FeaturedNationalVOLUME 19 ISSUE # 28

Budget: filling the gap between revenue and expenditure

The biggest problem of Pakistan’s economy is the increasing gap between revenue and expenditure towards which the IMF has repeatedly drawn attention. Government expenditure has two parts: non-development (or current) expenditure and development expenditure. In this context, the Fund has asked the government to achieve primary surplus. But the question is how to do it?

It is no secret that both current and development budgets suffer from high levels of inefficiency and corruption. Current expenditure can be curtailed substantially if the lavish perks and privileges allowed to the higher bureaucracy are withdrawn. Another need is to cut the size of the administration which is excessively bloated. Loss-making state enterprises provide another example of how billions of rupees are wasted annually which is a big burden on the national economy. Over the years we have talked about privatizing these industries but little action has been taken to the desired end. Among IMF’s many conditions an important one is the privatization of PSEs. But few governments have tackled the matter seriously.

The fiscal deficit needs to be controlled to ensure macroeconomic stability. This objective can be achieved by adopting austerity measures which will impact aggregate demand. Inflation also needs to be controlled to reduce the burden of interest payments. Steps are also required to resist pressure from cost-push and imported inflation.

According to experts, inflation in developing countries requires both supply-side impetus and aggregate demand squeeze policies. However, care has to be taken to ensure that austerity policies do not hurt economic growth, which in turn affects revenue collection. It may be added here that the recent policies of import restrictions badly impacted domestic production as well as exports, with negative consequences for employment and foreign exchange reserves.

There are two views regarding the allocation and use of development expenditure. The traditional view is that development expenditure should not be cut as this will decrease economic resilience and suppress aggregate supply which makes for positive consequences for inflation. Another argument is that development expenditure also increases domestic production, supports exports, generates employment and helps overall economic growth, which, in turn, means rising levels of revenues for the government.

But the non-conventional view is that in developing countries like Pakistan development expenditure should be curtailed and tightly controlled because much of it is wasted and pilfered by a corrupt bureaucracy and a rapacious political elite which siphons off huge funds in the name of local development projects. The size of wastage of developments is estimated at about 50 percent in most Asian and African countries. In weak and controlled democracies with extensive pockets of mafia rule in various sectors of the economy the incidence of pilferage of development expenditure is much higher. As such the fruits of so-called development do not reach the common man who is heavily taxed in the name of national interest and development budgeting.

A viable solution to this dilemma lies in decentralizing development expenditure and adopting a bottom-up approach rather than the top-down one as is the practice now. To this end local bodies at the municipal level should be strengthened so that they not only recommend and formulate projects and have funds to spend on them. Needless to say, if the local authorities rather than the babus sitting in their ivory towers oversee how efficiently funds are utilised and projects are implemented, much better results can be expected. At the same time improving the effectiveness of development expenditure requires that available funds be shifted away from unproductive activities to more productive ones

As for current expenditure, it should be cut to the maximum. The idea is to drastically reduce interest payments through appropriate policy measures. Also important is to enhance the tax base and increase expenditure efficiency. Our tax net is very narrow which puts too much stress on revenue collection. For example, agriculture contributes about 25 percent to GDP but its share in taxes is only 3-4 percent. Big landholdings also affect productive efficiency of agriculture. Similarly, the retail and wholesale sector is also mostly beyond the tax radar.

Another key to reducing fiscal deficit and debt burden lies in framing a new package of incentives for export expansion which alone can put more dollars in the government’s coffers and thus help build up forex reserves. FDIs is another well tried route to economic freedom from the stranglehold of IMF conditionalities. It is a shame that much smaller economies than ours like Vietnam, Thailand and Bangladesh have gone far ahead of us in the export race. They lured huge foreign investments through tax breaks and special concessions and now their economies are booming. It is not too late for Pakistan to correct past mistakes and chart a new economic future for itself.