THE BUDGET: ANOTHER VIEW
June 28 - July 04,1999
Fiscal policy in developing are designed to increase economic growth, to reduce inflation and budget deficit. The international comparison of performance of macroeconomic variables shows that the performance of Pakistan's fiscal policy was very satisfactory over the last thirty years regarding economic growth and maintaining low price level. However, the Pakistan's fiscal policy conspicuously failed to keep the level of budget deficit at unalarming level. Like most developing countries, in Pakistan the presence of huge budget deficit have created strong pressures (conditionalities) from the international lending agencies for wide range of tax reforms. In last three years the government was trying to pursue the policies of IMF and in doing so the trade off between high growth and low budget deficit has been achieved i.e the overall budget deficit has reduced but at the same time the GDP growth has also reduced. It is time to reexamine the IMF policies and make necessary changes to mould these policies in the interest of the nation.
This budget is a continuation of last four or five year`s budgets. It can be evaluated from three different angles. First, on philosophical ground that is the policies adopted in these budgets are justified on national interest, second on consistency ground that is whether all relevant policies are consistent or there is contradictions prevailed in these policies, and third whether the targets of this year budget can be achieved or not.
On philosophical ground this budget is also continuation of last few year`s policies of reduction in tariff and increase in domestic taxes. Also these policies advocates that the budget deficit should be reduced through the reduction in the expenditures and in the case of Pakistan where the more than 80 percent of non development expenditures are non discretionary most of the time axe falls on the development expenditures. This philosophical combination of reduction in tariff rates, increase in domestic taxes, and decrease in development expenditures is not at all desirable combination as it decrease the competitiveness of the domestic producers compare to the importers and therefore damage the domestic industries.
In this regard this budget is as harmful as the last four budgets.
The second issue is the presence of inconsistencies in government policies and the targets. A thourgh look on the budget also shows that this budget is full of contradictions and inconsistencies among the government policies, and the third issue is corollary to this issue whether in the presence of these contradictions next year's targets can be ascertained.
For example the government has set target of GDP growth 5 percent. Last year the attained growth rate was only 3.1 percent against the target of 6 percent. This GDP target based on the growth rates of manufacturing and agriculture sectors.
In this regard the growth target for the manufacturing sector is set 5.8%, in last year government could achieved only 4.7% against the target of 7.2%. For agricultural sector last year only .35% growth has been achieved against the target of 5.4% but this year again 4.3% growth target is set. Next year again these targets are very difficult to achieve because of the following reasons:
- Government has reduced the import duties on all goods upto 35 percent. This will reduce the cost of imports.
- At the same time Sales tax and Excise duties has increased, which increase the cost of domestic production.
- Due to continuous depreciation and devaluation the domestic producer is already in disadvantage.
- Government administrative policies continuously failed to produce congenial law and order conditions for the domestic producers.
- Agriculture growth in Pakistan mostly depend upon Providence and Nature.
Therefore, nothing much can be done through the Budget in this regard.
Therefore, it can be concluded that GDP target are over ambitious and difficult to attain. This conclusion can be substantiated from the trend of two very important determinants of GDP growth i.e. investment and saving.
1998-99 1998-99 1999-2000
B R B
(As Percentage of GDP)
In 1998-99 the investment level has also declined from 18.7 % of GDP to 12.5 percent of GDP. For 1999-2000 the government is also trying to increase the
investment atleast to 14.5 of GDP by decreasing the interest rate. This is consistent policy but may have decision and implementation lags upto two years however, meanwhile the introduction of lottery systems by the commercial banks may create liquidity problems for investment.
Similarly government is trying to increases saving rates to 14.5 percent from 12 percent. This is also difficult to achieve because of following reasons:
- This years the government has reduced interest rates on saving which will discourage saving.
- Removal of tax concessions on different saving schemes in last three years have already exerting their influence.
Once we are convinced that due to low investment and saving rates and contradictory policies these targets are ambitious and very difficult to attain then other targets will automatically fall short. For example if the growth rates of GDP can not be ascertained then the tax targets for Sales tax and Excise duties are also not attainable. If the CBR tax targets are not achieved then the total revenue target will also not achieved. Similarly the exports target was set at 18 percent despite a poor performance of last year. If the target of GDP and agriculture sector can not achieved then export target will also not achieved, this situation will be aggravated if the world recession also persist next year.
This budget also show inconsistent with the already announced policies of decentralization, devolution, and delegation of power at lower level of governments. One of most important and for reaching step taken in this budget is the abolishment of major local taxes like Octroi and Zila tax. This will have serious effects. First, This will increase the dependence of local government on federal government. Second, this may have more serious adverse impacts in those local government where the wining party will not be same as the winning party in the Centre. Third, If the flow of funds from federal to local government is not smooth and this is very much expected then it will create problems in the provision of services at local level.
In this regard in the allocation of funds from federal to local government new issues will emerge. For example, how government will allocate resources among the local government i.e. based on population, or based on collection or based on poverty and poor provision of services. This abolishment has increased the need for "Extended National Finance Commission Award (ENFC)" for which there is a need of constitutional amendment to recognize the existence of local governments. Given the poor performance of National Finance Commission award it appears that the smooth functioning of Extended NFC award will be more difficult.
This Budget is also inconsistent with the Prime Minister famous slogan "Qarz Autaru, Mulk Sanwarau". This budget has increased the reliance on foreign debt upto the extent of 185 billion which is 43 percent of total revenue receipt. Due to this the debt Servicing estimated at 287.9 billion equal to 68 percent of net federal revenues and 46 percent of total outlay. Debt servicing, defence, and civil administration which constitute almost 80% of total outlay left very few for the development expenditures which will reduce the provision of infrastructure and will be additional hindrance on GDP growth target.
The Budget is successful in maintaining low inflation rate. In Pakistan 60 percent inflation is imported inflation and 40 percent inflation is domestic. Last year recession in world market and negative growth in borrowing from banking system (-32 billion) were main reasons for low inflation in Pakistan. Despite the increase in cost push inflation (sales tax and excise duties) the overall trend is still negative but this is very vulnerable because once the world recession is over or the price of petroleum goes up in international market then inflation will increase unleashed in Pakistan.