Jun 162008

The government should be given credit for announcing the budget in a timely manner, and for at least attempting to manage the food crisis, unprecedented increase in fuel prices and a ballooning fiscal deficit

A spate of articles have appeared in the media criticising the budget for being “pro-poor and anti-rich”; providing “relief for some and hardship for most”; and prioritising the agricultural sector above all others.

This article is not meant to critically analyse the budget. I am cognisant of the challenges involved in preparing a budget that can satisfy the disparate political stakeholders in Pakistan even as it attempts to set realistic economic targets for the next fiscal year.

I would like to focus more on, first, whether the PPP has stayed true to its manifesto in carrying out its first major administrative task since taking over the government and, two, show how most of the budgetary targets will be difficult to meet if changes are not made in the larger institutional set-up of the country.

The government announced a Rs2.1 trillion federal budget, with a revenue target of Rs1.1 trillion. This indicates a budget deficit that is likely to be 4.7 percent of GDP. The main highlights of the budgetary package include a 20 percent increase in the basic pay and pension of civil and military employees, and an increase in the minimum wage from Rs4000 to Rs6000.

In the agricultural sector, the government announced a subsidy on fertilisers, making inputs easily attainable for farmers.

The industrial sector will continue to remain under pressure although the 15 percent duty tax on CNG buses and energy savers has been removed.

The industrial sector will also continue to be affected by energy shortages even though Rs62.42 billion has been allocated to the water and power division and Rs15.3 million to alternative energy development.

In addition, public sector development has been allocated Rs541 billion which includes the Benazir Income Support Programme and the establishment of the Human Resource Development Commission to review the state of unemployment.

The budget, by and large, has focused on at least 3 of the 5 Es from the PPP manifesto: employment, energy and equality. Since the PPP claims to be people-friendly and the only party concerned with job-creation and employment, steps to increase the minimum wage and salary packages are not surprising.

Prioritising the agricultural sector over the industrial sector reflects the need of the day — i.e. to ensure that people in Pakistan can afford to buy food. But these policies are bound to have broader repercussions which the government needs to be prepared to deal with on an institutional level.

Increasing the minimum wage is bound to lead to increased inflation. For one, it will raise the costs of production, making manufactured goods more expensive to buy. Second, people will have more money to spend. As it is, inflation is set to increase to 12 percent and will have to be closely monitored by the government and the State Bank.

Subsiding agricultural inputs, while a step in the right direction will widen the fiscal deficit which will have debilitating long-term effects on the economy such as the growing lack of competitiveness and a drop in the quality of goods produced.

The priority for the government, at this point, was to expand the revenue base by spending less and earning more. One of the ways suggested by economists was to broaden the tax net. The PPP manifesto suggests this as well.

This budget has set the tax collection target at approximately 24.5 percent higher than last year. At the same time the budget has proposed to provide relief to nearly 74000 taxpayers by increasing the level of taxable income. The government is also relying on income tax, worker’s participation and capital value tax as the primary source of direct taxation and customs duty and sales tax as the primary source of indirect taxation.

Hence it has increased duty tax on cell phones and luxury items. The government has also copped out by choosing to exempt capital gains tax on the sale of shares of companies listed on the stock exchange and by making no effort to include the retail and wholesale services into the tax net.

Other cost-cutting measures could include the lowering of the budgets of the president’s house, which has increased by 12 percent, and the PM’s secretariat which has been slashed by 30 percent. At least the latter is an effort towards some kind of austerity. Increasing the National Assembly and Senate budget to Rs1.86 billion, an increase of nearly 4 percent, is a positive development. Given the major problem in the judicial sector, the reduction in the allocation of the Law and Justice Division share by 4.52 percent is surprising.

The increase in the Public Sector Development budget by Rs21 billion is a good sign. Fifty-one percent of the federal PSDP (public sector development programme) budget is allocated for social sectors and the achievement of the MDGs (millennium development goals). While this is commendable, one has to wonder how the government plans to implement its development initiatives. Additionally, does it plan to revise, retain or scrap the current system of local governance?

Overall, the government should be given credit for announcing the budget in a timely manner, and for at least attempting to manage the food crisis, unprecedented increase in fuel prices and a ballooning fiscal deficit.

Yet, it is clearly obvious that this budget is not prioritising the expansion of the revenue base and will fail to meet economic targets unless there is close institutional monitoring at the implementation phase.

Lastly, this budget is focusing on short-term needs due to present circumstances at the expense of long term solutions to Pakistan’s economic problems.

Mariam Mufti is currently working on her doctoral dissertation on the party system of Pakistan at the Johns Hopkins University

Source: Daily Times, 16/6/2008

 Posted by at 9:42 am

Leave a Reply

%d bloggers like this: