KARACHI, Sept 20: Politics impacts on fiscal deficit as much as fundamentals of the economy or the stabilization programme.

And the variations in fiscal deficits become generally more marked in an election year and its verdict. A weak coalition government means larger budget deficits. A one political party rule that governs with a majority, fiscal management is more prudent and fiscal deficits turn out to be smaller.

Going by the global experience of developing countries, the fiscal deficit goes up by an average 2 per centage points in an election year, according to World Development Report 2002.

Besides, the coalition governments have much greater difficulty in managing fiscal deficits than single party governments. The World Bank study shows that on an average, fiscal deficits were 1.5 to 2 per centage points larger in countries where coalition governments were set up.

So, Pakistan’s anxiety to have a fiscal responsibility and debt limitation law is understandable. But what is the legacy, the military regime is handing over to the elected representatives?

In a country, where people bend laws to suit individual interests, it is the commitment and not law that counts so much. The fiscal deficit last year was 6.6 per cent against the IMF mandated target of 4.9 per cent. The trend for the current fiscal year seems to be no better. The Asian Development Bank says that budget deficit target of 4.4 per cent for 2002-2003 “seems to be very ambitious and will be difficult to achieve.”

In an election year, Pakistan cannot remain an exception to the general global experience. An indication of what is to come was given in the presidential referendum. An IMF comment on the temporary lowering of petroleum taxes and delays in automatic fuel cost adjustment of electricity tariffs during early April/May will be pertinent here to quote. Expressing “disappointment” over these decisions, an IMF report cautions “that these decisions may have re-politicized the credibility of the commitment to let market forces operate freely.”

Similarly in August, the GST on medicine was withdrawn, resulting in revenue loss of Rs2.5 billion. Earlier, the government had got reduced the proposed Wapda tariff allowed by Nepra by 19 paisa to 20 paisa per unit. The Rs4.1billion revenue loss to Wapda will be borne by the national exchequer.

Though these concessions may be justified to provide much needed relief to the common man, these are deviations from the mandated stabilization programme.

Budget deficits, say economists, represent the difference between politically popular expenditure programmes and politically unpopular taxation. No doubt, the military government has raised tax revenue by Rs100 billion during its three year tenure. Yet the re-launch of the tax broadbasing exercise has been effectively stalled since early 2001.

A growing fiscal deficit also appears to be inevitable in the emerging political scenario. With the official efforts to contain the two major political parties, the alternative appears to be a coalition government, which would need to keep afloat through bigger development and non-development spending and tax concessions.

With its own record of unsustainable fiscal deficits, the trend can be further strengthened if the major political parties form a strong opposition in the parliament. If the president and the parliament take a collision course, all the macro-economic indicators would take a nose-dive.

In the emerging political scenario, the need for a law that would limit government borrowing and guarantees by government and official agencies cannot be denied. The draft law, awaiting government approval, aims at phasing out the deficit on revenue or current budget. The overall public debt is targeted at 60 per cent of the GDP within a period of ten years, to be capped at the same level in the future.

If the government sticks to its pledge to stop borrowing from the IMF after the expiry of the current PRGF, it should work out it’s own mandatory deficit targets. Now, fiscal deficits are supposed to be governed by IMF’s mandate that are linked to the Fund’s financial assistance.

Finally, there is global movement towards containing fiscal, current account deficits and inflation rate. The US has a law that limits fiscal deficits. EU has set targets for member countries for fiscal deficits and for new entrants. Fiscal stability is now becoming a cornerstone of all well managed economies.

However, there are many a slips between the cup and the lips. For example, not all members of EU are able to stick to fiscal targets, made more difficult by the economic slump in industrial economies.

In March, Portugal indicated a 2001 deficit of only 2.2 per cent. Eurostat, the EU’s statistical agency, did not accept the figure. A fresh audit unveiled 4.1 per cent. In July, Eurostat rejected Italy’s stipulations. And the figure was revised from 1.6 per cent to 2.2 per cent. Germany has a forecast of deficit of 2.8 per cent for 2002 but tax revenues are below predicted levels.

Whatever the slippages or fudging, the issue is put on centre stage in fiscal management if related laws enacted.

In Pakistan’s case, the debt burden has to be made sustainable by containing the fiscal deficits. The global official and private capital flows are drying up. The tax revenues are unlikely to jump up. Political pressures for increasing development and non-development would mount with a representative government in power. But what is required is a strong commitment to the path charted out in the law.