FEDERAL BUDGET 2007-08

Strategic Suggestions

PROF. DR. KHAWAJA AMJAD SAEED*
Email: kamjadsaeed@yahoo.com

June 04 - 10, 2007

The announcement of budget as the annual feature raises several expectations. The salaried class hopes for the increase in their emoluments to counter the rising inflation. Pensioners desire an increase to protect their financial basket. The business community looks forward to receiving various incentives and concessions. Exporters expect a package of incentives. Farmers have a great hope for receiving benefits. Civil society hopes that the gap between haves and have nots will be narrowed. The government also expects to accelerate effort for domestic resource mobilization. All told, all the stakeholders have great interest in the budget. The Federal Budget 2007-08 is expected to be announced in the second week of June 2007. Until then everybody is keeping the fingers crossed. Our misfortune is that we are still following the British Legacy of confidentiality rather than following the enlightened outlook of releasing major budget proposals at least three months before the announcement of the budget for a public debate and for developing consensus. The present Government has inclination towards this thought but the implementation has yet to see the light of the day.

CONSTITUENTS

The paper has been divided into following parts:

1) In Search of an Economic System
2) Meeting the Challenges of the 1973 Constitution
3) Some Financial Aspects
4) A Review of Federal Budget 2006-07 with outlook for 2007-08
5) Strategic Suggestions

The above aspects are now explained below:

IN SEARCH OF AN ECONOMIC SYSTEM

The world including Pakistan tried capitalistic system for a long time. Unfortunately, it failed. In a recent broadcast of Mr. Bush, the honourable President of United States of America, stated that capitalistic economic system has failed to deliver the goods as the gap between haves and have nots has not been narrowed, what to talk of elimination.

In sharp reaction to the failure of Capitalism, Communism and Socialism were introduced in several countries. However these could not even complete one century of their life. Later, on account of the failure of this system, Mixed Economy was introduced which also ended up in Mixed-up Economy. Now there is a talk of Free Economy the implementation of which has failed to deliver social justice. Sixty years have passed and Pakistan has no Economic System. We tried with capitalism, later experimented with socialism and now are struggling to try Free Economy System. It is high time that all stakeholders in Pakistan must-brain storm and develop an Islamic Economic System so that the guidelines provided by Quaid-e-Azam Muhammad Ali Jinnah, the father of the Nation, is followed to the advantage of everybody. While inaugurating the State Bank of Pakistan on July 01, 1948, he said:

"In achieving our goal of creating a happy and contented people, we must work our destiny in our own way and present to the world an economic system based on the true Islamic concept of equality of manhood and social justice".

For implementing the above guidelines, tenets of Islam as contained in Quran and Sunnah should be practically implemented in true spirit.

MEETING THE CHALLENGES OF 1973 CONSTITUTION

It is high time that the Parliamentarians and the Budget preparers may thoroughly read the 1973 Constitution of Pakistan for quick comprehension. The budget should be prepared to achieve objectives given at least in the following four Articles of the above Constitution. These are contained box 1.

BOX NO.1

SELECTED ARTICLES OF 1973 CONSTITUTION

ARTICLE

FOCUS

3

Elimination of Exploitation

8

Freedom of Trade, Business or Profession

37

Promotion of Social Justice and Eradication of Social Evils

38

Promotion of Social and Economic Well being of people

SOME FINANCIAL ASPECTS

There is an urgent need to publish balance sheet of Pakistan so that every stakeholder may stand fully educated about our assets and liabilities. Double entry book-keeping should be introduced immediately in our country in Government enterprises and Government offices. Separate budget for the public enterprises be prepared and got approved from the Parliament. Serious thoughts may be given to introduce Planning, Programming, and Budgeting System (PPBS). The role of professional accountants needs to be strengthened and the Government must benefit from their expertise. An inflexible rule of ensuring financial sovereignty of Pakistan may be followed. An accelerated effort be made for domestic resource mobilization. Internal controls should be strengthened to ensure proper collection of revenues, disbursement and utilization of resources. Once the budget is approved by the Parliament, no more announcements should be made subsequently. This will ensure good-bye to mini or maxi budgets.

A REVIEW OF FEDERAL BUDGET

A Master Chart relating to Federal Budget 2006-07 as announced on June 05, 2006 is given in Box 2:

Box No.2

MASTER CHART: FEDERAL BUDGET 2006 - 07

PARTICULARS NEEDED

RS. (B)

%

1. Current Expenditure

880

67

2. ADP: 2006-2007

435

33

 

1315

100

Available Current Revenue-Net

705

54

Shortfall

610

46

 

1315

100

Source: Computed From: Budget Documents for 2006-07, Issued by the Ministry of Finance, Government of Pakistan, Islamabad.

The above presents a crisp summary of current expenditure, ADP, available current revenues and consequential shortfall. The federal budget 2007-08 will possibly be in the following pattern:

Box No. 3

SUGGESTED FRAMEWORK: FEDERAL BUDGET 2007-08

PARTICULARS

RS. (BILLION)

Current expenditure

1180

ADP: 2007-08

500

 

1680

Current Revenues

1000

Forecasted Shortfall

680*

 

1680

The above expected shortfall needs to be met. The possible financial pattern of financing may be as under:

Box No. 4

FINANCING SHORTFALL: BUDGET 2007-08

Particulars

Rs. (Billion)

External Resources

260

Banking Borrowing

150

Self-Finance of Provinces

100

Privatization Proceeds

70

Changes in Provinces Cash Balance

60

Net Capital Receipts

40

 

680*

STRATEGIC SUGGESTIONS

Based on earlier analysis and our current thinking, the following twelve points strategic suggestions are offered for consideration of the Government of Pakistan:

1) An enlightened Fiscal Policy be developed to reduce the gap between haves and have nots, pave the way for wider prosperity, alleviate poverty, promote employment and increase productivity in agricultural, industrial and services sectors.

2) Year 2007-08 be declared as "Productivity Year". At all levels namely; private, public, multi-national and other levels, institutionalized arrangements be initiated to boost productivity.

3) Special attention should be given to increase the share of education in GDP to a minimum of 4% so that foundation for human resource development revolution is firmly laid.

4) Educational reforms may be introduced to ensure functional literacy at the Primary level, Middle Tech and Matric Tech at 8th and 10th class, quality skill education at Intermediate and Graduate level and innovation backed quality higher education for a breakthrough in science and technology, managerial and executive jobs and to produce social scientists.

5) The golden principle of public finance be followed to ensure that all persons, irrespective of their profession, who are above the prescribed minimum threshold are required to file income tax return and pay income tax. The current ratio of tax payers to total population is very low and this needs to be substantially increased to boost domestic resource mobilization.

6) As announced earlier, Federal Excise may be merged into Federal Sales Tax so that only two indirect taxes exist namely: Sales Tax and Customs Duties.

7) The cost of running the Federal Government which at present is 38% of the total current expenditure in the Federal Budget 2006-07 may be appropriately reduced on staggered basis to ensure that it is brought down to 25% over three years.

8) At present, the defence expenditure is ranked No. 3 (28%). Under UN Umbrella a twenty years suggested "No War Pact" between India and Pakistan, both the countries should work out reduction in the defence expenditure and the consequential saving representing fiscal space be diverted to development expenditure.

9) Solid steps be taken to ensure that there is no deficit in the revenue budget for 2007-08. Instead surplus should be generated which may be used for financing the Annual Development Plan 2007-08.

10) The Federal Government share in development expenditure in the ADP 2006-07 is 62%. It should be restricted to 35% over a period of three years. Consequently the saving may be diverted to provincial ADPs so that the federation is strengthened and financial frontier of the Provinces is strongly broadened.

11) As best as we can, reliance on external assistance should be substantially reduced. This may be possible, if efforts are made to accelerate domestic resource mobilization.

12) Four articles of the Constitution mentioned in Box No. 1 may be carefully studied and reflected in the forthcoming federal budget for 2007-08.