Budget FY21 — growth imperatives

We can demonstrate through the budget a move to higher growth that is inclusive, sustainable and promotes stability

In the shadow of 1 in a 100-year shock to the world economies, Budget FY21 has to propose, in an unequivocal tone, growth inducing initiatives. What we want to avoid is a questionably low economic growth and a new normal based on lower productivity, higher debt and inequality, and sluggish investment and demand. Budget can, and must, counter all this.

Can we catapult the economy with levers that can ignite growth? It’s a question that is hardly considered. Initial conditions in which we went into the crisis do not inspire enough confidence that the economy is wired to come out with even a moderate growth and an inclusive framework. Conditions for growth have also changed post-Covid-19. Countries will want to be more self-reliant and aspire to generate more domestic demand and domestic supply to drive growth.

Budget can potentially be more influential this year as fiscal policy is expected to have a higher multiplier effect with a large output gap. A sound starting point for Budget FY21 is to glide the economy from a survival mode to a revival mode. It can signal a move away from policies of anti-inflation; austerity; taxing transactions; demand compression; taxation with muted emphasis on compliance, and; only scratching structural reforms, driven by a desire for securing policy credit loans.

Growth architecture can drive the Budget outlook. We can define policies to support creation of competitive markets in agriculture and power sector, significant deregulation not reregulation in the tax and labour area, an investment regime and a divestment effort. Supportive changes to laws and regulations governing inspections and assigning levies, especially curtailing discretionary inspection regimes operating on a ‘raid and seal’ premise can go a long way in providing impetus to the small and medium sized enterprise (SME) sector. Initiatives such as mandatory public procurement from SMEs and access to credit can create demand to spur growth. Budget FY21 can give a public nudge for cutting business red tape and make the industrial relations system more flexible. Some indication, however small, can be given on rationalising the size of the government and a reduction of non-debt financing expenditures.

Responsible budgeting today means investing to support our people and businesses to get through this crisis and to rebuild. Policies that favour growth in consumer demand for building homes have to increase the share of house building finance from a scanty 0.65% of total private sector credit. Credit expansion is essential to avoid excessive slowing of the economy. Banking sector can be incentivised or even coerced, to step-up to unclog key sectors using their strong liquidity. Government borrowing reliance can be shifted back to the SBP for some time — these are unprecedented times.

The SMEs sector is hopelessly starved for credit with mere 177,000 borrowers out of 5.2 million firms. Financial institutions’ credit direction must be facilitated through guarantee schemes, interest-free options, and making room for government contracts to act as collateral for firms. This is essential to prevent liquidity issues from becoming solvency issues in Pakistan. E-enablement and emerging digital economy, meanwhile, should also be on top of our mind as the world moves towards 5G connectivity and can be supported through a Business Development Services Fund. We can set aside funding to support small businesses to improve their e-commerce service offerings and propose incentives to encourage e-commerce adoption.

Risk of doing too little is greater than doing too much. Removing distortions of discretionary concessions estimated at 2% of GDP, taxation of inherited wealth, land and agri-incomes and capital gains will not only support revenue effort but also lead to competitiveness in the economy with our ability to reduce tax on businesses. We can demonstrate through the budget a move to higher growth that is inclusive, sustainable and promotes financial stability.

Published in The Express Tribune, June 3^rd, 2020.

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