ONE of the most scrutinised and commented upon items in the budget is the allocation for defence spending. Depending on the ideological leanings of those doing the commentary, the number is either ‘too high’ or ‘too low’.

The more dominant narrative, however, has been that the budgetary allocations for the defence sector leave little fiscal or policy space for civilian governments by ‘crowding out’ much-needed spending on the social sectors. It is an important issue that needs an unbiased examination.

While the budgetary allocations for ‘defence’ have been made far more transparent in the past few years than ever before, with an unprecedented break-up between personnel-related expenses and operating expenses etc. — which is not available in the case of many countries, including regional ones — the complete allocation still remains shrouded in mystery.

This is so because, not unlike the global ‘best practice’, defence spending is spread over a number of different heads in the budget — with parliament and the media usually focusing on the largest item, ‘defence affairs and services’.

The other expenditure heads contain relatively smaller, but not insignificant, amounts and include, for example, allocations for payment of ‘legacy expenditures’ incurred for upgradation of conventional capability, or to finance military operations in the northwest, or a non-civilian component of the public-sector development programme (PSDP). Another example of an item related to the defence budget but subsumed under a different head is ‘debt servicing’ of military loans (amounting to Rs4bn in 2010-11).

All told, I estimate this year’s budgetary allocation for the defence sector to be around Rs800bn, or approximately 28 per cent of the total budgeted expenditure. This figure includes military pensions, but excludes other security-related spending that falls under ‘civilian armed forces’ (such as Rangers and the police). It is important to emphasise that this is an approximation since I have used a past estimate of the non-civilian component of the PSDP. On its own, the non-civilian component of the PSDP is not a very large item, accounting for under 10 per cent of the total allocation, with projects in the nature of construction of barracks, or building schools in cantonments etc.

An important caveat is that the figure arrived at is the gross allocation for defence-related spending. For the past several years, sizeable inflows have occurred under ‘defence receipts’ (mostly relating to inflows under the Coalition Support Fund), which have provided an important offset to the recourse to budgetary resources by the armed forces. These payments are provided as reimbursements for expenditures already incurred by the armed forces for deployment and operations in the northwest.

Hence, on a net basis, after netting off gross expenditure with receipts, the total estimated allocation for the defence sector in the 2012-13 budget amounts to Rs679bn. This is equivalent to 21 per cent of the total budget outlay, or 2.9 per cent of projected GDP. Most discussion of defence spending is restricted to the issue of the size of the expenditure outlay. An important question that needs to be examined in any balanced discussion is: what are the implications for the wider economy (the externalities) of expenditure of this quantum.

While I have not done such an analysis, one can list the possible areas of spill over. These would include direct and indirect stable employment for a significantly large pool of people and its associated spending effects (with the value of this factor increasing in times of severe economic uncertainty), income support to over a million families via pensions and the multiplier effect of substantial spending on civil works and other infrastructure, especially in remote areas where much of this activity occurs.

On the flip side, if defence expenditure is displacing resources from spending on development, the trade-off for society needs to be worked out. A critical factor in any such exercise is determination of the ‘optimum’ level of defence spending for a country facing multiple security as well as developmental challenges. This is where broader issues related to defence spending come in, beyond the size of the defence budget.

These broader issues relate to transparency of spending by the defence sector, its accountability, and civil-military shared oversight. A related — and thorny — issue is determination of the ‘threat perception’ that generates the armed forces procurement plans. Currently, these areas are the sole prerogative of the security establishment in Pakistan. On all these issues, far more progress has to be made to optimise the defence sector budget, and to reduce the significant waste and corruption that occurs in the procurement process — from purchase of ordinary everyday supplies, to land for real-estate development, to the procurement of expensive weapons systems and platforms.

The submission of the defence budget with greater details to the parliamentary standing committees, and a threadbare in camera discussion, will be an important starting point. Equally important, two other steps need to be taken: (1) the application of PPRA (public-sector procurement) rules on any substantive procurement by the defence sector; and (2) the extension of the jurisdiction of the auditor general of Pakistan to entities such as the Frontier Works Organisation and National Logistics Cell, for starters.

Finally, another issue involving the armed forces relates to economic governance. There are at least two areas of the economy where the military has direct stakes and can play a more positive role: ensuring that real estate is brought more effectively into the tax net (something it has resisted in the past on account of being one of the larger developers in the country), and ensuring that smuggling across the border with Afghanistan, where personnel of the armed forces are deployed and which has damaged the economy very substantially, is drastically contained.

In conclusion, the defence budget is not as large as it is purported to be, in net terms. In addition, it has certain important externalities (positive spill-overs) into the wider economy. Nonetheless, it suffers from a lack of parliamentary debate, transparency, accountability and civilian oversight.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.