Judging the Budget

By: Editorial Team
Published: July 1, 2017
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Another budget, another set of promises by the government, but very little hope of achieving anything.

As has been the case for many years now, a lot of promises are made in every single budget, but not much is done to generate the resources needed to fulfill these promises and achieve the targets set out in the document.

And now, with new fiscal measures and financial policies being announced all year round, the budget has become a parliamentary event rather than a financial one.

The budget for 2017-18 (July-June) is also being labeled by some economists as an election budget, where the government’s focus is more on setting a narrative that it can benefit from in next year’s general elections, rather than focusing on actual development and growth.

There have also been allegations of fudging of statistics in an attempt to make the headline economic figures better and make the government look good.

But for a common man, numbers are not important.

It doesn’t bother him if the fiscal deficit is 4 percent or 5 percent of the GDP, or if the economic growth is 6 percent or 8 percent.

These are for the experts or the international financial institutions which give the government loans and aid, depending on these numbers.

For the public, what matters is if there will be water in their taps throughout the next year, if load shedding will come down and if the roads adjacent to their houses will be built this year.

Narratives spoke to three prominent economists and analysts to try and analyse whether the 2016-17 budget will make a difference in the lives of ordinary Pakistanis.

Mixed Signals

Dr Kaiser Bengali, renowned economist and former adviser to Balochistan CM

Budgets the world-over are designed to support a country’s economy.  However, Pakistan’s Budget 2017 is entirely directionless.

It sends no clear signals to the economy regarding growth. The entire purpose of budgets for the past few years has been to collect revenues for non-productive expenditures.

If you look at this government’s budgets over the past few years, you will be unable to discern the government’s priorities regarding the economy.

Inflation is expected to be low this year firstly because of low international oil prices and secondly, inflationary impact from the demand in the economy will be low because local demand is suppressed.

However, there are no clear measures in this year’s budget regarding inflation. When you have a directionless budget, the economic variables move at random. Any local or international factor can move prices in any direction. However, given the current parameters, inflation is not likely to be high this year.

If you look at this government’s budgets over the past few years, you will be unable to discern the government’s priorities regarding the economy

I will give you a concrete example of misinformed policy. The standard textbook policy is that you keep import duty on raw materials low and import duty on finished products high because then the manufacturers will import raw materials and produce finished goods locally.

This will produce jobs in your home country. But we import all our published materials while subjecting paper to import duty. As a result, even Urdu qaidas are imported from Indonesia and our printing industry suffers. Our import duty is designed to benefit three large paper manufacturers who prosper while the economy suffers.

The budget should not be assessed in terms of one year. If you look at the budgets of the past several years, they tax the poor rather than the rich. For the past 20 to 25 years, the budgets have included no provisions regarding welfare projects.

For instance, since 1977, the government has not built any housing schemes for the poor and none of the budgets have included any provisions for public housing. The private sector responds to purchasing power, not needs. So it makes housing projects with swimming pools and golf courses.

In short, the key indicators of the budget, such as tax and expenditures, have not been set keeping the poor in mind and income inequalities will continue to exist and may even worsen.

A Routine Affair

Sakib Sherani, former economic adviser to the government

This is not a growth oriented budget. Surprisingly, and contrary to the general perception, it’s not an “election year” budget either.

It doesn’t include any of the populist measures governments introduce in election years to win the favour of the people – untargeted subsidies and/or tax breaks. If anything, true to form, the finance minister has not been able to resist imposing new taxation measures of Rs 120 billion (around 0.4% of GDP).

While allocation for development expenditure has been ramped up significantly, such spending is subject to considerable delays and lags. In any case, the impact of such spending is diffused and occurs over a period of time.

Hence, in fiscal terms, this is a fairly conservative budget. That is both its strength as well as its weakness. Strength, because governments tend to table wildly populist budgets in an election year that prove to be fiscally irresponsible, and that usually lead to a macroeconomic crisis down the road. This budget largely avoids that.

Having said that, there is always an element of unrealism in budgets. The government always overstates its projected tax revenues and understates its expenditure requirements.

The weakness of the budget presented by the Pakistan Muslim League-Nawaz (PML-N) government, is that it fails to break the mould of the past 4 years in providing a growth stimulus the economy so desperately needs

This budget doesn’t appear to over-project revenues to the extent it was done in last year’s budget. But it is still an unrealistic tax collection target given that the government hasn’t made any progress in 4 years in FBR reforms. On the expenditure side, subsidies have been under-budgeted. The actual spending will be much higher.

Secondly, the amounts kept for bailouts to PIA, Railways and Pakistan Steel are unrealistic. The actual amounts will be much higher – as this is another area of government failure. Finally, even development spending seems to have been over-budgeted. The government will not be able to spend the amounts they have allocated.

The weakness of the budget presented by the Pakistan Muslim League-Nawaz (PML-N) government, is that it fails to break the mould of the past 4 years in providing a growth stimulus the economy so desperately needs.

Mr. Dar’s revenue-centric policies have driven the country’s large, formal, tax-paying and job-creating sectors such as manufacturing, into the ground. This budget was a chance to introduce a change in direction, as well as redeem the finance minister’s unfortunate legacy.

As far as the impact of the budget on the ordinary Pakistani is concerned, there will be none whatsoever. For the past many years, the budgets have been increasingly irrelevant in terms of improving the lives of the common man, particularly the budgets presented by this government.

In fact, by increasing the net of withholding and other indirect taxes exponentially, the budgets of the PML-N government have hurt the people by increasing the burden of inequitable, indirect taxation on them.

The people of Pakistan have been wondering whether it is a people’s budget, a stock market budget or a budget for “the Chinese”.

It is certainly not a stock market budget. None of the proposals put forward by them have been accepted. The Chinese have definitely been given several concessions and tax breaks but they had already been given those before the budget. And it’s certainly not a people’s budget. So it fails on all three counts to a large extent.

Unpromising Promises

Mohammed Sohail, CEO of Topline Securities Pakistan

Every annual development plan is divided into segments of which energy and infrastructure are key.

The more you invest in these two sectors, the more the economic activity increases in your industrial and service sectors which then contributes to a higher Gross Domestic Product (GDP).

This time, a record amount has been allocated for Public Sector Development Programme which may result in higher growth.

Secondly, it must be kept in mind that this is an expansionary budget. When public spending rises, inflation increases, so it might have an inflationary impact.

Comparatively, the older PML-N budgets weren’t expansionary as they were developed under the International Monetary Fund, which was a stabilisation programme.

The only positive aspects of this budget are that it may achieve growth momentum, as a record amount has been allocated for the PSDP and they have controlled defence expenditure

This time the PML-N wanted to get political gains from the budget which is why they introduced expansionary measures which will result in inflation. However, a lot depends on global oil prices which are low at present. If oil prices remain under control then inflation will remain within the government’s target of six percent.

Furthermore, it is also to be noted that economic growth automatically results in revenue growth.

If nominal GDP increases by 10-12 percent, revenue growth eventually increases by the same percent. Then you need tax measures to control the economy. However, this budget doesn’t have as many tax measures as it should have. It doesn’t tax any new sectors.

The dilemma of Pakistan’s economy is that our tax base is very narrow. No government has introduced taxes on new sectors. In the past few years, the government did expand into taxing real estate in the budgets but that’s it. And even now the government is relying on its old tax payers for revenues.

Additionally, one of the major challenges faced by our economy is low exports. This budget has introduced no major measures to address this problem.

Besides, no major incentives have been provided to local and foreign investors. The only positive aspects of this budget are that it may achieve growth momentum, as a record amount has been allocated for the PSDP and they have controlled defence expenditure. Other than that, they have generally failed on most sectors of the economy.

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Editorial Team
The Editorial team of Bol Narratives