THIS year’s budget makes one feel that the mandarins in the ministry of finance are in denial of the reality that Pakistan is facing a serious economic crisis and the risk of stagflation in the coming year, with the oil price threatening to break $150-a-barrel level.

It would be somewhat unfair to lay the blame entirely on the PPP government that not only inherited an economic mess but was also ditched by its coalition partner half-way through the budget making process.

However, these reasons or excuses, depending on one’s views, are irrelevant to the people. This year’s budget does not do much to provide any immediate relief to the people hurt by a record 19 per cent inflation and provides little hope that the government feels strong or confident enough to make tough decisions to either expand the tax net or slash wasteful government spending.

It is based on rather optimistic assumptions about the future economic performance of a country that has the second or third highest inflation rate in the developing world and one of the worst levels of budget and current account deficits. To say that the situation obtaining is the consequence of just one bad year would be an oversimplification of the problems and a serious underestimation of the challenges ahead.

The budget does contain many well meaning steps and incentives for agriculture, industry, and relief for the extremely poor that are in the right direction. But as a whole, it falls short of a bold response that is needed to face what may turn out to be the most difficult year for Pakistan’s economy in decades. The GDP growth target of 5.5 per cent is ambitious at best and wishful thinking at worst, when viewed in the backdrop of a tight monetary policy, outlook for high oil prices, three per cent drop in the production of major crops this year, and a struggling textile sector. If the GDP growth and other estimates turn out to be optimistic, as last year’s were, the whole budget exercise may prove to be an academic one.

The tax revenues are projected to increase by a one-fourth compared to an average growth of 18 per cent during the past two years when the economy was growing at a rate of 6-7 per cent. The finance minister announced amnesty on all undeclared assets if the taxpayers would pay two per cent on their market values. But this has been tried before and did not work.

Afraid of antagonising powerful vested interests by bringing them into the tax net, the budget plans to raise 56 per cent of the additional tax revenue from indirect taxes and has raised the general sales tax by a percentage point to 16 per cent when about nearly 80 per cent of the tax burden is already faced by common people.

Hence, the sales tax revenues are budgeted to contribute Rs110 billion or 45 per cent of the planned increase in the total tax revenues. The decision to raise import duties on luxury goods is a welcome step and is projected to contribute to a net increase of Rs32 billion in revenues.

It can be argued that it would have been unfair to expect this PPP government to come up with bold measures such as major cuts in establishment and defence expenditures in the current political environment. So it did what it thought was a pragmatic thing to do: control the fiscal deficit and money printing spree of the previous government.

It has cut subsidies by Rs112 billion to Rs295 billion which would still amount to about 20 per cent of the current expenditure, almost equal to the defence spending. This means that the consumers should get ready to pay even higher prices for petrol, electricity and wheat.

The budget makes a small gesture for the extremely poor --- the PPP’s traditional constituency --- by starting a Rs-34-billion income support programme, but this would amount to a monthly sum of about Rs170 per person. This together with the allocation of Rs28.4 billion for the People’s Works Programme is a considerable sum but runs the risk of a political backlash if implemented poorly.

Aside from the implementation issues, it is questionable if this is an intelligent use of resources for a government that has limited policy options. This money would have been better spent on providing additional subsidy on diesel oil. The contribution of rising fuel prices to the overall inflation cannot be ignored as the country is heavily dependent on the trucks that use diesel to carry goods including agricultural products.

If the government is expecting large aid flows from foreign governments or donors, the budget documents do not reveal this but this may be the most important aspect of the current economic situation that is not mentioned in the budget. Is the government expecting to be bailed out by the United States, Saudi Arabia, and others?

Even if it succeeds in getting some aid, it may not be enough and borrowing more is hardly a way out of an economic crunch. Belt tightening is, but Pakistan’s establishment does not seem to be ready or willing to do that.

Opinion

Editorial

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