Failing methods for deficit disorder

Persistent deficit can lead to more indirect taxes, higher petroleum levies

ISLAMABAD:

A few people noticed that the presentation of the annual budget statement for fiscal year 2020-21 on June 12 was preceded and succeeded by two mini-budgets on June 10 and June 17 respectively, with both supplementary budgets allocating billions of rupees for the outgoing fiscal year 2019-20 in an ex-post facto fashion.

Known as “throwing out the bodies” in political media, the sandwich approach was apparently politically motivated to avoid any accountability debate on supplementary budgets by taking all controversial decisions under the cover of a major distraction ie the annual FY21 budget speech.

These supplementary budgets approved loans and grants for various loss-making state-owned enterprises such as Pakistan International Airlines (PIA). Even the Federal Board of Revenue’s (FBR) tax refunds amounting to Rs0.1 trillion for the outgoing fiscal year were channeled through a supplementary grant in order to inflate its revenue collection figures.

It is evident that the cabinet and the Q-block have employed the ‘Shock Doctrine’ by using the Covid-19 crisis to justify austerity measures and harsh structural adjustments to the economy. The huge cuts on public investments in the budget, amid the Covid-19 crisis, may lead to more business closures and a further reduction in household income.

So, a day after receiving the thumbs up from the cabinet, the government got the thumbs down from the stock market, which went bearish afterwards.

The annual budget exercise, however, for the first time was completed under a new legislation called the Public Finance Management Act (PFMA) 2019, which is a great step forward in making the budget process more systematic and transparent.

The PFMA has resolved a lot of problems, though it has failed to curtail supplementary budgets.

Although the World Bank backed the Public Expenditure and Financial Accountability (PEFA) programme report for 2020 after implementing budget reforms, the US Department of State has released its 2020 Fiscal Transparency Report, agreeing that public finance processes are sound in principle but there is room for better audit reports and a full disclosure of public debt obligations.

The twin deficit problem is, however, as real as it gets and the fact that the Rs7.1-trillion budget has a Rs3.2-trillion deficit at a time when Covid-19 has brought economy to a halt is alarming.

Balancing budget

Though the government has been learning how to control discretionary spending, these procedures are not being closely adhered to after the State Bank lowered the cost of borrowing significantly. There is a need for budget balance in accordance with the economic cycle, which won’t be possible unless parliament legislates on rules for budget balancing.

The PFMA 2019 fails to address issues related to policy-based fiscal strategy and budgeting as it is primarily aimed at legitimising the already existing bureaucratic practices.

The Budget Manual 2020 gives no guiding principles on how to manage public debt or establishes any performance criteria for annual budget preparation. Systemic reforms are needed to allow provision of targeted stimulus during recessions for an anaemic recovery and austerity measures when the economy is overheating.

Very often, we see that the government takes austerity measures when actually a stimulus is needed and injects stimulus when austerity should have been the call.

For example, during the China-Pakistan Economic Corridor (CPEC)-driven economic boom from 2013-2018, the government had the opportunity to reduce subsidies, increase taxes and hence balance budgets with relatively ease as a stimulus package was not needed.

With the economy gaining momentum, 2016 was the right time to arrest the relentless rise in the sky-high debt and balance the budget. In contrast, the government subsidised imports by keeping the currency strong, reduced income tax rates and increased public expenditures by raising salaries of public servants.

Similarly, the current government should have taken a stimulus approach instead of an austerity drive as the CPEC shopping spree was over and the economy was already slowing down. It instead reduced subsidies, increased taxes and interest rates, resulting in a double-whammy for an already bearish economy, and high inflation.

Such policy attempts have a reverse impact and the government ends up having even lesser revenue than before, with the deficit escalating to new record levels.

Business cycles

The issue of budget balancing is hardly partisan but parliament, as a body, is apparently in a state of denial. Elected officials, at least most of them, recognise the bleak circumstances but are too concerned about next elections to win over voters.

But in spite of the politics around discretionary funds, someone has to lay the groundwork that will allow public officials to take firm action to address budget woes. This can’t happen unless finance gurus understand the politics and economics of business cycles.

If the deficit problem goes unchecked, then the public can expect more indirect taxes and higher petroleum levies in future, shattering the confidence of institutional investors.

One way to reduce economic uncertainty to some extent could be periodic publication of short, medium and long-term forecasts by the State Bank and the finance ministry related to interest rates, exchange rates, Consumer Price Index (CPI), public expenditures, tariffs, energy prices and revenue collection.

This will give the stakeholders a clear picture of future budgetary deficits and expected indirect taxes.

Trimming the government’s size by selling off white elephants and pension reforms are obvious policy options but they carry huge political costs. However, open and candid dialogue with all stakeholders needs to be initiated.

At the end of the day, balancing the budget is indeed a taxing job but, if ignored, it will only grow worse for the taxpayers.

The writer is a Cambridge graduate and is working as a strategy consultant

 

 

Published in The Express Tribune, July 13^th, 2020.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.