Business as usual – by Shahid Kardar

Published in The News:
The budget for 2010/11 has been presented at a time that the economy is struggling and the government’s fiscal position is under severe stress. This PPP government had inherited a precarious situation, which was compounded by insecurity and food inflation – some of it external in nature. Thus, it had limited room for maneuverability even if it had been able to achieve some directional shift to address perennial structural issues. Therefore, in many ways this is a modest budget which has tried to focus on maintaining stability and not raising any expectation for a major turnaround.

With this background, Dr Hafeez Sheikh needs to be congratulated on a brilliant presentation – candid, truthful and realistic – and for stating with clarity, his vision and his desire and intention to eschew the business as usual approach. He was also right in arguing that economic management is a 24/7 affair, as reflected in other government policies, like the monetary policy and policies with respect to administered prices of utilities and petrol and procurement prices of crops like wheat, and that the annual budget is essentially an accounting exercise, a statement of government revenues and expenditures. He also acknowledged the weaknesses of the government – its failure to address the issue of the low tax to GDP ratio, the crisis in electricity and the lax management of expenditures. It now remains to be seen how the vision that he had articulated will be owned by the rest of the political leadership and then implemented over the remaining tenure of this government.

While essentially agreeing with him on how one should look at the budget, I have one fundamental disagreement. In my opinion, the budget must indicate the steps in the proposed directional shift, something missing entirely in the budget that he is piloting; an act that he had to perform within six weeks of being parachuted into office, admittedly not adequate time to draft a plan to fit his vision and also garner support for it. Take the following examples: He spoke at length about the Rs235 billion losses of the PSEs and all that was proposed was their restructuring. A tried, tested and failed approach. Theirs is a case of moral hazard – these institutions know that they will be bailed out and successive governments have successfully been blackmailed into bank rolling them. Also, this government does not appear to be in the mood to privatize any of these organizations. There is little hope of addressing the issue of the continued losses of these PSEs as long as they remain in the public sector – these losses being twice the budgets of each of the provincial governments of KP and Balochistan, and also twice the annual financial assistance from the much maligned Kerry-Lugar bill. As long as they remain in the public sector they will be subjected to loot and plunder – as dumping grounds for party workers (serving as employment bureaus), for non-merit appointments of senior management and channels for bribes and other corruption.

He also spoke of the need for austerity even if in symbolic terms. But just before the budget was announced the PM went to Spain with the routinely large entourage. Also, while the written budget speech mentioned a 25 per cent salary increase for government servants, a 50 per cent increase was announced, with its obvious ripple effect on the budgets of the provincial governments. Moreover, there are a host of other agencies and departments whose roles were neither clear before and certainly no longer after the withdrawal of the concurrent list. You just have to drive through the Blue Area and some key sectors in Islamabad to come across organizations with exotic names that none of us would have heard of, let alone know with what mandate they are functioning. No reference was made to their future. Nor was any announcement made to reduce the size of government, the size of entourages with the PM or the President on foreign tours, discontinuation of Hajj and Umrahs at government expense and the grounding of the aircraft reserved for the PM, President, Governors and CMs. Our political leaders, only a small percentage of whom are actually taxpayers, are simply unwilling to make even a modicum of a sacrifice.

Let me now proceed to look at some of the budgetary targets. The tax revenue target is grossly overstated. The government hopes to collect Rs1,667 billion through the FBR. With the likely collection of Rs1320-30 billion in FY 2010, inflation of say 11 per cent (despite the government hoping for a rate of 9.5 per cent), economic growth of 4 per cent and assuming the government collects all the additional taxes that it has proposed, tax revenues are not likely to exceed Rs1,600 by the end of FY 11. In my opinion, the government should congratulate itself if by end of financial 2011 it has Rs1,570 in the kitty. Moreover, expenditures are understated, to begin with by the Rs25 billion for the extra 25 per cent increase in salaries announced in the budget speech.

Having accepted that the issue of the low tax to GDP ratio and poor resource mobilization had to be addressed, the only step the government has taken to correct the inequitable tax structure is to levy a capital gains tax on transactions in the equity market. For instance, the budget could have proposed an inheritance tax or the re-introduction of the wealth tax. It could have also threatened to levy a withholding tax on all the sale of cash crops like cotton, sugar, rice and even wheat, if the provinces do not start collecting revenues by taxing agricultural incomes. It was business as usual when all that the government did was to raise the GST by 1 per cent age point on all goods and services already in the GST net.

The trouble is that the rather selfish, if not greedy and predatory, rentier elite is not prepared to put in place an equitable tax structure that requires contributions from them on the basis of their capacity to bear such a burden. No wonder ordinary people ask why they should pay additional taxes, especially if the government cannot ensure the safety and security of their lives and property, let alone deliver decent quality basic services. So, Islamabad will simply have to beg and borrow more even to finance its non-productive expenditures, as the debt to GDP ratio continues to soar.

The budget deficit target of 4 per cent of GDP has been set on the assumption that the provinces will have cash surpluses of Rs167 billion – this being equivalent to 1 per cent of GDP. An unrealistic assumption, considering that they are not restricted by any Fiscal Responsibility Act and their past behavior provides no basis for making such an assumption. And in keeping with tradition, the governments of the two larger provinces have already announced deficit budgets.

To be concluded