A fun­da­men­tally flawed fis­cal pol­icy

The Pak Banker - - 4EDITORIAL - Dr Muham­mad Yaqub

THE coun­tries in the Far East, which were way be­hind us in eco­nomic and so­cial de­vel­op­ments up to the 1960s, have by now de­vel­oped to a stage where they are the envy of our coun­try. Even Bangladesh, which was con­sid­ered to be a bas­ket case and an eco­nomic drag when it was a part of Pak­istan, seems to be march­ing ahead of us.

Pak­istan is rich in nat­u­ral and hu­man re­sources but is be­ing left be­hind by other coun­tries in the re­gion. The pub­lic is at a loss to un­der­stand what is ail­ing the coun­try. In a nutshell, an in­sin­cere and in­ef­fec­tive lead­er­ship has failed to ex­ploit the full po­ten­tial of the coun­try and has in­stead dragged it to­wards the in­glo­ri­ous sta­tus of a fail­ing state.

Specif­i­cally in the eco­nomic field, the main fac­tor for the coun­try's poor per­for­mance is fis­cal mis­man­age­ment year after year by suc­ces­sive gov­ern­ments in the last three-four decades. Not­with­stand­ing the self-con­grat­u­la­tory and boast­ful speeches of a suc­ces­sion of fi­nance min­is­ters while pre­sent­ing bud­gets, and en­dorse­ment of fis­cal pol­icy pro­grammes of almost all the gov­ern­ments by the IMF, the pub­lic should be aware that fis­cal mis­man­age­ment is in fact the mother of all eco­nomic ills in Pak­istan.

Fis­cal mis­man­age­ment has ad­versely af­fected not only al­lo­ca­tion of re­sources and rate of eco­nomic growth, price sta­bil­ity and dis­tri­bu­tion of in­come but also di­rectly neg­a­tively im­pacted the lives of or­di­nary peo­ple. On the ex­pen­di­ture side, waste­ful and in­ef­fi­cient use of re­sources for the ben­e­fit of the rich and pow­er­ful, com­bined with cor­rup­tion and pil­fer­age of na­tional wealth for self­en­rich­ment by the rul­ing elite have been re­spon­si­ble for in­ad­e­quate fund­ing for the health, ed­u­ca­tion and so­cial wel­fare sec­tors leav­ing the vast majority of the pop­u­la­tion prover­bially out in the cold. On the rev­enue side, ex­clu­sions, de­duc­tions and ex­emp­tions in tax­a­tion given to the vested in­ter­est groups and the rul­ing class have kept tax rev­enue way be­low the po­ten­tial, and the in­ci­dence of what­ever taxes have been col­lected has fallen heav­ily on the poor.

The high level of pub­lic sec­tor ex­pen­di­ture ac­com­pa­nied by a low level of tax rev­enue as a per­cent­age of GDP forced suc­ces­sive gov­ern­ments to fill the gap by ex­ces­sive do­mes­tic and for­eign bor­row­ing. With the pas­sage of time, the ser­vic­ing of the mount­ing pub­lic debt has be­come a part of the prob­lem en­trap­ping the gov­ern­ment in a vi­cious cir­cle.

De­spite the fact that ev­ery gov­ern­ment kept a part of the ex­pen­di­ture hid­den be­hind the re­ported fis­cal statis­tics, the of­fi­cially con­sol­i­dated ex­pen­di­ture of the fed­eral and provin­cial gov­ern­ments av­er­aged about 20 per­cent of GDP in the last five years, fluc­tu­at­ing in a nar­row range of 19 to 21 per­cent of GDP de­pend­ing upon the ex­tent to which ex­pen­di­ture was kept out of the pub­lished fis­cal statis­tics.

On the tax­a­tion side, the to­tal tax rev­enue of the fed­eral and provin­cial gov­ern­ments in the last five years av­er­aged about 9.8 per­cent of GDP with the year-to-year fluc­tu­a­tions be­tween the low­est 9.3 per­cent of GDP and the high­est 10.1 per­cent. More­over, about 65 per­cent of the to­tal tax rev­enue was de­rived from in­di­rect taxes which are re­gres­sive in their im­pact and have a di­rect bear­ing on the rate of in­fla­tion. Not­with­stand­ing data ma­nip­u­la­tion, there was an av­er­age an­nual gap of over 10 per­cent of GDP be­tween the recorded con­sol­i­dated ex­pen­di­ture of the fed­eral and provin­cial gov­ern­ments and their tax re­ceipts.

A part of this gap was cov­ered with what is called non-tax rev­enue which av­er­aged about 3.5 per­cent of GDP in the last five years with wide year-toyear fluc­tu­a­tions rang­ing from 2.6 per­cent of GDP to 4.2 per­cent. About one half of the non-tax rev­enue is the prof­its of the SBP and 'de­fence' re­ceipts as recorded in the fed­eral bud­get.

But we all know that the SBP is a non-profit or­gan­i­sa­tion and its huge prof­its do not rep­re­sent any com­mer­cial ac­tiv­i­ties. What has hap­pened is that the gov­ern­ment has en­gaged in mas­sive bor­row­ing from the SBP in the last five years on which it pays in­ter­est. That in­ter­est in­come is ploughed back as non-tax rev­enue in the form of profit trans­fers by the SBP to the fed­eral gov­ern­ment. Th­ese prof­its will not ex­ist if suc­ces­sive gov­ern­ments had not in­dulged in ex­ces­sive bor­row­ing from the SBP as a sub­sti­tute for tax ef­fort.

It may be added that gov­ern­ment bor­row­ing from the SBP amounts to im­plicit tax­a­tion of the poor through in­fla­tion the bulk of whose bur­den falls on the poor and the small savers. The de­fence forces are not a rev­enue col­lect­ing agency, and the 'de­fence' re­ceipts per­haps rep­re­sent a part of the Coali­tion Support Fund of the US gov­ern­ment that are shown in non-tax rev­enue. Both SBP prof­its and de­fence re­ceipts are tem­po­rary and re­versible and will cre­ate fur­ther fis­cal dif­fi­cul­ties once they dry up.

Even if we take non­tax rev­enue at its face value and merge it with tax rev­enue, an av­er­age an­nual gap of 6.5 per­cent of GDP be­tween to­tal ex­pen­di­ture of the fed­eral and provin­cial gov­ern­ments and their to­tal rev­enue re­mained un­cov­ered. The gap be­comes big­ger if ad­just­ments are made for un­recorded ex­pen­di­ture of the pub­lic sec­tor and wind­fall/ non­re­cur­ring re­ceipts - such as for­eign grants and pri­vati­sa­tion pro­ceeds - recorded above the line in fis­cal statis­tics. Un­for­tu­nately, fis­cal data ma­nip­u­la­tion has been taken to a new 'art' form by the PML-N gov­ern­ment which has en­gaged in 'ac­count­ing en­gi­neer­ing' much more ag­gres­sively in pre­par­ing and pre­sent­ing the bud­getary statis­tics to make them look bet­ter on pa­per. For ex­am­ple, the bud­get deficit for FY13 - the last year of the PPP-led gov­ern­ment - was blown up to 8.2 per­cent of GDP by in­clud­ing the pay­ments of cir­cu­lar debt at the last mo­ment. In FY14, the cir­cu­lar debt was kept out of the bud­get, and with some ad­di­tional ac­count­ing trick­ery the bud­get deficit was shown to have de­clined to 5.5 per­cent of GDP.

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