Budget by the people: Reality versus rhetoric

In a welcome departure from the past, the Punjab government has invited suggestions from the public at large and stakeholders for framing Budget, 2023.

As expected, the opposition has termed it as outsourcing governance. The Annual Financial Statement (Article 202 of the Constitution), commonly known as the Budget, is the most important medium, through which the government shares with the people the state of the state’s economy and finances. Therefore, consulting people in the run-up to the budget is not only unexceptionable in principle, but is also a sine qua non (absolutely necessary) for a sound budgeting exercise. For such an exercise to be meaningful, the following suggestions may be useful. Acknowledge the problem The first step towards solving a problem is to acknowledge its existence. By all accounts, Punjab’s economy and finances suffer from a deep structural malaise. However, successive state governments, instead of acknowledging the problem and facing it upfront, have been either kicking the can down the road, or have attributed it to factors exogenous to the state government. Frankly, the problem and its solution are both with the state government. The government being a continuous entity, blaming the past governments is also not a solution. Instead, admit the problem, draw a reform path and follow it resolutely and steadily.

Assess the true magnitude

Unfortunately, the books of the government do not reflect the true picture of state finances. Its debts and deficits, to put it euphemistically, are grossly understated, as they do not account for deferred liabilities, unfunded liabilities and off budget liabilities. The government books neither reveal what it owns or what it owes. Therefore, take a good measure of the fiscal situation and spell out what will it take to reverse the trend.

Live within the means

The current fiscal situation faced by the government is the cumulative effect of living beyond its means. As a consequence, its expenditure base is way beyond a mid-size state can afford and its revenue pool has been negatively impacted by its political economy, as it has evolved over the past three decades. So far, the state government has followed a policy of “borrow and spend, borrow more and spend more”. It is not only unsustainable but also untenable. No wonder, the government has to borrow more every year just to discharge its debt-servicing obligations. The day the borrowing spigot is tightened, we will be staring at debt default. Thus, follow the old adage to cut your coat or pyjama according to your cloth and let all stakeholders equitably share the burden resulting therefrom.

Improve budget marksmanship

Integrity of the budget is the core of the bond of trust between the state and its citizen. An analysis of variations between the budget estimates (BEs), the revised estimates (REs) and actuals (As) over 10 years from 2011-12 to 2020-21 carried out by the 6th Punjab Finance Commission reveals that not only are there wide variations between BEs and REs, but also between the REs and actuals. This reflects not only poor budget marksmanship, but also has serious unintended consequences.

First, the line departments are unable to plan their implementation strategy on the basis of BEs, as there is little certainty of these being backed by actual releases. Second, it distorts priorities, as priority programmes are normally soft targets for budgetary cuts. Third, it leads to creation of future unfunded liabilities.

Poor budgeting means cost and time overruns in project implementation. Lastly, selective release of funds leads to arbitrariness and rent seeking. This underscores the need for setting up of an independent entity patterned on the US Congressional Budget Office (CBO) – a statutory body for independent analysis of budgetary and economic issues emanating from the budget process.

Poor disclosures

People, being the ultimate stakeholders, must be apprised of the true state of the state’s economy and finances. Conventional budgeting is mainly focused on highlighting the real and imaginary achievements of the government and concealing its failures. The government is able to get away with it because the short-lived media and public interest is limited to the highlights of the new budget and claims made in the previous budget are accepted without any questions. The problem is compounded by poor disclosures about the budget process in the various budgetary documents presented to the state legislature. There’s no doubt that fiscal responsibility legislation (FRL) enacted by states incorporate provisions for disclosures relating to fiscal indicators and targets, transparency mechanisms and enforcement measures. However, on the ground implementation is extremely poor.

Weak fiscal responsibility legislation (FRL)

Most states, including Punjab, enacted FRLs. Punjab enacted the Fiscal Responsibility and Budget Management Act, 2003. However, the law has been observed more in breach than compliance. It has been amended half a dozen times because of the government’s inability to adhere to the fiscal targets stipulated therein. No wonder such a weak law has neither fostered fiscal prudence nor achieved better fiscal outcomes.

The provisions of FRL are rendered even more ineffectual because of inadequate disclosures and there being no cost to the non-achievement of the targets. By not insisting on fiscal prudence as a condition precedent, while allowing the state government to raise fresh loans, the Union government has unwittingly pushed the state into a debt trap. Therefore, FRL needs to be redrawn by incorporating fiscal targets germane to the state, as also strong enforcement and disclosure mechanisms. Any divergence from the FRL, except in emergency, must carry a cost and push the state government towards hard budget options.

The way forward

These fundamental reforms are bound to take time to flesh out details and to ensure administrative and legislative compliance measures. However, a broad roadmap in this behalf may be suitably incorporated in the ensuing budget. Failing this, budget by the people, like many in the past, will be an empty rhetoric.

PEOPLE, BEING THE ULTIMATE STAKEHOLDERS, MUST BE APPRISED OF THE TRUE STATE OF THE STATE’S ECONOMY AND FINANCES. CONVENTIONAL BUDGETING IS MAINLY FOCUSED ON HIGHLIGHTING THE REAL AND IMAGINARY ACHIEVEMENTS OF THE GOVERNMENT AND CONCEALING ITS FAILURES