THE newly inducted government that found itself in the midst of a host of internal and external challenges soon after its induction was confronted with the daunting task of presenting the budget for the upcoming fiscal year.
Steering the economy and dealing with all these problems is a daunting task and we must allow some time to the present government.
The budget is one of the most important documents that sets out the priorities and targets of any government in terms of social and economic development. Whether the targets set by the government at the beginning of the fiscal year are met by the end or not is an important criteria to judge the performance of the government but at this point, it is too early to say anything about that. What we can analyse objectively at this point are the priorities set out by the present government and the potential impact of the measures that it intends to take to address the economic problems that are gripping the country at present.
In particular, since the mandate of the present government is based upon its egalitarian philosophy of improving the wellbeing of the ordinary people and to promote the development of the people, for the people and by the people, it seems pertinent to analyse its priorities and the potential impact of the budget on the lives of ordinary people especially those belonging to the lower income groups.
Let us start by examining some of the positive features of the current fiscal year budget. The commendable feature is that the government has not budgeted any real increase in the defence budget and decided to present the intra-sectoral allocation within the defence budget for discussion in the parliament. What will pay off in the long run in terms of releasing additional resources is to review how efficient and transparent this allocation is within various heads. It is also commendable that the government intends to provide incentives to the agriculture sector that has been neglected by the previous governments. This will have positive repercussions on not only poverty reduction but also for ensuring food security and stabilising food prices.
In terms of direct relief measures, the government has allocated a substantial amount for the Benazir card scheme that pledges to provide Rs1000 per poor family as identified by the Nadra data base. While this is a commendable step, previous experience throughout South Asia shows that apart from huge management costs that are associated with such schemes, they end up with problems such as poor identification and targeting as well as leakages.
It is not clear how much of an impact the Rs1000 handout will have on easing the burden imposed by mounting inflation particularly that related to food items. Food inflation has been record high and since April 2008, it has been estimated to be 25.5 per cent as quoted by the Economic Survey. The withdrawal of subsidies from fuel, power and wheat; and an increase in general sales tax is going to exacerbate inflation even further. It is not hard to conclude that in such a situation, the positive impact of direct relief measures such as raising the salaries of government employees and the Benazir card scheme will be offset by the ever increasing inflation leaving the poor worse off in the ultimate analysis.
No matter how creative these relief measures are, they are nonetheless meant to provide temporary relief. What is needed in the long run is to provide opportunities to the people in terms of health and education and thereby empower them by enhancing their capabilities. The budget in this sense is quite a disappointment. The allocation for health and education have increased nominally (the allocation for health sector has increased from Rs18bn to Rs19bn and that for education from Rs24.3bn in the previous year to Rs24.6bn in the current year) and after accounting for inflation, these allocations have declined in real terms.
This is a pity taking into account the fact that some of our health and education indicators are even weaker than those of Sub-Saharan Africa. Our infant and maternal mortality rates are one of the highest in the world. For the past ten years, the government has been allocating less than one per cent of its GDP (between 0.5-0.6 per cent of GDP) on health. Research in Pakistan has been showing consistently that one of the greatest income shocks amongst the low income groups in Pakistan is the medical expenditure and it is important to realise that increasing access to health in an equitable manner is tantamount to fighting poverty.
In terms of education, the recent Education for All report indicates that Pakistan is host to the highest absolute number of out of school children in the world after Niger. This is quite an embarrassing situation and the government seems to be completely oblivious as is evident from the priority given to this critical sector in the current budget. What are even worse are misplaced priorities within the education sector: 75 per cent of the total allocation for education is directed towards the Higher Education Commission. This is an unfair allocation both on grounds of efficiency and equity in public finance.
It is highly recommended that the government rethinks its priorities regarding social sector development. Past experience shows that whenever governments attempt to reduce fiscal deficits, social sector allocation that is already low is the first one to be slashed. While it is too early to predict this but overall the strategy of this government in reigning in the fiscal deficit is no different from the previous governments. Instead of devising a strategy that generates revenues by expanding the tax net and by curbing tax evasion, the government has relied on indirect taxation, the burden of which falls on the poor and the middle income groups.
Progressive taxation on capital gains, real estate, and other sources of wealth is absent whereas sectors such as agriculture and services remain exempt from taxes as ever. Such a regressive taxation policy is bound to increase inequality that is already on the rise.
It was hoped that the current government would realise that achieving fiscal discipline and increasing revenues is important, but not on the backs of the poor. If the government wants to address the challenges of inflation, rising inequality and poverty, it must devise a progressive taxation policy that relies less on indirect taxes and more on increasing the tax-GDP ratio by extending the tax net to untaxed sectors. Moreover, given the dismal human development indicators there should not have been any compromise on the allocation as well as the utilisation of social sector spending.
The writer is the director of Mahbub ul Haq Human Development Centre in Islamabad.
Source: Daily Dawn, 2/7/2008