FEDERAL BUDGET 2000-2001

 

An analysis and suggested Framework

By Prof. Dr. Khawaja Amjad Saeed
Jul 24 - 30, 2000

PRELUDE:

The above budget was presented on June 17, 2000 by the Federal Finance Minister. Discussions have been going on in Pakistan. While many have appreciated the budget, other have subjected this to criticism. Differing views continue to be expressed as part of the ongoing debate. This piece, however, looks at the following aspects:

A. Master chart presenting the amount needed, resources available and financing pattern.

B. Major Targets set for 2000-2001.

C. Tax Reform Strategy.

D. A review of current expenditure.

E. Suggestions.

The above aspects are now explained below:

A: MASTER CHART

Two categories of budgets are prepared in Pakistan. The first category is known as revenue budget in which annual revenue and annual current expenditure are presented. The other category is Annual Development Plan (ADP) in which development schemes are included. Budget Deficits continue to be hotly debated. The Government has projected a sum of Rs. 166 billion as budget deficit. However, according to a famous Pakistan Economist, the amount is Rs. 172 billion. Based on figures available, the following master chart (Table 1) has been prepared and this shows the amounts needed, amounts available and financing pattern:

B: MAJOR TARGETS

Projections relating to Federal Budget 2000-2001 can be achieved provided major economic targets for the above year could be accomplished. In this respect, the Government of Pakistan has announced major targets and are given on Table No. 2.

C: TAX REFORM STRATEGY

The present tax system in Pakistan is a subject of severe criticism. Assessees are screaming for a new tax system. Even the Government is struggling hard to devise new tax strategy. Society looks to all stakeholders to a new face of tax system. Lot of new strategies are being developing for reducing the number of taxes, rationalizing the tax system and streamlining the Central Board of Revenue.

However Table No. 3 summarizes the tax reform strategy of the Government of Pakistan announced by the Federal Finance Minister on June 17, 2000.

D: REVIEW OF CURRENT EXPENDITURE

Debt Servicing: Rs. 306 billion: The economy of Pakistan has been planned all along on debt financing. Domestic resource mobilization to meet current expenditure and development expenditure was never addressed in a serious manner. This initiative has rightly been taken by the present Government. With strong determination and full commitment, Tax Amnesty Scheme (TAS) was announced on March 15, 2000. By the grace of Allah, a sum of Rs. 100 billion was declared till June 30, 2000 by the people of Pakistan on which the Government of Pakistan qualifies to actually collect a sum of Rs. 10 billion as income tax. It is high time that TAS-2 should now be announced and its marketing be effectively undertaken to convert the underground/informal economy into a formal one. This should be given a serious attention. The new scheme may continue till September 2000 @ 12% tax of declared assets. Based on press reports, it is generally believed that only 1/10h of underground economy has surfaced as formal economy due to the above TAS scheme. Till now, the internal loan of Pakistan stands at Rs. 1.16 trillion and the reported figure of external loan is $ 38 billion ($32 billion long term loans and $6 billion financial obligations). The Federal Budget is prepared in such a manner that no amount is charged/appropriated for return of internal servicing except to the extent of profit/return payable to lenders from whom internal loans have been taken. However, debt service of foreign loan does include the amount for payment of installment and interest. Table No. 4 presents the breakup of Rs. 306 billion representing debt servicing.

The crying need is to develop a strategic plan to substantially reduce the above amount on staggered basis on a period of 3 to 5 years, failing which debt servicing will continue to be a burden with a heavy drain on the federal budget and consequently budget deficit will continue to be upswinging.

Planning on self reliant approach needs to be operationalised rather than given a lip service through sloganeering as has been consistently done in the past. Enough awareness exists in this respect. Now action plan is the crying need of the hour. The sooner this is done, the better.

Other expenditure: Rs. 138 billion: Comparative increase of above amount relevant to 1999-2000, can be understood if it is pointed out that a sum of Rs. 26 billion relating to pension of armed forces has not been included in Rs. 138 billion. Major break up of the above amount is given in Table No. 5.

A strategic plan on the following lines is urgently required to rationalize the above expenditure:

a) The Institute of Cost and Management Accountants of Pakistan be associated with expenditure reduction exercise. This can be given as a project. The Institute will set up a Task Force which will undertake the above exercise within three months and will present a report to reduce the above expenditure.

b) An analysis be carried out to explore the possibility of closing down the ministries at Federal level the business of which is substantially provincial under the 1973 Constitution of Pakistan, e.g. Education, Health, Sports, Labour, Youth Affairs — to name a few. For policy formulation, the Planning Commission may have lean set ups for the shedded ministries. The Government may take bold initiative in this respect like other bold initiatives undertaken by it relating to Tax Amnesty Scheme and Tax Survey for documentation of economy.

c) Activity Based Management (ABM) may be considered for implementation. This will require association of specialists in ABM to undertake the exercise. Cost and Management Accountants can also play a productive role in this respect.

d) The Government must target 100% computer literacy in bureaucracy by starting massive training programmes. Human Resource Development will be strengthened and IT revolution will enable fuller participation of the Government employees. Value for money will eventually spring up as a motivational slogan. The announcement of allocating Rs. 15 b for I.T. in the Federal Budget 2000-2001 is a welcome step.

Defence: Rs. 135 billion: Details / Composition of the above amount are not available in the Budget Documents. Historically the amount is considered to be confidential.

It is interesting to note that this amount is too small compared to Indian Defence expenditure. For 2000-2001, the Indian Budget includes an addition of Rs. 128 billion in the defence expenditure. However, by the Allah's grace and blessings, the Nuclear deterrence provide a strong shield to our defence. Moreover, the armed forces of Pakistan has a quality edge over the enemy.

E: SUGGESTIONS

Some suggestions are given below for consideration of the Government:

Budgeting system: While several budgeting systems exist in the world, Planning Programming Budgeting System (PPBS), managerial revolution of McNamara, is suggested for application in Pakistan.

Financial system: Double Entry Book-Keeping system should be operationalized. This was introduced in 1494 by Luca Pacioli, an Italian Mathematician. The nation wishes to see the balance sheet of the Country. Serious thought be given to implement this suggestion to enhance our credibility on financial front.

Good bye to secrecy: Every year the Federal Budget is released in tense atmosphere. The Government in power has fear of strikes, demonstrations, and other uncertainties. The business community is afraid of new taxes and implications which may unfavorably affect after the announcement of Fiscal, Monetary, Trade and other policies. Public at large and particularly people in low strata of income bracket have fear of losing their purchasing power. All in all fear phobia continues to dominate with growing uncertainties. We have been living with the above framework for the last over five decades. It is high time that we should switch to other system. We must say good-bye to secrecy style of budget announcements. This legacy must be replaced with an enlightened system of open door policy relating to budget making in Pakistan.

The following strategy is suggested for favourable consideration of the Government:

ADP: ADP may be released in the first week of April each year together with any comments/observations from the stakeholders. Debate may continue through seminars, print and electronic media and by the end of April of each year. By then consensus would have been achieved and ADP would then be ready for implementation w.e.f. July 01 of each year.

The provinces will also have a clear view of availability of funds from Federal Budget. Therefore, clarity will exist about the resources on which their respective ADPS can be developed by them. The autonomous bodies will have clear-cut idea regarding their programmes and committed resources. On-going and new schemes picture will be available. Besides, details would be available for special programmes as well. Thus participative approach will develop and this would be fruitful and productive from the view point of the Country.

Revenue Budget: In the first week of May every year, the revenue budget should be released with the following framework alongwith major decisions which the Government wishes to take in the following areas:

a) Taxation

b) Non-Tax Revenue

c) Economic Policies covering all the three sectors of the economy namely, agriculture, industry and services sector.

d) Major policy decisions affecting stakeholders.

The above may be announced for public debate and discussion for developing consensus. By the end of May every year, the nation would have been involved and subsequently budget approval can go through a smooth process.

Domestic resource mobilization: Domestic Resource mobilization may be initiated as the niche for resource generation. Some very good steps have been taken in this direction. Now we must consolidate the gains and accelerate our efforts to achieve such heights as will enable us to wipe out the budget deficits and operationalize self-reliance in our beloved Country. This approach must always be pursued on war footing for staying economically sovereign.

Conclusion

It is high time that synergy be unleashed to accomplish the goal of economic sovereignty, self-reliance, prosperity on wide spread basis and ensuring an accelerated socio-economic strategy to uplift the image of Pakistan and enable it to play a productive role in the 21st Century.

MASTER CHART

Particulars

Billion Rs

%

NEEDED

1. Current Expenditure

578

83

2. ADP: 2000-2001

120

17

 

698

100

AVAILABLE

Current Revenue - Net

412

59

SHORTFALL

286*

41

.

698

100

FINANCING PATTERN

1. External Resources

179

63

2. Net Capital Receipts

78

27

3. Self Financing of PSDP
by Provinces

31

11

4. Credit from Banking Sector

288
(2)

101
(1)

 

286*

100

Source: Extracted from Budget Documents for 2000- 2001, issued by the Ministry of Finance, Government of Pakistan, Islamabad, June 17, 2000.

 

 


 

Particulars

Target

1. GDP (%)

5.0

2. Agriculture (ma)

3.9

3. Manufacturing (%)

5.9

4. Services (%)

5.2

5. Inflation (CPI) (%)

4.5

6. Investment (Rs. b)

546

7. Exports ($ b)

10

8. Current Account Deficit ($b)

1.26

 


 

TAX REFORM STRATEGY

Area

Strategy

1. Number of Taxes at Federal & Provincial Levels

Reduction

2. Tax Rates & Penalties

Reduction

3. Assessment & Collection Procedures

Simplify

4. Labour Levies

Reforms

5. Dispute Resolution

Efficiency

6. Tax Base

Broaden

7. Tax Administration

Honesty & Efficiency

 


 

DEBT SERVICING

Particulars

Billion Rs.

%

A: Debt Servicing

   

Domestic Debt

176

58

B: Foreign Debt

   

Servicing

55

18

Loan Repayment

75

24

  130

42

  306

100

 


 

OTHER EXPENDITURE

Particulars

Billion Rs.

%

1. Running of the Civil Government

80

59

2. Grants

44

32

3. Subsidies

12

8

4. Unallocable

2

1

 

138

100

* Chairman, Seminars & Conferences Committee,ICMAP
Dean: Executive Programs, Punjab College of Business Administration, Lahore.