What happens when you lose your way

Budget seems like a hodge-podge of populism and reformist enthusiasm.

KARACHI: The general opinion of most critics is that budget was populist, and not reformist. One could however disagree that the budget was actually reasonably reformist but got dragged down by inherent populist tendencies that plague most political parties in Pakistan. The urge to please the jiayalas or the workers or activists usually manages to take over.

But that is where the budget went wrong. It was not populist enough to please the masses. And it was not reformist enough to ensure that the economy will be in a better state when the next budget is being presented, by the same people, or maybe a different government, which still remains to be seen.

This is what happens when you are not sure what you want. The government was torn between two extremes. It seems as if the prime minister wanted a populist budget – one can’t blame him for thinking like a politician – it is election year after all. Apparently there was a debate going on, on the eve of the budget whether to reduce petroleum prices further, and issue a fresh notification after one had already been issued. This was being opposed by the Ministry of Finance which by many standards as come across as the voice of reason over the past four years.

It is this inability to see eye to eye on core issues like circular debt, the energy crisis and excessive government borrowing which tends to make one feel that not a lot is going to change. However no matter how hard the government tries, they will not be able to tighten their belt as the budget seems to indicate. For example, because it is election year allocation and utilization of allocation for development expenditure is expected to be at maximum.

This is likely to be hit by another measure that has two flaws in it. One, that it is ambitious – also a hallmark of populist regimes – and second that it is populist. The measure in question is revenue collection and it seems highly unlikely that the government will be able to achieve a tax target that is 18% higher than last year’s. This looks particularly difficult because no significant measures have been announced to increase direct taxes and with the implementation of single digit GST rate regime, taxation targets are expected to be missed yet again.

As a result targets of controlling the budget deficit will also most likely be missed and against the government’s target of keeping the budget deficit at 4.7%, 5% or higher seems more plausible.

The target for subsidies has been set at Rs209 billion. Last year, the government doled out subsidies to the tune of Rs512 billion. Electricity subsidies for this year have been set at Rs120 billion. Last year the government ended up paying Rs412b as power subsidy and this year it wants to eradicate subsidy entirely. In an election year, that could be a tall order.

So in a situation where the government is unable to distance itself from the conundrum of fiscal rules operating at the crossroads of politics and economics, one can only hope that this year will be any better for the economy. Key issues like failure to implement IMF reforms, failure to implement the RGST, the lack of any serious measures to eliminate power subsidies and resolve circular debt will be at the forefront when our economic managers sit down to prepare another budget, next year.

Published in The Express Tribune, June 11^th, 2012.