The federal budget 2007-08 is to be presented on the eve of the elections and in the background of the judicial crisis and the Karachi incident. But the budget will mirror the present official strategy on investment, social growth and infrastructure development. .

Higher defence spending and profligacy will dominate the current expenditure, instead of the gains from buoyant revenue receipts being complemented by moderation in the total expenditure, particularly the non-development spending.

A deceleration in the rate of growth in major components of current expenditure, i.e. debt servicing and general administrative expenditure complemented the effort on revenue side. But in 2005-06, the current expenditure has surpassed the target by Rs92.3 billion and the total spending exceeded the target by Rs134 billion. A large sum of money was spent on unproductive sectors. The current phase of high growth has provided the government an opportunity that should have been used to improve the fiscal health of the economy. It should be the government’s imperative to undertake major tax reforms to improve the tax-to-GDP ratio, expand the taxpayer base, increase tax compliance and make tax administration more efficient.

It is only possible if the government moves to a tax system that is widely based on moderate tax rates. Despite the recent reforms, the tax effort remains modest owing to structural snags.

The administrative reforms envisaged by the CBR, especially moving toward a functional organisational structure, have not yet helped to enhance tax efficiency, as well as improving the tax climate and governance. The unfair distribution of tax burden has created an environment of safe heaven for tax evaders. Only a policy to expand taxation gradually into the agricultural and service sectors would bring greater yields, as would efforts to reduce tax evasion. The improvement in the tax resources come from a buoyant economy, broadening of the tax base, including expansion of the tax net to uncovered sectors, phased rationalisation of exemptions, plugging of loopholes and improvements in tax administration. The mix of such policy measures would need to be continued to sustain the buoyancy in tax collections. These additional resources could fund higher outlays on expenditures, especially development outlay.

Unfortunately, last three federal budgets offered no notable change in policy direction to attain a high tax-to-GDP ratio. The last federal budget (2006-07) envisaged a target of growth in tax collection which is not more than the GDP nominal growth; it means stagnation of tax-to-GDP ratio. .

One of the major objectives of the Fiscal Responsibility and Debt Limitation Act 2005 is to bring about a qualitative change in the composition of total expenditure, by increased emphasis on development and social sector spending and on asset creation resulting in increase of productive capacity with possibility of commensurate returns on such investments. As long as the increase in the total expenditure emanates from rise in development expenditure, it is good for the economy.

However, the recent upsurge in the defence expenditure is not prudent because for the last three consecutive years, defence expenditure has outpaced target by fair margins. The defence expenditure can be rationalised without compromising on security concerns. The lifestyle of senior defence officers is creating a social distortion. .

The recent upsurge in the development expenditure is no doubt aimed at improving the shabby infrastructure. However, an effective analysis is needed through an efficient monitoring system. The dividend from these expenditures may not be direct in the short-term but are certain to impact the government revenue in the medium and long-term, if accompanied by proper effectiveness analysis. These expenditures play a crucial role in employment generation and poverty alleviation.

However, the government has failed to evolve a system of monitoring to assess effectiveness of value for money. The upcoming federal budget should provide guidelines or a system of monitoring of the efficacy of value of money being spent on social welfare. This is necessary to eliminate the waste from public expenditure.

One of the claims of the last budget was its focus on relief. Substantial amount was earmarked for subsidies being offered to Wapda, sugar industry, importers of pulses etc. The common man on the street has nothing to share in this subsidy. This subsidy could only improve the balance sheet of the fertiliser manufacturers, sugar industry, importers of edibles etc. The poor farmer is not focus of all these developments. The next budget should avoid wasteful subsidies. Transfer payments should only be used as incentive to gear economic activity or provide direct interventions for those who are living at subsistence level.

Public money need to be spent on creating incentives and skill development to enhance employability of the poor as stated in the federal budget 2004-05. But so far there is no reference to any programme of imparting skills to the youth. The National Internship Programme (NIP) is a step in the right direction but it is redundant with examples of mismanagement and lacks clear objectives. It could be streamlined in the next budget through proper management of the institution.

Pakistan is still one of the most under-taxed countries where important sectors are not contributing enough, for example, textile industry’s contribution to the national exchequer is negative; it means the government is paying tax revenue to the textile industry instead. Tax evasion is still widespread and the government seems handicapped on this count. The burden of income tax is mainly placed on the shoulders of the salaried class.

The key issue is: Why the government was not able to broaden the tax base and enhance the tax-to-GDP ratio by utilising four consecutive years of higher growth (growth averaged seven per cent in this period)? Why no stringent penalties were imposed on tax evaders? These issues need to be addressed in the next budget.