Economic Advisory Council terms budget strategy ‘anti-poor’

Published: May 1, 2011
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Economists criticise government for not taking necessary steps to resolve crisis.

Economists criticise government for not taking necessary steps to resolve crisis.

ISLAMABAD: 

The top economic advisory body has slammed the government’s budget strategy, terming it anti-poor and claiming it cannot boost growth due to squeezing fiscal space. It has also suggested that loss of jobs will continue next year as well.

It was the second major blow to a thin paper, outlining the government’s priorities in the wake of a dwindling economy, as the opposition has already termed the document a “pack of lies”.

In a meeting of the Economic Advisory Council (EAC) on Saturday, attended also by Finance Minister Dr Abdul Hafeez Shaikh, top economists, including former finance ministers, voiced their reservations about the upcoming budget. The economists criticised the government for not taking difficult economic decisions that were necessary to come out of the crisis.

They said the biggest concern for next year was double-digit inflation. The government has targeted an inflation rate of 12 per cent for fiscal year 2011-12.

“The government itself is responsible for the mess, as it is shying away from taking difficult decisions, which will affect the ruling class the most,” said former finance minister Shaukat Tarin. He urged the government to strike a balance between growth and economic sustainability, and added that if agriculture tax was not levied, urban political parties would not let the government collect retail tax.

Tarin explained that if the government did not present a comprehensive energy plan to overcome the crisis in 15 days, people would come on streets, making it difficult for the government to present the budget.

EAC showed consensus only on the issue of taxing the agricultural sector. It also recommended that canal water be priced realistically and advocated continuation of power tariff rationalisation. However, the economists opposed the revival of wealth tax, terming it regressive. The Pakistan Business Council has already opposed the wealth tax.

Economic growth

For the outgoing fiscal year, economic managers have estimated a 2.8 per cent increase in national income. For the upcoming fiscal year, the gross domestic product (GDP) growth is estimated at 4.2 per cent, according to the Budget Strategy Paper. It seems the government will continue to follow a tight monetary policy in the name of macroeconomic stability, which will result in a slower growth.

According to the Asian Development Bank (ADB), Pakistan needs a growth rate of around eight per cent to create jobs for three million young people entering the market every year.

“Delays in implementing policy measures and fiscal management practices that are necessary for macroeconomic stability have undermined investment in infrastructure and production capacity.”

Former finance minister Dr Hafiz Pasha said the government did not have enough fiscal space, without which it would be difficult to present a growth-oriented budget. Ironically, the Ministry of Finance has been selling two budget deficit targets. At one point, the budget strategy paper puts the deficit estimate for the upcoming fiscal year at 4.5 per cent (Rs950 billion). However, another page shows the figure at five per cent of GDP (Rs1 trillion).

The economists also asked the government to increase the tax-to-GDP ratio by at least one per cent every year in a bid to increase the lowest ratio in the world, which currently stands at 9.1 per cent. However, the government has planned to add only half a percentage point this year.

Published in The Express Tribune, May 1st, 2011.

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Reader Comments (1)

  • Meekal Ahmed
    May 1, 2011 - 6:01AM

    The wealth tax is REGRESSIVE??

    This is what an “economist” has said according to this report. Who is this economic nut-case?

    I have great respect for Shaukat Tareen Sahib. But HE should have introduced the agriculture income tax when he was FM.

    If this year’s fiscal out-turn is expected to be 5.3-5.5% (perhaps even higher once all the numbers are in), next years target of 5% implies NO fiscal adjustment. You can with that number say good-bye to the IMF, that’s for sure.

    But the people will pay the price in terms of higher inflation, a weaker external current account, higher borrowing and debt, and perhaps a more depreciated exchange rate. You cannot have your macroeconomic cake and eat it too.

    Of course an inflation target of 12% for next year is and should be absolutely unacceptable. But what does an inflation number of, say, single digits (8%?) imply for the fiscal and monetary stance? Who is going to have the guts to implement such a tightening of policies and how will this be achieved?

    It would be a miracle if the tax-to-GDP ratio rose by 0.5%. How is that going to be achieved?

    Dr. Pasha is wrong to think that a tight fiscal stance is anti-growth. Growth must come from the private sector. A tight fiscal stance will limit government borrowing and debt, lower interest rates and make room for the private sector to invest in new capacity, create jobs, export and thus stimulate growth.

    A looser fiscal stance (bigger fiscal deficit) will simply “crowd out” the private sector which is what has been happening for some years now, keep market interest rates high, increase debt and stifle economic growth. Recommend

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