Budget repair

Published May 11, 2023
The writer has served as advisor, Ministry of Finance, Government of Pakistan.
The writer has served as advisor, Ministry of Finance, Government of Pakistan.

THE federal budget for fiscal year (FY) ‘24 will be presented against a complex domestic environment and a challenging global economy. There has never been a more critical time to work hard to putting together a budget that builds the strongest case for policy and structural reforms. We have an economy teetering on the brink of default — the situation in June will not be much different.

Globally, central banks and governments are profusely trying to manage the uncerta­inty emanating from efforts to contain inflation and market turbulence. Recent ev­­e­nts indicate higher volatility in the global financial system, brought on by synchronised interest rate hikes around the world. The prospects of another global recession, or at least a considerable slowdown, are real.

Pakistan is more vulnerable to global events due to its extremely weak economic position. Authorities’ revised estimates indicate the economy will grow by just 0.8 per cent in FY23, a massive 4.2pc lower than what was forecast at the beginning of the fiscal year. The hit to growth will have a substantive negative effect on employment. Next year’s trimmed estimates of 3.5pc GDP growth are hardly encouraging. The downside risks to growth remain high due to a lingering balance of payments challenge.

The nation is approaching budget FY24 with unparalleled levels of debt generated through living on borrowed resources. The large recurrent budget deficits have resul­ted in the build-up of this public debt, reaching 78pc of GDP in FY22, just shy of the record high of 81.1pc of GDP in FY20. The budget deficit has averaged 6.96pc of GDP over the last five years to FY22, nearly double the stipulated limit of 3.5pc in the Fiscal Responsibility and Debt Limitation Act.

Federal budget-making needs course correction.

This challenging economic environment necessitates serious thinking on the principles of the next budget. They must include a plan for responsible cost-of-living relief at a time when the average headline inflation for FY23 is estimated to clock in at an unacceptably high level of 28.5pc and stay elevated at 21pc in FY24.

Fundamental expenditure reform needs to be a key ideological area of the budget. The reform must focus on reducing unnecessary expenditures on devolved subjects from the centre, moving away from state-guaranteed pensions, and improving the quality of the country’s development spending.

The spending pressures in the large areas are constant and compounding, especially on overblown mark-up costs, burgeoning subsidies, trillions in unfunded development projects, and increasing needs for defence. Spending is the direct driver of ongoing structural deficits, and needs desperate reform. With the increasing digitisation of government services, there is a real possibility of carefully reducing the size of the federal government.

Budget FY24 is a big test of engaging our supply-side growth drivers, funding national security priorities, incentivising women’s economic participation, targeting subsidies, especially in the energy and food sectors, and advancing to increased direct taxation. It is time to show restraint from large deficits. In sum, budget principles must reflect a direction on expenditure, subsidy and tax reform.

There has been little appetite to fix a tax system generating just 10.3pc of the GDP in revenues for over the past decade when just one area — next year’s markup alone — would consume over 6pc of GDP. Pakistan’s domestic revenue mobilisation strategy fails on many counts. It undermines economic growth, collects more than 70pc of revenue thro­u­­gh indirect taxation, and is unfair toward poor and middle-income earners and younger generations. Both the sales tax and income tax bases remain narrow, with multiple concessions contributing to low revenue efficiency. The present taxation framework stifles innovation by incentivising investment in unproductive areas and fails to efficiently raise revenue for the provision of effective government services.

The country has shied away from taxing real capital gains on property, retail and wholesale, and agricultural income. Yet, it provided nearly Rs1,482 billion in tax concessions and exemptions in FY22 — many of them to the affluent segments of society. It is time to recognise that the economy’s current mix of taxes is inefficient and unfair.

Sadly, federal budget-making has been marked by decades of missed opportunities and warped priorities. It needs course correction. Budget FY24 is an opportune time for the authorities to outline a highly credible medium-term fiscal strategy to return the budget to under 5pc of the fiscal deficit on a sustainable basis. The real conversation we need to have as a country is about repairing our budget and the correct choices we need to make on what’s affordable and fair.

The writer has served as advisor, Ministry of Finance, Government of Pakistan.

khaqanhnajeeb@gmail.com

@KhaqanNajeeb

Published in Dawn, May 11th, 2023

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