The budget for the next financial year must stimulate growth, repair the broken economy, mitigate the pain being felt by the poor and revive public trust in the government's capability to ferry the country through the present tough times. The budget speech delivered by State Minister Hina Rabbani Khar on Saturday evening pledges to address all these challenges as well as meet public expectations. The government has promised to boost the economy, create new jobs and protect existing ones, alleviate poverty, bring down price inflation, curtail unproductive expenditure, raise tax revenues and provide relief to the poor.
The outgoing fiscal 2008-09 has been painful for the people as price inflation soared, power and gas bills swelled, real incomes shrank, and healthcare and education expenditures rose. It has also been very difficult for the manufacturing sector industrial output dropped substantially, not least because of the domestic and global demand contraction, energy shortages, security concerns and expensive credit. Millions lost jobs and an even larger number is waiting to be fired unless the economic conditions improve soon.
The year has not been easy for the government, which took over at a time when foreign inflows were drying up, oil prices were shooting through the roof and the global economy receding into a decline not seen in 80 years. After initial inaction, the government had to work hard to stabilise the economy and improve the deteriorating balance-of-payments situation. While seeking to stabilise the economy, it had to face public ire for cutting energy and food subsidies and curtailing funds for development. It, however, should be commended for taking politically tough decisions on which the previous government under Gen Pervez Musharraf had dithered. Having stabilised the economy over the last two quarters, it is essential that the government now concentrates on growth.
Apparently, the budget for the next fiscal is headed in this direction. If rising unemployment and poverty are to be tackled on a sustainable basis, the country must grow, and fast. Several fiscal and tax incentives have been proposed for the rejuvenation of industry and agriculture, the two most vital sectors of the economy. Besides setting up a fund to boost exports, the budget contains proposals for a quicker revival of the construction, auto and elecommunication sectors.
These sectors are expected to lead the economic recovery during the next year, just as they did for several years in the period 2003-07. The public sector investment in the social and economic infrastructure — particularly in water and power, irrigation, roads, education and health — under the Public Sector Development Programme should also help kick-start economic growth. Thus it should not be a problem for the government to achieve the target of 3.3 per cent GDP growth.
But successful revitalisation of growth hinges on two variables foreign assistance and collection of targeted tax revenue. The government is expecting Rs138bn in foreign assistance and another Rs170bn from the Friends of Pakistan Group.
The tax revenue target of over Rs1.5tr may also be too ambitious even if the economy were to recover. Although the government has doubled capital value tax on real estate transactions and withholding tax on imports and pledged to extend the scope of tax on several services, it will find it difficult to meet the tax target, especially in the light of the dismal performance of collectors during the outgoing year. Some of the impact of the increase in existing taxes would be offset by tax incentives given to the car and telecom sectors.
It is unfortunate that the rulers have again failed to tax the rich agriculturists. Any shortfall in tax collection or foreign assistance targets could force the government to borrow more from domestic sources or cut development spending at the cost of economic recovery. Additionally, rising oil prices continue to pose a serious risk to efforts aimed at curbing inflation and bridging the current account deficit. But, as they say, we should begin the new year on a positive note.
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