An economic system and its architecture are designed and managed to achieve the essential goals of economic growth, stability, employment and efficiency. Economic management is a function of complex interactions of multiple systems and subsystems, one of its prime instruments is economic policy which is implemented through fiscal and monetary management of the economy. Fiscal management constitute a formal policy plan by a government to manage the real side of an economy through expenditures and taxation control measures. The monetary management, on the other hand manage inflation and employment, through controls of money supply and interest rate. Generally, the fiscal policy in a market economy is laid out in the form of an annual budget plan which is a document designed and prepared to allocate and manage scarce and constrained resources to the multiple ends of economic, political and national objectives. In line with the international practices in vogue, Pakistan also outline its Fiscal policy in the form of an annual budget planning exercise.
The annual budget plan for financial year 2020-21 was presented to the National Assembly on June 12, 2020 by Federal Minister Mr Hammad Azhar. This is the 3rd budget plan of the incumbent PTI government. The budget speech gave an overview of the economic performance of the previous year and laid out revenue and expenditure goal for the coming year.
Economic performance of previous fiscal year and future plans are the main drivers of the federal budget. The economic performance of the previous year policy for the 1st 3-quarters was indicated by shown by stabilisation of the economy and improvement in economic indicators. Main indicators consisted of reduction in the triple deficits, Current Account deficit by 73% from $ 10 billion to $ 3 billion, trade deficit by 31% from $ 21 billion to $ 15 billion and fiscal deficit from 5% to 3.8% of the GDP. On the other hand, a primary surplus of 0.4% of GDP was achieved for the 1st time in last 10 years, FBR revenue increased by 17% with aim to achieve the revised revenue target Rs 4,800 billion, remittances increased to $ 17 billion and foreign direct investment more than doubled from $ 0.9 billion to $ 2.15 billion. Besides there was historic refund of Rs 254 billion to the business community and the direct cash transfers in the form of “Ehsaas Program”. The success of debt management strategy was indicated by shifting 74% of domestic debt portfolio to long term, thereby, saving an amount of Rs. 240 billion. Acknowledgement for this performance can be found in form of IMF approval of Extended Fund Facility of $ 6 billion, Bloomberg’s ranking of Pakistan Stock Exchange as one of the top performing markets of the world, Moody’s ratings upgrad from B3-Negative to B3-Positive and improvement in “Ease of Doing Business” ranking. However, the Covid-19 crisis has severe negative repercussions at the national and international levels both. Industry and retail businesses have severely hit, reducing national output by Rs 3 trillions to reduce GDP growth projection from 3.3% to -0.4%, budget deficit upward revision to 9.1% from from 7.1%, FBR revenue loss Rs 900 billion, non-tax revenue loss by Rs 102 billion in addition to reduction in exports and remittances, large scale manufacturing and FDI and tourism.
The focus of the fiscal policy plan for the year 2020 -21 of the PTI government is continuation of its effort to improve fiscal discipline through a combination of measures. These constitute Implementation of Public Finance Management Reforms, reduction of financial burden by Austerity and restructuring, elimination of borrowing from SBP for budget financing, facilitating PSDP spending and capping stock of public guarantees.
The overall outlay of the Federal Budget 2021 is Rs 7137 billion. The revenue side of the plan consist of FBR taxes of Rs 4963 billions and a non-tax revenue of Rs 1109 billion, combining to make gross revenue stream of Rs 6573 billion. The inflows contain bank and non-bank borrowing components of Rs 889 billion and 1395 billion respectively. On the outflow side the major outlays are interest payments of Rs 2946 billion, followed by provincial share of Rs 2874 billion and then Defence, Affairs and Services of 1289 billion. Public Sector Development Program (PSDP) outlay is Rs 650 billion.
Resource generation and allocation is inherently subject to constraints and limitations, the severity is much more the wider the span is. The constraints of budgeting in Pakistan are diverse, while some are intrinsic or in other words genetic, others are structural and still others are external, while there is yet another set that is contingent. Debt servicing and defence services constitute the inherent, genetic and binding constraints of budgeting in Pakistan, consuming the major share of revenue. Provincial shares allocation is a compulsion that needs to be fulfilled. Structural constraints include undocumented economy though is a consumer of the infrastructure remains out of the resource contribution net, thereby, lay disproportionate load on the contributing documented resources. Hence, infrastructure investment has to cater for the non-contributors and free rider component of the economy. High cost public sector; administration, services and inefficiency, and sick state-owned enterprises are yet another structural constraint of the economy that have to be serviced by the scarce resources. External financing and their restrictions, primarily, the IMF conditionalities are also binding to be fulfilled in taxation and public utilities. Political manifesto, an inherent part of democracy, also vies for its own share of resources; Benazir Income Support and Ehsaas programs as well as subsidies and manifesto specific schemes have to be financed at any cost. These constraints are major distortions on the resource allocation equation which is further aggravated by the unforeseen contingent requirements. The spite of Convid-19, the dreaded contingency has adversely hit even the most stable and expanding economies, Pakistan is too meek a subject. Besides consuming huge financial resources and adversely hitting production, it has induced huge uncertainty in the budgeting process. Coved-19 hit global economy will also constitute a negative shock for Pakistan economy. Budgeting in these constraints and uncertainties is a difficult proposition for any economic planner and political dispensation.
The official budget document expresses the specific thought out philosophy and approach of the plan as a crisis budget. The budget philosophy is expressed as a balancing act between corona expenses and fiscal deficit, controlling primary balance at sustainable level, protecting social spending, resource mobilisation with the minimum tax structure changes, accomplishing IMF benchmarks and proffer viable external defence and internal security. At a secondary level, the plan will also encompass provision of stimulus package to support the economy, stimulate growth by adequate development outlay for Naya Pakistan Housing Scheme, Kamyab, Jawan, Sehat Card and Billion Tree Tsunami schemes. The budgetary proposal will continue with the austerity measures, revision of the National Finance Commission (NFC) Award and rationalisation of the subsidy regime.
The figures of the budget proposal are lower compared to the budget of 2019-2020 and its revision. This can be termed as rationalistion of the present budget in view of the economic indicators, the result of the preceding budget and the Corona uncertainty. The FBR revenue target has been revised downward to Rs 4963 billions compared to the previously planned ambitious target of Rs 5,555 that was revised to Rs 3,908 billion. The taxation matrix assign the major contribution to income tax of Rs 2036 billion and sales tax of Rs 1919 billions. In the non-tax revenue head, the petroleum development levy shows more than doubling to Rs 450 billion from Rs 216 billion. The taxation measure indicate the continuation of preference for assured, low cost and tested measures. The much propagated tax base widening measure seems to have been relegated again as shown by the high GST rates and collection. Higher petroleum development levy collection will deny the end consumers, both the household and the industry, the benefit of the global petroleum pricing fall. As an important input, higher petroleum prices, though will generate easy revenue for the government, but will add to the cost of production, thus reducing production, consumption and revenue generation, besides adding to the already non-competitiveness of exports. The revenue shortage is aimed to be met through non-bank borrowings which shows a huge upward jump. Compared to previous year non-banking borrowing of Rs 833 billion the new target is Rs 1394 billion. Thus the net public debt will be increased by more than double from the previous year target of Rs 583 billion to Rs 1178 billion, with major component increase in the permanent debt from Rs 211 billion to Rs 864 billion. This increase is the result of planned decrease of foreign borrowing from Rs 2990 billion to Rs 2157 billion. This is liley to reduce pressure on the primary balance of the government.
Unlike the marked changes on the revenue side the expenditure side, which is subjected to the higher pressure of constraints the figurative variations are lesser from the previous budget. Mark up payment remains as the highest allocation with Rs 2946 billion, up from previous year of Rs 2891 billion. This may be attributed to the high mark up rate of 13.75% as set by the State Bank to control inflation, which has added to national debt and arguably played lesser role in reducing inflation. Defence expenditures in real terms have seen a capping whereas housing and federal health allocations have seen market change to Rs 35 and 25 billion respectively. A striking feature of the budget is the freezing of pays and pensions in view of the Covid-19 adversity. Besides, demotivating the public sector employees this measure is likely to have negative effect on disposable income in the face of high inflation and this not faring well for the manufacturing sector in the form of reduced consumption.
This resource-expenditure matrix have been computed to lead to a budget deficit target of 7% compared to the previous targeted deficit target of 7.1% and incurred of 9.1%. This again appears to be too ambitious a target. The overall budget was more oriented towards changes in regulatory procedures. New measures and revision of existing measures are prominent omissions. Also are there rare estimates of the various measures outlined in the budget. The choice appears to be for a more cautionary fiscal policy and not any drastic changes. On the development measure, the preference is stabilisation vis a vis growth-oriented measures.
The choice for cautionary fiscal policy and stabilisation may be the choice in view of the uncertainty at the global level. The world economy is heading for contraction and negative growth and so will be the prognostics for Pakistan economy.
Budget is the result of the plans, policies, operations and performance of the state, the government and the incumbent political dispensation. The downward trend in both; the indicators of the previous year and the planned budgetary figures are not manifestations of good economic health. Reversal of the trends and the direction will require revamping of the team of economic directors and bureaucratic practitioners. While the previous two budgets of the present government that were framed as transitions from the policies and preferences of the previous government, this 3rd annual budget, should be manifestation of the choices of the PTI manifesto. It will be gauged not in comparison with the performance of the previous set up but will be measured against expectations build and propagated by them. The budget plan appears to be over simplistic, probably in view of the of the global uncertainty in the face of the Covid-19 menace. Neither does it dwell deeper into resource generation nor outlines the financial effects of the various policy measures proposed. It appears to be an intermediary document for more amendments and consequent revisions, plans and corrective measures generally termed as mini-budgets in Pakistan, that has become a regular trend in financial planning in Pakistan, that are now accepted and expected practices, compared to other elsewhere where it is considered undesirable and indications of weakness. On the positive side, stabilisation and the arresting downward trend of the indicators may respond positively to facilitating policies, transparency and the resolve of the government to deliver in adverse circumstances. The economy has the capacity to rebound and respond to inputs and incentives form the government. Sector specific policies and packages, for instance the realtor sector, may in combination with the development outlay take a start and stimulate other sectors of the economy. The budgetary proposal will deliver the planned results in combination with economic measures and policies specifically tailored to the needs of the industry. No secluded document or standalone plan can succeed until and unless it is implemented and tuned in combination with other measures of economic revival. The government has to find the team, develop the confidence, take the decisions, generate the will and take the pill to get the results.