THE cash-strapped government’s plans to boost its annual development spending by as much as 31pc in the next financial year is meant to create good optics ahead of elections. It was expected, considering the enormous pressure the government finds itself under, owing to an economic slowdown and high inflation. In fact, some ministers had recently hinted at taking steps to provide ‘relief’ to the public through an expansionary budget. However, success of the coalition government’s strategy to spend its way out of the economic slump to increase the growth rate to 3.5pc from the current year’s 0.3pc is uncertain at the moment. This is not the first time that a government is trying to increase growth to please voters by boosting development spending — and hitting the wall a few months later. But the space for the current rulers is even more limited, with its inability to manage the economy because of the cash crunch and uncertainties related to the IMF programme and external account. Yet driven by its need to appease disillusioned and angry voters, it is setting a rather unrealistic development spending target in the budget that would have to be revised down later in the year due to potential fiscal constraints.

Given our tight financial situation and successive governments’ inability to raise the tax-to-GDP ratio of less than 10pc, one of the lowest in the world, any excessive spending or the pursuit of a loose fiscal policy is ill advised without implementing substantial tax collection measures. So far, the government has given no indication of its intentions to broaden the tax base to increase revenues, except the imposition of wealth tax on agricultural and other assets. Other tax measures so far proposed by the Tola committee will only burden corporate taxpayers. With the tax revenue collection target for the next fiscal year likely to be set at Rs9-9.2tr or equal to 8.6pc of GDP, few expect the government to be able to achieve it amid the unprecedented economic slowdown. Indeed, the coalition partners, especially the PML-N, have lost a lot of political capital over the last one year and their leadership must be feeling a compulsion to foster productivity and put some money into the pockets of lower-middle-income voters to woo them back. But it would be disastrous if it is done at the cost of fiscal discipline.

Published in Dawn, June 5th, 2023