Reducing deficit

Published May 8, 2021

THE numbers show that the government has managed to arrest growth in fiscal deficit — the difference between the government’s income and expenditure — as a ratio of GDP during the first nine months of the present financial year to March. But the problem with numbers is that they are often used by governments to mask the reality. The government may have brought down the deficit to 3.6pc of GDP from 3.8pc a year ago through a reduction in development spending and a provincial surplus of nearly 1pc of the size of the economy. But the question is: can it keep it at that level during the last quarter of the fiscal? That would be near impossible. The fiscal gap is estimated to grow to at least 7.5pc by the close of the fiscal year as the government’s bills become due, the expenditure side of its balance sheet expands and the provincial surplus disappears into thin air. That makes a lower deficit number at this stage irrelevant unless the government can contain it at that level in the last quarter as well.

The more important numbers in the summary of the country’s fiscal operations relate to the spiking cost of debt servicing, and the burden placed on common people through indirect taxes and levies. The debt-servicing expense has shot up by almost 12pc to Rs2.1tr or equal to 82pc of total revenues, forcing the government to borrow more money to pay its other bills. The share of indirect taxes and levies — which impact, directly and heavily, low-middle-income groups — in revenues is surging. The collection of petroleum levy, for example, has jumped by a whopping 87pc and of indirect taxes by 14pc (compared to 9pc increase in direct taxes). The fiscal deficit is at the heart of our chronic economic troubles and the government’s inability to invest in infrastructure to forge growth. Indeed, the government has been successful in achieving primary surplus — the difference between revenues and expenditure excluding debt payments — in the last two years. But this was done by curbing essential expenditure, especially development spending, at the cost of people’s well-being and jobs rather than by increasing its tax revenues. There is no possibility of decreasing the overall budget deficit and controlling growth in public debt without rapidly raising tax collection. For that the PTI government will have to undertake tax reforms, which may hurt powerful lobbies. Does it have the political will for that? It has not really shown any so far.

Published in Dawn, May 8th, 2021

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