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The budget for the financial year 2012-13 is the fifth in a row presented by the incumbent regime, a record for any elected government. An opportunity to manage economy of the country for consecutive five financial years, a reasonably long period, had put this government in a perfect position to take measures that could reduce, if not totally eradicate the economic problems confronting the nation and hardships faced by its people.

This last budget also presented an opportunity to take stock of fundamental national economy issues and lay the foundations for expected lasting stability and growth. It is in this setting that a Task Force of the Institute of Policy Studies, Islamabad has reviewed of the federal budget 2012-13.

Budget and the fiscal position

Overview of the performance 2011-12

The fiscal performance in the current year (2011-12) remained below expectations. The fiscal deficit that was estimated at 4.0% percent of GDP has soared to 7.4 percent of GDP due to slippage on revenues and expenditure, causing greater reliance on borrowings. The main hemorrhage occurred due to a sharp rise in current expenditure. The total public debt reached 60% of GDP with debt servicing remaining the major item of expenditure.

The revised budget 2011-12 presented a similar picture in sharp focus. The revised estimates showed a decline of 13% in tax and non-tax revenues and the shortfall was met by heavy domestic non-bank and bank borrowing. Credit from the banking system was three times of the budget estimates which resulted in serious consequences in terms of fuelling inflation and crowding out effect on availability of bank credit for the private sector. Decline in external receipts (by 45%) due to deteriorating external relations also contributed in increased bank and non-bank domestic borrowing. Thus, a budget that was planned on 56 percent tax and other revenues and 44% borrowed resources, turned out to be exactly the reverse (44% self-resources and 56% borrowings).

Slippages also arose on the expenditure side, with current expenditure exceeding the budget estimates by 10.4% and the development expenditure by 4.7%. A major share of the current expenditure was devoted to interest payments on debt, defence, subsidies and civil administration. Thus the budgetary performance remained below expectations signifying ineffective governance and management, besides fuelling inflation and increasing dependence on borrowings.

The budget 2012-13 presented by the Finance Minister in the parliament aims at ensuring macro-economic stability. The total outlay is Rs 3,203 billion, which is marginally higher than the revised estimates for the previous years. The budget envisaged sustained improvement in tax and non-tax revenues and external receipts and reduction in bank and non-bank borrowing. A notable feature is the proposed containment of the current expenditure to slightly less than the revised expenditure of the previous year while raising the development expenditure by 23.7%. Given the past trend and expansive mood of the government, it is doubtful if these allocations would not be surpassed. While allocations for all items of the current expenditure (interest payments, defence, civil administration) have been raised, the only item of reduction is subsidies from Rs 512 billion in 2011-12 (revised estimates) to Rs 208.5 billion. The budget has no evidence of austerity, in fact allocations for President House, Prime Minister House and other top functionaries have been increased substantially.

The budget contains some tax and other relief measures, notable being:

-- 20% increase in salaries and pensions of the government services

-- Increase in allocation for Benazir Income Support Programme

-- Targeted subsidy on essential goods through Utility Stores

-- Technical training and internship programme

-- Raising the Income Tax exemption from 300,000 rupees to 400,000 rupees

-- Reduction in Customs Duties

These and other measures proposed in the budget are not strong enough to revive growth and investment, ensure stability and improve living conditions of the people. The size of the Public Sector Development Program (PSDP) has been increased to Rs 871 billion (provincial share of Rs 513 billion and federal Rs 360 billion.)

Allocations for defence (Rs 545 billion) is the second major item of current expenditure after interest payment (Rs 926 billion). The allocation is 10% higher than the previous year. Taking inflation into account, this is no increase in real terms. Bulk of the defence budget goes into the salaries and operating expenses, leaving only Rs 120 billion for the physical assets which seem to be less than what is required considering factors such as stoppage of Coalition Support Fund (CSF) payments and India's total defence budget having reached $42 billion. It may be recalled here that India has increased its defence spending by 17% in the ongoing fiscal's budget, and it has emerged as the world's top arms importer in 2007-11 period, importing some 10 % of the global arms import volume.

State of economy

GDP and sectoral growth: Pakistan is witnessing low economic growth for last four years averaging less than 3 per annum. The growth is estimated to improve slightly from 3 percent in 2010-11 to 3.7 percent in 2011-12. The agriculture growth is estimated at 3.1%, manufacturing 3.6% and services 4%. Real private consumption is estimated to grow by 11.6% in fiscal year 2011-12 as compared to 3.7% growth last year indicating a decline in savings and investment. The investment fell from 13.1% of GDP to 12.5% while national savings declined from 13.2% of GDP to 10.7%. The gap between total investment and national saving was filled by inflow of external resources.

External sector: There are mixed signals from the external sector. The positive estimate is that of the sustained and sizable growth in remittances, registering an increase of 20% and reaching 10.9 billion dollars in the first 10 months of the fiscal year 2011-12. The areas of concern are decline in reserves, rising import bill and slower growth in exports. The rupee is also depreciating in the exchange market. The current eurozone crisis and the looming recession coupled with rise in food and oil prices may add to the pressures on external sector.

Inflation: A typical feature of the current economic situation is high inflation with low growth. The inflation rate after peaking at 25% in August 2008 has come down to around 10%. Besides the rate being still higher, the cumulative effect of inflation of past four years has devastating consequences for consumers.

Energy and power sector: The country has been witnessing an energy crisis for the past four years. Despite claims, there is no respite in sight. Loadshedding of electricity and gas has impaired the economic growth and added to people's woes. Despite raise in tariffs, the availability remains uncertain. Some critical issues that need to be addressed effectively are line losses, resolution of circular debt issue, effective utilisation of existing capacity, utilisation of new sources of energy like coal (Thar) hydel, solar and wind energy. Progress on these fronts is painfully slow.

Employment: The persistent low growth over years coupled with increase in youth population has aggravated the unemployment problem. The measures proposed in the budget ie offering some 100,000 jobs and internships, are dismal. The economy should grow by over 7% per annum to bring unemployment to reasonable levels ie over 7% to 4%.

Social safety nets: All evidence shows that poverty and income disparity is on the rise. The issue has been hardly addressed in the budget. Although the allocation for Benazir Income Support Programme (BISP) has been increased from Rs 50 billion to Rs 70 billion, it is evidently a controversial and politically-oriented programme and a number of questions are raised from the concerned quarters. The scheme is making people dependent upon monthly allowances and small cash benefits rather than increasing their capability to make a reasonable living.

Informal economy and philanthropy Notwithstanding the role of the state, two features of the Pakistani society need to be noted. The first is the role of informal economy and the second, the role of philanthropy in helping the poor and disadvantaged.

Informal economy: Studies have been conducted to estimate the size of informal economy but results vary widely from one quarter to three fourth of the documented economy (Rs 5,000 billion to Rs 15,000 billion). Whatever the size, the fact of the matter is that it is generating value addition and playing a critical role in providing employment, income and relief to the poor. The system may not be exploiting the production potential optimally, or may be based on exploitation and distortion, avoidance of taxes and legal and social norms. Yet, without it the condition would have been much worse. The need is to reduce the informal character of economy by giving fiscal and monetary incentives and undertaking national surveys to assess the size of the informal economy. It may be mentioned that this phenomenon is not peculiar to Pakistan and even exists in advanced countries.

Philanthropy: Pakistan is perhaps one of those countries where philanthropy and social voluntary work is widely prevalent at all the level. Apart from paying Zakat, people of all religions and beliefs are spending a part of their income and effort towards alleviating poverty, hunger, illiteracy, diseases and social evils. The responsibility of the state is to a very large extent being shared by the society. Not only should this factor be appreciated, it should be encouraged through appropriate means by the government.

Conclusion The budget is one of the main instruments of economic policy. It is reasonable to expect that in addition to being a balance-sheet of the government's income and expenditure, the budget would contain measures to help in economic growth and stability, contain inflation, stimulate investment and generate employment and improve living conditions of the people.

The budget does not come up to expectations, as it presents marginal improvements.

-- Marginal increase in GDP growth from 3.7% to 4.3% next year

-- Inflation going down slightly from 11.5% to 9.5%

-- Slight improvement in tax to GDP ratio, from 10.3% to 11.1%. Reduction in public debt as size of GDP from 60% to 56.5%

-- Reduction in fiscal deficit from 7.4% to 4.7%. (In view of the past experience, this seems a difficult task.)

-- No effective plan to solve the energy crisis.

-- Perpetuation of inconsistent policies and vulnerability to yielding under political pressures.

The current budget is also important on these counts namely (a) transfer of major part of revenue to provinces under the NFC Award and (b) 18th Constitutional Amendment abolishing the Concurrent List and shifting the responsibilities of all major sectors (agriculture, industry, education, health etc to provinces, and (c) last budget of present coalition government. While tax revenues have been divided on the basis of NFC Award, sectoral responsibilities (including staff and functions) are not fully transferred to provinces. Political considerations have led to proliferation of ministries and divisions at the federation, negating the objectives of the 18th Amendment.

In creating the enabling environment for economic activity, good governance and rule of law play an important role. One of the major reasons behind Pakistan's low performing economy is weak governance and rule of law. Cases of gross corruption, increase in discretionary and secret spending and extravagant lifestyles of the rulers despite pressing economic hardships have eroded the people's confidence. This is partly responsible for avoidance of taxes and peoples' resistance to government's policies and measures. The budget 2012-13 does not present any serious effort that can be seen as restoring the confidence of the people.

Task Force for Institute of Policy Studies, Islamabad

Copyright Business Recorder, 2012

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