Great expectations

A.B. Shahid

The Federal Budget 2007-08 is likely to have very little in common with what Charles Dickens had to write about in his great novel bearing the same title, but framers of the budget certainly have great expectations about a host of things (especially GDP growth rate) that, as of the moment, appear a shade over-ambitious given the hurdles that the economy is struggling to jump over.
These hurdles include the carried forward fiscal deficit of Rs.212 billion, trade deficit of $10 billion plus and current account deficit of over $7 billion. The saving grace has been the inflow of foreign funds in the form of workers' remittances ($5.5bn), direct investment ($4.16bn), and portfolio investment lately hovering around a billion dollars and fresh borrowing of $1.25 billion. Although there was a significant rise in tax revenues, particularly in the direct taxes, bulk of the resources that plugged the current account deficit were non-trade receipts, which is not a good sign.
This backdrop makes projections about tax revenue (Rs.1 trillion) and PSDP (Rs.520 billion) seem ambitious. Since precise projections of the coming budget have yet to be released there is hope that they could be made more realistic before being announced. Economic Survey is to be released a day before the Finance Minister delivers his budget speech leaving little time for anyone to assess even superficially the achievements of 2006-07 or to offer credible opinions on the accuracy of 2007-08 revenue collection projections and adequacy of the proposed expenditures. But, lack of concern for timely release of the Economic Survey is not new; under earlier regimes too the Ministry of Finance performed no better on this crucial count.
For the moment what we have are promises that the budget will be 'people-friendly' and this sweet sounding expression is being touted as the budget's most important feature as if budgets normally are not required to be people-friendly or, perhaps be the opposite thereof. Then there are eight-year projections about fantastic improvement in the debt-to-GDP ratio (down to 20% from current 52%), and reduction of the fiscal deficit to a level (3% of GDP) that even several well-to-do EU members are finding hard to achieve.
Pakistanis would love to see these dreams come true, even if it takes eight years. The only problem is that the present state of affairs doesn't inspire much confidence in such a possibility unless the government takes steps that it has been reluctant to take during the past four years in its effort to appear too business friendly. Being business- friendly is a good policy for encouraging investment in the economy's long-term productive capacity but it must not convey that businesses can get away with almost anything.
Weak, and many cases (e.g. capital gains in real estate and stock market trading) almost no regulation at all, has allowed a host of inequities to develop, which will keep taking the gloss off the high growth that the government doesn't tire of claiming. As yet, all we have heard about are plans to tax the incomes of doctors, lawyers and consultants. Not a bad idea at all, but what about taxing capital gains and agricultural income beyond a threshold that doesn't accentuate poverty? With the economy beginning to show clear signs of a slowdown, where from will we raise extra revenue that will fund the PSDP?
We seem to forget that, year-after-year budgets provide the means to steadily achieving the most important single reason for the existence of the state - fairer distribution of wealth. A case in point is that, in spite of criticism from every quarter (except the government) the spread between rates payable on bank deposits and those recoverable on loans has risen consistently. This process, accompanied by consistent reduction in taxation of this sector, has made Pakistani banks the third most profitable bunch of banks anywhere in the world. This continuing distortion has been allowed in the name of de-regulation (i.e. business friendliness). Isn't it timed to at least stop reducing tax levy on the banking sector?
Let us now take the grand promise to cut the debt-to-GDP ratio to 20% in the next eight years. This target can be achieved only by providing the economy the infrastructure necessary to sustain GDP growth above 7% and rapid growth in tax revenue as the main source for outlay on current and development expenditure. This dream may come true but in given the medium term drag on economic productivity caused by power supply shortage (to name just one factor) GDP growth is likely to suffer, and along with it tax revenue.
How then do we propose to finance the expansion needs (that will rise in direct proportion to population growth) of the infrastructure necessary to sustain GDP growth above 7%, and increase growth in tax revenue? This places in doubt the budget makers' estimate of collecting tax revenue in excess of a trillion rupees in 2007-08 on which has been built the edifice of the budget's great expectations. In any budget, the estimates that have a bearing on its success are the ones about GDP growth and tax collection. In the present case both are overly optimistic.
The expanding trade deficit (that slowed down a bit towards the end of 2006-07) is huge and it is fundamentally wrong to claim that foreign remittances and privatisation proceeds are the right sources for plugging it. The right source for plugging it are export proceeds which are almost stagnant, firstly because of the fuel price and power shortage-driven escalation in cost of manufacturing of export-oriented units and, secondly, because in spite of our claims, we are still trying to concentrate on European markets that are no longer accessible because of high competition. Situation would be worse after 2007 when these markets lift all restrictions on imports from China.
On the import side, we are simply unconcerned about the fact that we are importing a lot of grossly under-invoiced consumer goods that are sapping away the capacity of our domestic units to produce and sell the same goods at competitive prices within Pakistan. The number of industrial units that had to pack-up because of this is distortion is now in the hundreds. While our exporters continue to be slapped with 'anti-dumping' duties, we have not bothered to retaliate in like manner although it is a restriction that does not violate the WTO regime. It is a measure that needs to be adopted (with due care) without any loss of time because it has direct implications for sustaining employment, at least at the current level.
Finally, budget framers must keep in mind the filter-down effect of the taxes they propose because those taxes could accentuate inflation, which has remained out of control of both the Ministry of Finance and the Central Bank. Guarding against this possibility is critically important for containing both the rising popular dissent and the spread of poverty. It should not be a situation where what the government gives by one hand in the form of salary increases to the lower ranks of the bureaucracy is taken away by the other hand in the shape of increased taxes.
As for the private sector, it must be made to realise in clear terms that it must carry its (and much bigger) share of burden in alleviating poverty. So far, it has rewarded only the top managers thereby accentuating economic inequities. It is time that this huge sector contains its greed for profits within respectable limits, and feels more responsible and caring when it comes to paying its lower ranks. Unless the budget incorporates these measures into the laws emanating there from, the job will only be half gone. If government can't meet great expectations, it must meet the more ordinary ones.