Fiscal gap

We are faced with the dilemma of twin deficit. Time and again, higher fiscal deficit has led to high current account deficit, and vice versa. Thus, to curtail current account deficit, the fiscal house has to be put in order first. It is relevant to note here that that during the tenure of the present PML- N government, the fiscal revenues have increased from 13.3 percent of GDP in FY2013 to 15.5 percent in FY2017. That is primarily attributed to growth in tax revenues, from 9.3 percent of GDP in FY2013 to 11.6 percent in FY2017. But there is not much to talk about non- tax revenues, as privatization, coalition support fund and other non- tax revenues are hard to come by. On the expenditure side, the control is visible. Spending equated to 21.5 percent of GDP in FY2013 and stood at 21.3 percent in FY2017. The fiscal deficit was lowest in FY2016 at 4.6 percent, primarily due to restricting expenditures to 19.9 percent while the revenues were growing.

The question is: What can the government do to control the fiscal deficit? The revenues are growing; but the problem is that half of the revenues are going to the provinces after the Seventh NFC awards. The debt-servicing cost, on an average, was 3.8 percent of GDP (FY2004-10) prior to the Seventh NFC award but it has now increased to 4.4 percent of GDP (FY2011-17). With the growth in both external and domestic debt, along with currency depreciation and hike in domestic interest rates, the servicing cost may increase further. The federal hands are tied when it comes to controlling debt servicing. Similar is the case with defence spending and general administration expenses, although these are relatively declining in terms of GDP.

In these circumstances, development expenditure is the only sector the government can tinker with. The PSDP was by far the highest at 5 percent of GDP in FY2017 as compared to the average of 3.4 percent of GDP in FY2002-16. The bulk of increase in PSDP came from provinces, which spent 2.7 percent of GDP on it in FY2017 versus an average of 1.5 percent in FY2002-16. And they may be inclined to spend more in FY18 as provinces are sitting on accumulated cash surplus close to the elections.

Given this, how much of the trillion-rupee federal PSDP can be trimmed? Not much in the given situation but the next federal government ought to do so in FY19. But the main dilemma is how to put reins on provincial spending. Well, if IMF programme becomes a reality, the fund may come up with a contingency fund condition for federal government from provincial share. But it is easier said than done, considering polarized provincial political realities. Apart from development expenditure, the grants and subsidies can be thinned. The subsidies were too high in FY2010-11 when electricity related subsidies were steep. They were reduced subsequently owing to clearance of circular debt and low oil prices.

Now oil prices are inching up again, and power capacities are adding to increased capacity charges. Besides, imported RLNG, which is more expensive than domestic gas, is increasing in the gas mix. At prevailing tariffs (both for electricity and gas), the subsidies ought to increase unless tariffs are revised up. Thus, the main fiscal challenge for the new government in FY2019 would be to cut development expenditure and raise energy prices substantially to control fiscal deficit and thus curb current account deficit. But this would be at the cost of slowing the growth process spurred by enhanced energy at affordable prices amid heightened development spending as of now.