NationalVOLUME 16 ISSUE # 13

The rising debt and fiscal deficit

Every year the government prepares a fiscal policy statement for the parliament which reflects the overall health of the economy. In the fiscal policy statement for 2020-21, recently submitted by the Ministry of Finance to the National Assembly, it has been disclosed that the per capita debt jumped to Rs175,000 at the end of the last fiscal year, denoting an additional burden of Rs54,901 or 46pc on every citizen within two years.

Earlier, the Debt Policy Office had presented a detailed draft of the policy to the Finance Ministry which compressed it and prepared a short summary for the federal legislature. Significantly, the 11-page document does not contain many vital pieces of information necessary to understand the real debt situation and the trajectory of the economy.

Despite claims to the contrary, during the PTI government’s tenure, the per capita debt has been increasing from year to year. The total public debt was recorded at Rs36.4 trillion at the end of June 2020, while per person debt burden increased by Rs21,311 or 14pc in the last year. It may be added here that in June 2018, the total public debt was Rs24.9 trillion and the Ministry of Finance at that time worked out the per capita debt at Rs120,099.

In the PTI government’s first year, the per capita debt increased by 28pc or Rs33,590 and in the second year it rose by another 14pc. But the government has blamed the previous PML-N and PPP governments for the debt burden that it added in the past two years. “The government paid Rs2.6 trillion against interest payments on the debt mostly obtained by the previous regimes,” according to the statement.

In the second last fiscal policy statement, the Ministry of Finance had made full disclosure of the breach of the Fiscal Responsibility and Debt Limitation Act by mentioning clauses related to reduction in the total public debt-to-GDP ratio, the annual limit set to reduce the debt and the status of new guarantees. All these clauses have been missing in the latest report of the ministry.

Along with an increase in debt, expenditures have also been rising. The statement showed that total expenditures by the federal and provincial governments increased to 23.1pc of GDP – up 1.5pc of GDP. The government failed to abide by the Fiscal Responsibility and Debt Limitation (FRDL) Act of 2005, which lays down that the federal fiscal deficit should be limited to 4pc of the size of the national economy. As it is, the federal deficit stood at 8.6pc of GDP – more than double the limit set by the law.

According to the fiscal policy statement, the current expenditures of all the five governments remained at a 28-year high level in the last fiscal year 2019-20. Compared to it, development spending was the lowest in 10 years in terms of the total size of the economy. The Finance Ministry informed the House that development expenditures slipped to the lowest level in 10 years at 2.1pc of GDP. For the purpose of comparison, in the fiscal year 2010-11, the development expenditures were equal to 2.8pc of GDP. At the same time, total expenditures in terms of the size of the economy were at the highest level in 21 years – at 23.1pc of GDP.

On the revenue front, the total revenues increased to 15pc of GDP. The tax revenues stood at 11.4pc -slightly lower than the previous fiscal year. The non-tax revenues increased to 3.6pc of the total size of the national economy – the highest level in the past six years.

Another interesting piece of information in the fiscal policy statement is that the federal and provincial governments cumulatively collected Rs1.1 trillion in taxes, which is 15% less compared to the targets. At the same time, their expenditures too were Rs854 billion or 8pc lower than the budgeted figures. On its part, the federal government collected Rs936 billion less revenue as compared to the target and its expenditures were also Rs80 billion less than the amount approved by the parliament.

In the fiscal year 2019-20, the government had set the FBR’s revenue collection target at Rs5.5 trillion but the actual collection was less than Rs4 trillion. The reason for it, as cited in the policy statement, is that the collection fell because of the coronavirus pandemic which crippled Pakistan’s economy. This is understandable as the pandemic and the subsequent lockdown brought all economic activities to a standstill for several months.

It is an indication of the deteriorating economic situation that the total development spending by the five governments slipped to the lowest level in over a decade to a mere 2.8pc of GDP. Federal development spending was only 1.3pc of GDP. According to economic analysts, the PTI government is following a policy of withholding vital facts and figures related to financial management which in earlier years were routinely placed before the National Assembly. But this is no more so.