PUNJAB plans to implement a rolling expenditure planning framework from the next financial year to manage its current spending — barring its pay and allowances bills — in a better, more predictable manner. The new rolling expenditure framework will help the provincial government cope with the impacts of the expected coronavirus-induced revenue shocks on its ability to meet the potential emergent expenditure without significant disruptions to its routine budgeted public service delivery assignments.

The Framework for Rolling Expenditure (FRE), according to the budget documents for 2020-21, is structured in a way as to cater to the exigent spending requirements of the government — arising from a pandemic (like Covid-19) — “above and beyond the budgeted expense for the year”. “The rolling expenditure model provides insight into requirements for future adjustments in case of releases lower than the budgeted amounts in a certain period,” the documents say. The new rolling expenditure mechanism is more demand-driven as compared to conventional supply-driven.

The new expenditure framework is being rolled out in view of the uncertain conditions amid the global health crisis that had infected nearly 169,000 and killed around 3,300 people across the country by Saturday morning. “It is difficult to make revenue and expenditure forecasts for the entire year in such uncertain times. Hence, we’ve decided to implement the Framework for Rolling Expenditure in the new budget in order to cope with these uncertainties by monitoring and controlling expenditure on the basis of actual demand as against conventional supply model,” provincial finance secretary Abdullah Sumbal says.

The new rolling expenditure mechanism is expected to make budget allocations resilient enough to combat unexpected macroeconomic challenges

Like the rest of Pakistan, Punjab is also tottering under a massive economic shock caused by the pandemic owing to business interruptions and shutdowns from social-distancing measures. Facing a significant resource crunch for the last couple of years because of the slowing economy on the back of the International Monetary Fund mandated economic stabilisation policies, the plague has exposed the vulnerabilities of the provincial economy, aggravating its fiscal troubles and spawning uncertainty about its income streams during the next financial year. The health crisis spawned by the coronavirus has amplified shortfall in its share from the divisible tax pool to a whopping Rs473.6 billion and in its own tax collection to Rs103.9bn during the present year.

The FRE implementation is expected by the provincial finance managers to make budget allocations resilient enough to combat unexpected macroeconomic challenges. The new framework will govern the execution of non-development expenditure assignments and is structured to enable the province plan the next fiscal year more realistically in a responsive manner on a rolling basis. The budget documents argue that the framework will provide the government with better control over cash flows by mitigating the impacts of revenue shocks.

“A categorisation of the most essential, moderately essential and lesser essential expenditure helps minimise the impact of the potential revenue shocks to ensure minimum disruption to public service delivery, the documents add. “Such fiscal controls are mandated owing to the challenges that accompany exigencies like the Covid-19 pandemic, which force diversion of significant resources off course, amid the need to ensure the provision of service delivery with minimal disturbance.”

The FRE is meant to serve three key ends: a) creates resilience to revenue and expenditure shocks; b) ensures minimum, unavoidable disruptions to the most important aspects of normal service delivery; and c) releases funds for budgeted expenditure assignments on a demand-driven model. The framework envisages monthly releases on all non-development expenditure heads excluding pay and allowances, which gives control over cash flow to mitigate the impacts of revenue shocks. This carries the advantage of greater spending control at the beginning of the year.

The next Punjab budget anticipates that the negative impact of the Covid-19 to continue at least through the first half of the next fiscal to December, creating a perpetual uncertainty on both supply (revenue generation) and demand (expenditure) sides. Given this uncertainty, the government is pursuing a multi-pronged fiscal strategy that focuses on revenue generation through economic growth and broadening of the tax base; provision of relief and economic stimulus for the businesses especially the construction industry; and, extension in social protection cover through relief to the Covid-19 affected sectors of the economy.

The fiscal hole, which is likely to grow bigger in 2020-21 depending on how the virus pandemic unfolds in the province and the rest of Pakistan going forward, has struck the budgeted assignments of the government hard this year. The government had to divert substantial resources from its budgeted allocations to pay for unseen Covid-19 related expenses at the cost of its development and public service delivery. The budget documents show that the development spending for the current year has been revised down by about 18 per cent to Rs255bn and the government is projected to close the year in the negative territory with an estimated resource gap of nearly Rs20bn. Originally, the resource gap was projected to be Rs118.3bn and has been narrowed through ways and means (overdraft) borrowing of Rs77bn from the federal government at the six-monthly treasury bill rate, using up the provincial cash balance of Rs42bn with the State Bank of Pakistan.

Next year’s consolidated income estimates of Rs2240bn contain substantially large new commercial borrowing of Rs331.9bn for the wheat procurement operations and soft foreign loans of Rs133bn for development, which also includes a Rs40bn Chinese debt for the Lahore Orange Metro Line Project. These loans form almost 21pc of the total income estimates for the year. In addition, the government has also shown the projected private financing of Rs25bn in infrastructure projects means to be completed in the Pubic-Private Partnership mode as capital receipts.

The Framework for Rolling Expenditure may help the provincial finance managers bring some predictability to its spending in an uncertain macroeconomic environment in the wake of the once-in-a-century health crisis. The question is: can the framework also make up for the massive shortfall in the federal tax collection being foretold by every expert?

Published in Dawn, The Business and Finance Weekly, June 22nd, 2020