Daily Times

A temptation that is hard to resist while writing on the lacklustre budget for the coming fiscal year is to reproduce much of my article from last year, which was published in this space. Most of the targets set in last year’s budget, though they were modest, have been missed. The only new factor that pushed growth down and inflation higher was the unprecedented flood. Other factors were predictable right from the beginning of the year.

However, if one keeps the present macro-economic situation in the country in mind then it is no surprise that Dr Hafeez Shaikh was unable give a please-all budget for 2011-12. Like many of his predecessors, he had to knock together a budget sitting in a tight space with no elbow room.

Just take a look at what the constraints are under which the budget-makers of the country have to balance the books. In the first place, all finance ministers have faced the problem of working out a budget with a small tax revenue. All finance ministers have tried and failed to bring the undocumented economy into the tax net. Some people suggest that the term ‘tax net’ be given a positive spin and be called ‘tax club.’ It would make people feel part of an exclusive club with membership of only a couple of million in a country of over 177 million. Last year, attempts to levy the Reformed General Sales Tax across the board were not only resisted by the opposition but also by the coalition partners of the government. The reason? Parties like the PML-N and MQM have the support of the bazaar, which does not pay taxes.

I am not aware of any new study, but according to a couple of studies done in the 1990s, 50 percent of the country’s GDP is not accounted for. So while the good news is that this sector flourishes consistently, it can be said that our growth rate is mostly under-reported; the bad news is that the government is deprived of revenue from a parallel economy.

Realising the constraints of the ruling political alliance, the finance ministry has decided to spread tax resources by removing GST exemptions from selected industrial sectors and by enhancing the direct tax club membership. The latter is being done by identifying 700,000 potential tax payers who do not file their tax returns. Notices to 71,000 have already been issued. This is the right step considering that the number of people who file returns in this country is just 1.5 million.

Despite this constraint, where the tax revenue income expansion is the challenge, the budget has estimated an almost 23 percent increased income from this head over the actual receipts in the outgoing year 2010-11. The assumption of the budget makers is mainly based on two magic numbers: four percent GDP growth and 12 percent inflation. The rest of the increase, it has been assumed, will come from new tax administration.

Now these are ambitious targets and, once again, at the end of 2011-12, we may find that most targets will be missed. Why? Most conspicuously, the external inflationary pressure is not likely to ease this year. Those who complain of a high inflation rate completely ignore what has happened in the international market. In one year, food prices globally have shot up by 48 percent, oil prices have jumped up by over 40 percent and gold by 25 percent. The Economist, in its June 4 issue, shows that maize prices have soared by around 80 percent, wheat by about 65 percent, sugar by 45 percent, palm oil by over 40 percent, beef by 20 percent and rice by five percent. The way the world is today, global inflation is transmitted to all countries — the only difference is the variation of the impact. Efforts to contain inflation through higher interest rates and tight monetary policy have their negative impact on investment.

Okay, so more inflation may help in getting more revenue as it did in the outgoing year. But this means revenue collections from the existing taxed sources and persons. The real test would be how fast and effectively the tax club forced membership is expanded in the coming fiscal.

Another constraint for the budget-makers is that, like 2010-11, the foreign receipts from the IMF and Kerry-Lugar-Berman assistance programme may fall much short of expectations. This may result once again in a heavy reliance on domestic borrowing like the last fiscal year and we may end up with a higher deficit financing target than envisaged in the budget. Even this year’s deficit, which the government claimed has been brought down from 6.3 percent to 5.1 percent, accounting experts say is understated. Their view is that the energy sector’s circular debt, for which the government has given sovereign guarantees, has been parked outside the budget in a separate entity. If that is included, the deficit would be higher, a leading financial expert explained.

So how do we meet the deficit? We borrow from the people through the banks and central bank and we borrow from the multilateral agencies and other countries. There is a lot of rhetoric about breaking the proverbial ‘begging bowl’. In the first place, borrowing is not begging. No country or business grows without borrowing. Prudential borrowing is for generating output that is more than the borrowed input. It becomes dangerous when a country or a person starts borrowing for current expenditure.

Let us put emotionalism aside. Budget 2011-12 shows that after providing for the Rs 1,203 billion provincial share, the federal government revenue and capital receipts would be Rs 1,925 billion only. This does not include the external receipts, which are borrowings, Rs 303 billion domestic bank borrowing and Rs 125 billion envisaged provincial surplus. As against the Rs 1,925 billion real resources, it has current expenditure of Rs 2,315 billion leaving a yawning deficit of Rs 390 billion. We have not yet talked about the development expenditure. Add to this an ambitious Rs 452 billion development budget and the total deficit comes to Rs 842 billion.

The usual criticism is that the government should cut its expenditure to live within its means, which in this case is Rs 1,925 billion. Of this amount, 53.7 percent goes into the repayment of loans and interest, 25.7 percent to the mighty defence, 2.3 percent to pensions and grants, 8.6 percent to subsidies and 10.5 percent to running the government. So where is the fat that can be pared for breaking the begging bowl? Obviously we cannot cut on our debt repayment. The other two major areas left are running the government and defence. We are told that the country is in a state of war so we cannot cut on defence expenditure, which is nonsense. The war we are fighting does not need buying expensive F-16s, an increase in our nuclear stockpile and missiles if we decide that we are not going to fight with India. Expenditure on the civil government and subsidies should also be slashed. But even after doing all this we would need to borrow for development expenditure, which of course is attached to strings as all lenders want to ensure the payback capacity of the borrowers.

The writer can be reached at ayazbabar@gmail.com