VIEW: A budget speech with a difference —Imtiaz Alam
Inflation cannot be brought down simply by fiscal measures, although they are very crucial. Without improving security environment, lowering of interest rates, overcoming the energy crisis, reducing the cost of production and increasing exports, we cannot achieve and sustain a higher growth rate in manufacturing, services and agriculture
I had my doubts that the economist-finance minister would be able to cope with the enormous task of reconciling the political demands with the economic constraints while not letting “modest upturn” slip away from his grip. The budget speech by our new finance minister, Dr Abdul Hafeez Shaikh, was exceptional — realistic, educative and without a rhetoric. Being an able economist he focused on resource mobilisation, reduction in losses, current expenditure and inflation while offering relief and targeted subsidies to those who deserved it most. The real test of the minister was on VAT, which he wisely substituted by reforming the General Sales Tax (GST). Indeed a good beginning in difficult times.
The finance minister was right in demystifying the overwhelming myth of the budget being a panacea of all malaises or an instrument of all miseries. He rightly emphasised the 24 hours for 365 days management of economy encompassing greater areas than covered by the income and expenditure measures in a budget. No doubt, thanks to the belt-tightening measures taken in the last two years, there is some measurable recovery reflected in lowering of inflation from 25 percent to 11.5 percent (July-April), although of late there is upward swing, fiscal and current account deficit, 5.1 percent and 2.8 percent of GDP respectively, and some symptoms of growth in the areas of large scale manufacturing (4.4 percent) and services (4.6 percent). Even if a revised GDP growth rate of 4.1 percent is marginally exaggerated, the fact remains that the outgoing year is better than the last fiscal.
The key objectives set by the finance minister are well directed: a) consolidating recovery while tackling macroeconomic imbalances, security and coping with international financial crisis; b) checking inflation by reducing borrowing and taking other measures; c) self-reliance through resource mobilisation by intelligently reforming the GST as a substitute of VAT by withdrawing exemptions, except education, health, food items and on a business with a turnover of Rs 750,000; d) protecting the poor by expanding Benazir Income Support Programme (BISP), targeting subsidies towards the poor, Rs 25,000 health insurance per poor family, food security for 13,000 villages, Rs 10,000 internship for post-graduates, 100-days job for 200,000 unskilled youth, raising salaries and pensions, etc; e) enabling environment for private investment. A challenging task on whose performance the finance minister and his able team of economic experts will be adjudged by the end of the next fiscal.
Mr Shaikh also dwelt upon the damage being done to the economy by the energy shortages, which is equal to 2 percent of the GDP. The growth rate cannot go up without addressing the energy shortages in the medium and long term. Although the minister quite critically spoke about the haemorrhage being caused by the public sector corporations to the national exchequer to the tune of Rs 235 billion, which is much higher than Rs 165 billion expenditure on civil government, he did not indicate the measures to stem worst mismanagement of PEPCO, KESC, PIA, Pakistan Steel, Railways and other public sector corporations. He must put them in order. The austerity measures, such as freezing the federal government’s expenditure, are not enough. After the adoption of 18th Amendment, all those ministries and divisions that come under the Concurrent List must be abolished and the concerned civil servants sent to the provinces to run the same. Other measures to improve economic governance, like introducing automated system of allocations, are also not enough unless he takes bold measures to reform the Federal Bureau of Revenue (FBR) and public sector corporations.
Although setting a target of keeping fiscal deficit at 4 percent of the GDP seems to be ambitious, it will depend mainly on expanding the GST in collaboration with the provinces, strictly restraining domestic and external borrowing for budgetary support and controlling the losses of public sector corporations. Similarly, inflation cannot be brought down simply by fiscal measures, although they are very crucial. Without improving security environment, lowering of interest rates, overcoming the energy crisis, reducing the cost of production and increasing exports, we cannot achieve and sustain a higher growth rate in manufacturing, services and agriculture. Price-drive incentive for agriculture is also not a sustainable impetus; it should be supplemented by measures to increase per acre yield and other agro-related businesses, such as dairy production, horticulture, etc.
Most remarkably, the government has stood its ground to introduce VAT. The finance minister outmanoeuvred the critics by keeping GST at a reduced aggregate rate of 15 percent while withdrawing all exceptions, except on items and services essential for the people. He rightly took the necessary time for its implementation and to bring the provinces on board. No doubt this budget reflects a most significant devolution of financial resources to the provinces, which has brought the provincial government under greater fiscal responsibility. If the provinces do not improve their governance, use resources prudently and efficiently with right priorities the objective of devolution to benefit the people will be lost. The people and the media must watch out for provincial budgets and their allocations. After the substantial transfers to the agriculture through higher support prices, this is the time to introduce the agricultural tax. This will be a great opportunity for Punjab Chief Minister Shahbaz Sharif to set the ball of agro tax rolling for other chief ministers to follow.
The measures announced by the finance minister are very much within the parameters of structural adjustments in the fiscal sphere and as emphasised by the IMF and rightly so from the perspective of a lender. They help to keep us live within our means, which we are not accustomed to. But unless we address a low economic equilibrium and restructure the basic structure of our productive sectors and nature of exports we will not get out of the trap of low growth and macroeconomic imbalances. Ignored for too long, our human resources and physical infrastructures need to be improved and developed. Greater focus must be centred on the human resource development through better, meaningful, scientific and useful education and by providing skills to the young labour force. Much is being said about the scarcity of water and energy, not much is being done for conservation and reduction in waste and losses.
No doubt the finance minister has a tremendous task at his hand and he needs to improve things in all spheres of our economic life with the help of leading economists who are part of his team. But he must focus on six areas: a) energy; b) reforms of public sector corporations to eliminate the losses; c) substantially promoting investment and raising tax-GDP ratio; d) human resource development at a mass scale and qualitatively; e) poverty alleviation through employment generation, better education and healthcare (expansion and diversification of Benazir Income Support Programme); and f) reduction of defence expenditure and debt-GDP ratio. Rest will follow.
Imtiaz Alam is Editor South Asian Journal. He can be reached at firstname.lastname@example.org