Faustian bargains: Development budget to be cut, again

Planning Commission undertaking ‘rationalisation exercise’.

ISLAMABAD:

As always, the development budget is the first to suffer the axe.

Faced with an increasingly sharp questioning of its fiscal assumptions, the government is scrambling to get control over the projected budget deficit for fiscal year 2012 and is expected to start cutting expenses by reducing the development budget.

Sources in the Planning Commission said that the government has begun a ‘rationalisation’ exercise with two aims: reducing or even freezing funding for projects that are not meeting deadlines, and reducing the overall size of the Rs300 billion federal development budget.

The move to begin making drastic changes to budgetary allocations just one month after the money bill passed parliament is unusual and indicates serious flaws in the government’s fiscal framework for the year ending June 30, 2012.

Yet even as the development budget is being cut, sources in the Planning Commission say that the projects initiated at the behest of influential politicians are likely to remain untouched, even if they are falling behind deadlines.

Initial reports indicated the cut could be as much as Rs30 billion, or one-tenth of the federal development budget. However, Planning Commission officials emphasised that the rationalisation exercise has not yet been completed and therefore it is impossible to state an exact figure.

The Rs300billion figure had already been far below what had been requested by various ministries for their development priorities. A further cut from an already low budget is likely to adversely impact the completion of several crucial projects.

The government suffered a major fiscal setback on July 23 when the Federal Board of Revenue confessed that it had misled the nation in stating that it had met its revised tax collection target of Rs1,588billion and had been able to collect only Rs1,550billion.

That admission disturbed the government’s entire budgetary calculations, forcing the government to review both its revenue collection and spending plans. On the revenue side, the government has already been contemplating levying new taxes.

Finance ministry officials say that a cut in the development budget ‘was not needed’ and that the Planning Commission had initiated the rationalisation exercise on its own. Even the Planning Commission spokesperson, Asif Shaikh, said that a cut in the development budget was not being considered at this point.

But officials within the Planning Commission said the rationalisation exercise was being conducted to reallocate funds towards projects that are closest to being completed, with 60% completion being used as a benchmark for funding decisions.

The total size of the Public Sector Development Programme is Rs4,100billion, of which Rs3,100billion is currently unfunded, an amount that represents 1,800 projects. The unfunded portion of the development project portfolio has almost doubled in five years, jumping from Rs1,700billion in 2006 to Rs3,100billion this year.

“PSDP has always been the first item to be cut when fiscal policy is unable to deliver on controlling the deficit,” states the analytical review of the PSDP portfolio.

The Planning Commission said the number of unfunded projects was increasing due to the approval of many provincial projects without consideration for fiscal constraints.

It is unclear how effective the commission’s rationalisation exercise will be. Officials admitted that a recent exercise that put 1,000 projects into different categories had yet to be implemented when allocating funds.

Published in The Express Tribune, August 9^th, 2011.