milieu is a sure prescription for failure.

The PTI-led government plans to double the tax revenue by revamping the Federal Board of Revenue (FBR). That was also a key part of all the IMF programmes which were earlier followed without achieving their targets. The FBR reforms require a cost-benefit review of the organisation as the bulk of the taxes are said to be collected by businessmen on the tax authority’s behalf.

The PTI says it will incentive businesses to enter the formal sector. But that depends on reducing the cost of doing business that drives economic activities into the informal sector. There is a wide range of taxes, fees, levies and contributions which, when combined, place a heavy burden on businesses.

These multiple taxes raise the cost of tax compliance and encourage tax evasion. Pakistan ranks 172 out of 184 countries in the level of tax compliance difficulty. A cost-effective public delivery service is necessary to cut production costs and achieve globally competitive productivity.

In the public sector, project costs are often understated at their feasibility stage by sponsoring agencies to make approvals less difficult, which — coupled with delays in implementation — result in cost escalation. Neither donor agencies nor successive governments have carried out cost-benefit analyses of completed projects.

Quite often the earnings of such projects are not enough to repay borrowed money. Earmarked funds are diverted from slow-moving projects to those nearing completion. This results in a lot of money being wasted.

Owing to the temporary and partial relief it provides, the cyclic austerity process so far adopted to address the financial crises has failed to subdue the stubborn twin deficit deficits which resurface after a while with a vengeance.

Published in Dawn, The Business and Finance Weekly, September 3rd, 2018