There is no doubt that the steady increase in the size of the budget during the last eight years under General Musharraf's over-sight (that includes the five years of this parliament), is indeed a source of great satisfaction and is laudable by any standard. Be it for the growth in revenue collection or exports, the size of the public sector development programme or the manifold increase in foreign reserves, the very size of the budget is a testament to the all-round strides that have been made in the national economy.
The continuity in business-friendly policies have boosted investor confidence, foreign as well as local, despite the fact that there has been a marked increase in the militancy of the extremists, the law and order situation remains precarious, with suicide bombings, kidnappings for ransom, dacoities and vehicle snatchings having become a way of life in the country. Pakistan as a country may not enjoy an unenviable position in the comity of nations on the touchstone of corruption, crime and quality of life indices, but it surely does occupy a prominent position on the basis of business and investment-friendly policies that have no parallel in most countries around the world.
It was widely expected that the year 2007-08 being the year of elections, this budget would have a hallmark of distribution of largesse seeking to gain people's support for the party in power at the cost of the economy. It must be said to the lasting credit of Prime Minister Shaukat Aziz that he did not succumb to political temptations and throw caution to the winds. He has indeed stayed the course charted by him which has yielded major gains in the economy already. The increase in the pay and pensions of the bureaucracy by 15 percent has been matched with a similar increase in the raising of minimum wage from Rs 4000 to 4600 per month. The across the board promotions in the bureaucracy too have been restricted up to Basic Pay Scale 16.
The outlay of the budget at Rs 1874 billion, is a record in the history of the country. However this figure quoted in the budget speech on the floor of the house is at variance with the budget document which puts the size of the budget at Rs 1599 billion. The federal government expenditure is estimated at Rs 1353 billion.
Resource availability has been estimated at Rs 1394 billion (as against Rs 1100 billion in the budget estimates for 2006-07) and these are comprised of Rs 1135 billion from internal sources - revenue receipts, capital receipts, financing by provinces for the public sector development programme and change in the provincial cash balance - while external resources are estimated at Rs 259 billion. Privatisation proceeds are projected at Rs 75 billion, and the government would resort to Rs 130 billion borrowing from the banking system. The overall budget deficit is estimated at Rs 398 billion, which is 4 percent of the GDP. The debt-to-GDP ratio is a healthy 53 percent, according to the budget estimates.
A very encouraging and unprecedented feature is the increase in the collection of direct taxes that have for the first time risen to 40 percent of the total revenue collection for the current fiscal. Of the total revised estimates of revenue collection of Rs 840 billion, direct taxes account for Rs 321 billion. A similar ratio is envisaged for the next fiscal with direct taxes estimated to yield Rs 408 billion in the total revenue collection estimates of Rs 1030 billion.
This is indeed laudable when large segments of the GDP such as agriculture, stock market and real estate remain outside the direct tax net, which precisely is the reason for the low tax to GDP ratio. Despite the increase in tax collection in real terms tax to GDP ratio remains inelastic because of these distortions in the tax regime that unfortunately continue to exist owing to the clout and nuisance value of certain sections of society.
Recognising the steep rise in food inflation and its devastating impact on the poor in the country, the government has had to take recourse to subsidy on essential food items such as rice, ghee, sugar and pulses sold through the Utility Stores Corporation (USC). To ensure the availability of the essential items to larger sections of people throughout the country, the number of USC outlets would be increased to 5000. It is believed that this expansion in the store network would be achieved through a franchise system, which, however, will defeat its purpose if used for political patronage.
The members of parliament and provincial assemblies belonging to the ruling coalition or their nominees would be awarded the franchise that would help them garner support and people's goodwill in their respective constituencies. The addition of a new schedule in conformity with the State Bank prudential regulations in the income tax law for taxation on banks would facilitate the working of the banking system and lead to a significant reduction in litigation.
The provision in the statute that allows holding companies to operate without dual taxation would also facilitate take-over of restructured sick units by healthy corporate entities and also permit enlargement in the size of the corporates enabling them to access international capital markets.
There are, however, structural weaknesses that can well be termed as potential risks for future economic growth. The economy is being driven by household consumption that accounts for over 70 percent of its GDP. Pressure on prices and interest rates is high that would adversely impact future growth. Trade accounts for a small part of our GDP and our export sector is struggling to maintain competitiveness in low value added items. Savings and investment rates are also dismal and the increasing trade deficit is a serious challenge for our economic managers.
This deficit is the result of an uncompetitive export sector and consumption outstripping domestic production. The serious lag in the development of human resources and infrastructure, that reflects the years of neglect accorded to education and replenishment of the existing infrastructure. The scarcity of power is also a big stumbling block in generating production surpluses.
The government's borrowing from the central bank that obliges an increase in reserve money is also a matter of serious concern as it contributes to increase in inflationary pressure. In short, our macro-economic fundamentals are inferior to those of many emerging economies, suggesting that comparatively we are more vulnerable to vagaries of weather and exogenous shocks.
The question uppermost in most thinking people's minds today is how best to secure the economic gains achieved so far and sustain them in times to come. There have been instances, though rare, in the life of this country when the economic bandwagon got going and took off but was derailed by a political upheaval and the gains made in the economy were frittered away.
It is our earnest prayer that we do not repeat the mistakes of the past and that our leaders show the political sagacity, flexibility and statesmanship to rise to the occasion and resolve the brewing crises on more than one front that threaten all that has been so painstakingly built over the last eight years before it is too late. May Allah (SWT) guide the government and the opposition in this hour of trial and have mercy on our people and our country.