THE most worrying aspect of the budget 2012-13 is on the expenditure side.
In his speech Finance Minister Abdul Hafeez Shaikh expressed some frustration that he had not succeeded, in spite of the promise made by him in the budget speech of May 2012, to lower the fiscal deficit to 4.1 per cent. It came out instead at 7.6 per cent.
This was because of slippages in both expenditures and revenue collection. The government had spent much more and raised far less than promised by way of taxes. Its subsidies had also increased in particular in the power sector. The failure to meet last year’s targets was attributed to the government’s inability to stick to the timetable for licensing the 3G telecommunication bands. These were expected to yield handsome financial rewards. Also, Islamabad received considerably less from the US managed Coalition Support Fund by way of compensation for the support it provided to Washington and its NATO allies in the war on terror in Afghanistan.
The finance minister said the government would attempt to reduce the amount of subsidies particularly those given to Wapda. The promise for austerity, however, was balanced by generosity. Government employees were to receive an increase of 20 per cent in their salaries and pensions.
Prime Minister Yousuf Raza Gilani, a few days ahead of the budget had announced that his first priority was not to impose any new taxes.
He didn’t say whether the administration would reform the tax collection system to bring the non-tax payer under the tax net who had forced the tax-to-GDP ratio down to just over nine eight, one of the lowest in the world.
The budget tinkered with the tax system but did not make any significant structural changes. This was in line with the prime minister’s pre-budget pronouncement.
According to the finance minister’s estimate his proposed measures will increase the tax-to-GDP ratio to 10.1 per cent. This is only a marginal improvement and would not leave government’s financial position much healthier than it is today when the present administration completes its tenure.
How will the economy revive if the fiscal deficit remains large — at an unsustainable level — is a question that was left unanswered in the budget.
The government’s second priority is to improve the energy situation which now is not only costing the economy but is resulting in enormous discomfort for the population. Those who attempted to estimate the damage to the economy have come to the conclusion that it is even more problematic than the rise in terrorist activities in the country. The government has had four years to deal with the situation but it has only worsened.
There is also agreement among experts in the energy area that the sector in Pakistan is poorly managed. Generation capacity, it is said, is not the real problem; managing the sector is the most important issue. However, very little attention has been paid by authorities to formulate a comprehensive strategy to deal with the worsening situation. The budget mostly ignored the subject.
It is the prime minister’s third priority that must cause a great deal of concern to those who worry about the country’s deteriorating economy. Mr Gilani said — and the budget reiterated — that his administration would create 100,000 jobs for the unemployed. A simple back-of-the envelop exercise suggests that some 5-6 million people must be looking for work.
Creating 100,000 jobs, therefore, touches only a small part of the problem equivalent to about 0.5 per cent of the unemployed. The government’s focus in an election year, therefore, will be on creating jobs in the public sector, in particular in the already-stressed government owned enterprises.
Loss-making enterprises in the public sector are ultimately helped by the government although their deficits don’t figure in the official numbers about government finance. Not able to raise resources through taxation, the government resorts to printing money. The amount printed will no doubt increase as election-related expenditures rise during the year resulting in high inflation. Pakistan has had double-digit inflation now for several years.
The real danger about persistent increases in prices — in particular the prices of goods of everyday use — is that it generates inflationary expectations. These bring about a fundamental change in economic behaviour which is highly damaging for the long-term performance of the economy.
The PPP-led government believes that it may have found a way of softening the impact of its ‘print, print, print’ money approach to economic management. Some of the printed money as well as some of the assistance received from international development agencies are going into the Benazir Income Support Fund.
The BISF is reasonably well managed and it appears that safeguards that have been built into it for identifying the families that receive regular grants to supplement incomes do reach the intended beneficiaries. In other words the programme is protected from the types of leakages that are common with such income support programmes.
That said, the problem was with the macro aspects of the programme — the source of its funding.
The cash-strapped government and the one in the words of the prime minister committed not to increasing taxes will once again resort to printing money. This will add to inflationary pressures.
The budget has not dealt with any of the serious issues faced by the economy. Its proposals will not quicken the rate of economic growth, make the country less dependent on official capital flows in order to pay for the large and growing trade deficit or improve the performance of the state enterprises that are a heavy drain on the budget nor provide jobs to the unemployed to reduce the high incidence of poverty.