OUR long desire to emulate the Asian Tigers’ progress remains unsuccessful so far, reflecting an inability to craft a viable development strategy. So our budgets too, like the new PTI one, don’t reflect an underpinning grand strategy to upgrade the economy, but are more collections of small ideas to reward key political and economic allies for short-term gains. They fail to give sustainable progress and often cause fiscal and current account deficits.
East Asian development strategies targeted higher-end industries, especially export-oriented ones. States supported local entrepreneurs on R&D, marketing and technical issues to penetrate these industries. But support was tied to technical upgrading and exports growth by firms. This not only helped companies grow, it also ensured rapid national progress. Such measures are missing from the budget. As with the ones over the decades, it provides no clarity on likely progress on the key criteria that budget measures should be rigorously tested against: upping tax and exports revenues, upgrading the economy technically and upping social equity.
The budget provides no clarity on likely progress on key criteria.
Measures predictably reflect old ideas. There is relief for public servants, pensioners and labour that may foster some social equity. There are relief measures for numerous industries rather than a few key ones the state chooses to upgrade the economy. Some measures aid the politically favoured rather than the economically promising. They largely include tax breaks industries have devoured for decades without attaining much technical upgrading or expansion. One sees few support measures on R&D, marketing and technical issues and no performance links.
There is the BISP-related programmes expansion that may foster some social equity. Finally, there is a large increase in the development budget. But this is subject to cuts if tax targets are not met. Such state projects have low efficiency, high leakages and dubious links with economic upgradation or tax or export revenue expansion. Thus, the budget may fuel the twin deficits by wasting precious fiscal resources on small ideas that may neither increase tax or exports revenues sufficiently nor upgrade the economy.
While past regimes have all fed the twin deficits, the PTI has done especially badly on fiscal deficits, giving the largest fiscal deficit-GDP ratios over three years (7.5-9 per cent) seen since 2000 at least. While the PTI showcases PML-N’s reliance on high current account deficits to deliver high GDP growth and its own current account deficits cuts, its own much lower GDP growth has come via very high fiscal deficits, mainly due to its failure to attain tax revenue targets. The gap in 2019-20 was 30pc, the highest since 2000 that widely beat the 15pc gap in 2012-13.
Tax revenue growth is measured in nominal terms and is thus close to nominal rather than real GDP growth. Since 2008-09, our annual real GDP growth has been 3.3pc, nominal GDP growth 12pc and FBR revenue growth 12.5pc. Under the PPP, it was 2.8pc, 15.7pc and 16pc. Even in 2008-09 when real GDP growth was near zero due to a global crisis, tax revenue growth was close to nominal GDP growth. Under the PML-N, real GDP growth was 4.7pc, nominal growth 8.5pc and tax revenue growth 1.5 times higher at 13pc.
Under the PTI, annual real GDP growth is 1.8pc, nominal growth 11.5pc, but tax revenue growth is only 6pc. Tax revenues did grow by 20pc this fiscal year but only after the low base effect of two years of near-zero growth. So by failing to equal tax revenue growth even to its nominal GDP growth, let alone the 1:1.5 ratio of the PML-N, the government has seen the national treasury lose nearly Rs2 trillion in tax revenues since 2018-19. The effects of having six FBR heads in three years, infighting and incompetence, and a lack of tax strategy are clear. With a high tax target 25pc higher than this year’s actual, it will very likely run a fiscal deficit of above 7pc next year too.
Even external deficit cuts may vanish given rising oil prices, stagnant exports and uncertain remittances levels. While a floating rupee will cut current account deficits, it will fuel inflation too and won’t end external deficits fully. The rupee lost nearly 60pc value from 2008-13. Yet reserves fell by $4 billion in 2012-13 despite faster exports and remittances growth under the PPP than now and a current account deficit-GDP ratio of only 1.1pc. So we were back with IMF in 2013. Oil prices are now above $75 per barrel. Our imports may again cross $50bn this fiscal year. So we may suffer high twin deficits soon while economic upgrading remains elusive. But given team incapacities and looming elections, there is little hope that the PTI can quickly change track and undertake reforms to deliver sustainable, equitable economic upgrading.
The writer is a political economist with a PhD from Berkeley.
Published in Dawn, June 29th, 2021