Pakistan’s expenditure puzzle

The entire federal government runs on borrowed money. Last year, nearly Rs3 trillion were allocated for debt mark-up, while another Rs1.4 trillion for foreign debt repayment. This turns out to be exactly the same amount as net revenue receipts of the federal government of Rs4.4 trillion. After taking care of debt related payments, the federal government was actually left with nothing. Let that sink in.

And if this is not enough, this crisis is spiraling. Our annual interest payments have more than doubled during the last four years and our public debt to GDP ratio now stands at 81%, owing to high deficits in successive years on the back of relentlessly rising public expenditure.

However, our unmanageable recurrent public sector expenditure has evaded any serious attention of the policymakers. It’s mostly the revenue mobilisation that captures their fancy. In the current financial year, about 89% of the total projected federal expenditure of Rs8.4 trillion will be subsumed by the current side, leaving little room to finance public investments that are critical for future growth. This is what we need to fix, if we are serious about changing our fiscal trajectory.

Let’s look at our major expenditure heads. In the budget 2021-22, Rs1.3 trillion or 18% of the current expenditure has been set aside for defence services, Rs500+ billion for pensions and Rs479 billion for running of the civil government, besides interest payments claiming the lion’s share of 40%. Other major heads include grants and transfers of Rs1.1 trillion and subsidies of Rs682 billion.

The massive defence budget is a reflection of country’s national security challenges. The underlying political economy is also complex, leaving little room for negotiating a significant reduction. The civil government expenditures are even more rigid, owing to the massive government workforce. Years of politically motivated recruitments have not only enhanced the wage bill manifold but will continue to drive up the pension bill on the back of generous unfunded post-retirement benefits.

Therefore, on the current expenditure side, it’s only the subsidies, state-owned enterprises (SOEs) or pensions, where the government can potentially make a significant dent in the short term.

Last year, the government allocated Rs209 billion for subsidies and ended up spending Rs430 billion. This year, the subsidies have been increased to a massive Rs682 billion, with more than 90% going to energy sector, reflecting costs associated with poorly negotiated past contracts, artificial sweeteners to appease political constituencies, an inefficient transmission and distribution network, and delayed decisions. Radical power sector reforms are the only answer here.

State-owned enterprises bleeding the national exchequer are another stress on public expenditure.  They provide subpar services (if at all) to consumers, yet mostly offer guaranteed employment and generous benefits to political recruits. There are many SOEs for which even the rationale of government ownership is not clear. Rather than correcting market failures, in many cases they distort the free market. The options to fix these SOEs are quite clear. The government should privatise or restructure them or close them altogether, but no one wants to bell the cat.

Pay and pensions are yet another area that needs to be overhauled. The accrued pension liabilities run into trillions but are not reflected in our books. Yet countless pay and pension commissions, including the most recent one, have not done anything.

In the next few years, the policy discourse would inevitably pivot towards our unproductive government expenditure and its unmanageable growth. It would therefore be prudent to preempt this without being coerced by international lenders. This would help us preserve the room for a home-grown reform agenda at an acceptable pace.