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A huge disconnect

June 03, 2011

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Prime Minister Syed Yusuf Raza Gilani and Federal Minister for Finance Dr. Abdul Hafeez Sheikh coming towards the Parliament for presenting budget 2011-12.-APP

Compared to his budget speech last year, the finance minister’s speech yesterday was empty and disappointing. It was devoid of much content or merit and failed to identify or address any of Pakistan’s numerous pressing problems.

It is difficult to say what more he would have added had he not faced much of the abuse hurled at the government, something which only a full reading of the text will reveal.

Based on what he presented just a day earlier in the form of Pakistan’s Economic Survey for the current financial year, the budget presented by the finance minister yesterday for the fiscal year 2011-12, confirms what many economists have been saying for some time.

There is a huge disconnect between the real problems which afflict Pakistan’s economy and its people, and the government’s response to them. It seems that this government does not have the ability, or perhaps even the desire, to address Pakistan’s key economic problems.

It certainly does not have a plan. What makes matters for worse is that this is the last-but-one budget before elections are held and the budget to be announced next June will have to be a populist election budget which tries to win votes rather than take difficult decisions.

Because of this, the budget presented yesterday was a major disappointment and fails to address Pakistan’s economic problems, and will only make matters worse.

The key problems which were identified in the Economic Survey included persistent and high inflation, persistent and low growth, low revenue collection leading to a high fiscal deficit which continues to add to the overall debt, and a dramatic fall in the investment rate. These are the core issues which affect Pakistan’s economy, and required a major and forthright attack, nothing short of this.

However, the government’s efforts have failed to deal with any of these issues. Blaming floods, the continuing war on terror, or the rise in global petrol prices or the global economic slowdown, does not allow for any excuses.

If anything, these significant constraints on the economy should have provided the impetus for major departures from the past.

The core problem facing Pakistan, which has a bearing on development, on debt and on defence expenditure, as well as on aid and donor dependence, is that of taxation and revenues. Without raising taxes, none of Pakistan’s economic problems can be resolved.

The finance minister in his speech admitted that only 1.5 million people have filed their tax returns this year, only half of those who are registered. By stating that 70,000 people have been given notices with 700,000 more expected, does not constitute a tax policy.

Moreover, by raising the taxable income level to Rs350,000 and saying that this will give relief to ‘lakhs’, i.e., they will no longer be in the tax net, is also at odds with what is required.

The ‘azm’ which he said his government has to expand the tax net, stands contradicted by announcements in the budget. This will also certainly not help achieve the overly optimistic budget deficit target of 4 per cent.

The ‘relief’ announced in the budget was mainly for government employees who will benefit through some measures related to their permissible benefits and, especially, due to the 15 per cent pay rise which builds on the 50 per cent increase in the last budget which, however, came in for particular criticism by most economists.

There have also been some other measures which offer some sectoral relief, such as to the cement sector affecting construction, and some lowering duties on soft drinks.

Since he was not able to read through the full text, one hopes that the measures he skipped were more substantive than these.

The announced development expenditure for 2011-12 has been increased from the announced Rs468 billion last year to Rs730 billion yesterday, or less than 4 per cent of GDP.

The truth behind these figures is that this year development expenditure, which has been cut throughout the year, will probably be one-third of what was announced, or about 1.5 per cent of GDP. One should expect the same the next year, and the rising trends in unemployment and poverty are unlikely to be reversed on account of government initiatives.

One should add in passing that Bangladesh which announced its budget a few days ago has allocated 7 per cent to development, and their economy is doing far better than Pakistan’s.

Moreover, with military and security-related expenditures nearing around Rs800 billion and debt servicing the same amount, we are back to the bad old days of the past, when there was very little left over for development.

The inflation rate of 14 per cent this year is unlikely to fall on account of the one per cent fall in the GST rate, especially since international food prices are expected to rise over the next year and oil prices continue to remain unstable, both important causes of domestic inflation.

The expectations that many of us had from the finance minister, that he would announce far-reaching and bold reforms which affect revenue generation, the deficit, military expenditure, as well as inflation, have not been met.

The huge disconnect which this government has demonstrated in terms of issues of security, ‘sovereignty’, the dominance of the civilian government over the military establishment, over foreign policy, and even in relation to the judiciary, have all been reconfirmed and re-emphasised with regard to economic issues as well.