The IPR report released on Tuesday shows concerns with the way government makes the budget. Both its stated goals and estimates often turn out to be misplaced. In most years, the budget sets out to realize the aims of growth and poverty alleviation. However, few measures in the budget support these goals. Similarly, Government of Pakistan (GoP) forecasts a lower than justified target for the fiscal deficit. It usually gives higher revenue and lower expense amounts than circumstances merit. It also uses high provincial surplus estimate to bridge the gap.
The report gives comprehensive proposals for the coming budget. It says that without an overall strategy, the new budget will again tweak at the edges. It also says that a meaningful budget should be guided by a medium-term economic strategy. So far, it seems that this is being done in name alone. Clarity of goals and coherence in government plans are important for economic management. The report called upon the government to respond especially to the balance of payments challenge. Depending on Chinese largesse is not a plan.
The Report says to earn more revenue, GoP must make hard choices that affect the political economy of tax avoidance and evasion. To make spending more effective, it must revisit subsidies for Public Sector Entities (PSEs) and power supply. The government should focus on debt management and development priorities. Government has done well at fiscal consolidation recently. In fact, 2015-16 was the first time in years that FBR achieved its target. Yet, for many reasons we are far from having a stable macro economy that can underpin growth.
The budget cannot meet all the above challenges, but it must begin to move the economy in the right direction. That is possible only if it is part of a strategy, because most important shifts must take place before preparation of the budget. The report calls on GoP to strengthen the macro framework. This is possible by increasing government revenue through broadening the tax base, reducing exemptions, and strengthening compliance. There is also need for structural tax reforms through simplified procedures, rationalized systems, and removal of distortions.
On the other hand, GoP must rationalize expenditure and to the extent possible increase the share of development spending. It must reduce subsidies by reforming or privatizing PSEs. There is urgent need also to review the power sector policy structure.
The present power policy will take us back to a dead end after initial improvement. The report especially raises the issue of governance. No economic policy will work without governance improvement. Pakistan performs poorly in all governance indicators with the result that in most areas government is a hindrance rather than a support to economic activity.
The Public Sector Development Program (PSDP) has too many projects with an average throw forward of eight years. To be effective it must keep just those projects that directly support growth in priority sectors.
The above proposals will help with competitiveness of the economy. There is need also to focus on urban infrastructure so that cities support economic growth and serve as service clusters. Skills development and R&D too are key for the economy, especially for priority sectors. Such support must go with setting up industrial parks under CPEC.
"We must offer opportunity to the young and those outside the economic mainstream. This is important for economic progress and social stability. GoP can stimulate private sector investment through access to credit and make an earnest review of regulations that reduce barriers to investment. It should make major investment in training of youth. Training centres may collaborate with international providers of mass open online courses to train millions of young people each year," Report said.
At the same time, GoP must link unemployed youth with an existing social security system eg BISP. It must promote export of workforce by providing skills training with international certification. The budget must also keep an eye on the country's need for stability. The data is instructive. Pakistan has a young population with about 60% people below the age of 25 years. This means there are about 120 million young people in the country. While overall unemployment in the country is below 6%, 11% of the young are without jobs. Two million young people enter the job market each year. GoP estimates that 22.6 million children are out of school. About a third of the young suffer from malnutrition that could affect their cognitive skills forever. These numbers are important. It shows how Pakistan has lost the potential that a young population offers. Such disadvantages are also drivers of instability as they cause alienation. All over the world, populist ideologies have captured the imagination of young minds. In Pakistan, this has happened for many years.
Copyright Business Recorder, 2017