Legislating fiscal stability

We need to implem­ent laws that can instil fiscal discip­line in a credib­le, transp­arent manner.

The latest Debt Policy Statement is not a bearer of good tidings for the ruling coalition. Presented to the National Assembly in pursuance of Section 7 of the Fiscal Responsibility and Debt Limitation (FRDL) Act 2005, it reports, by end January, yearly progress towards the goalposts determined by this law. The first goalpost stipulates that the revenue deficit — the difference between revenue and current expenditure — become zero by June 30, 2008 and a surplus beyond. This goalpost has been missed by a wide margin. On June 30, 2010 the revenue deficit stood at Rs308 billion, or 2.1 per cent of the GDP. Secondly, the total public debt was to be no more than 60 per cent of the GDP at the end of fiscal year 2012-13, with the ratio declining thereafter. The total public debt at 60.6 per cent of the GDP on June 30, 2010 makes a mockery of this goalpost. Thirdly, between 2003-13, the total public debt was to decline every year by 2.5 per cent of the GDP, provided that social and poverty alleviation related expenditures are not reduced below 4.5 per cent of the GDP. Budgetary allocation to education and health was required to double from the existing level in terms of percentage of the GDP between 2003-13. Instead, 0.7 percentage point of the GDP was added to total public debt in 2009-10. While total poverty related expenditure was above 4.5 per cent of the GDP in 2009-10, expenditure on health and education in 2009-10 fell to pathetically low levels of 0.76 and 1.77 per cent of the GDP. Finally, new and renewed guarantees were not to exceed two per cent of the GDP in any fiscal year. In 2009-10, the realised ratio was 2.7 per cent of the GDP. On December 31, 2010 the guarantees amounted to Rs563 billion.

When the FRDL Act was passed with great fanfare on June 13, 2005, there was limited empirical evidence to support improved fiscal performance as a result of implementing such laws. It was billed as an effective instrument to instil fiscal discipline in a credible, predictable and transparent manner. New Zealand, the pioneer in the field, adopted such a law in 1994. Brazil has been another success story under the presidency of Lula. In general, these laws combine procedures, and strengthen fiscal transparency and numerical rules such as ceilings on deficits and public debt. This is the case in Pakistan. The legislation may also cover various jurisdictions — federal, provincial and local. The FRDL Act of 2005 applies only to the federal jurisdiction. As the Eighteenth Amendment allows provinces to raise debt internally as well as abroad, this may have to change. There are also variations in terms of sanctions and escape clauses.

It is obvious that the FDRL Act is not working towards debt reduction. Nor is it proving to be a means to achieve macroeconomic stability. Laws work under the threat of punishment. The FRDL Act does not impose sanctions against any breach of targets. For reasons of national security or during a national calamity, the National Assembly can allow deviations from the targets. War against extremism and devastating floods were grounds to do so. Although presented in the National Assembly, the Debt Policy Statement was not debated. The finance minister did not take took time off to give reasons for deviations, nor did he seek the approval of the National Assembly for moving the goalposts. Indeed, the government-opposition committee deliberating on the 10-point agenda is not even considering using the FDRL framework for fiscal sanitisation.

The original draft of the law had proposed salary cuts for officers failing to ensure compliance of the targets. Perhaps the time has come for writing this provision into law.

Published in The Express Tribune, February 4^th, 2011.