After the end of what was an in-camera meeting of the Senate Standing Committee on Defence and Defence Production, its chair, Senator Mushahid Hussain Sayed, ‘revealed’ that the country’s defence expenditure is only 2.3 per cent of GDP and the 33rd highest in the world. The secretary of defence told the Committee that the defence budget for the current fiscal year was Rs545 billion. This is what the budget documents for 2012-13 say: Rs545.386 billion to be exact, out of an estimated GDP of Rs23,655 billion. Not much of a revelation there. One wonders why the members of the Committee — Chaudhry Shujaat Hussain, Farhatullah Babar, Sehar Kamran, Raja Muhammad Zafarul Haq, Haji Muhammad Adeel and Tahir Hussain Mashhadi among them — termed it a good beginning as nothing more was shared than the numbers approved by parliament at the time of the budget.
The given amount of Rs545.386 billion is the current budget of the Defence and Defence Production Divisions. As the honourable senators would know, all divisions of the federal government also have a share in the Public Sector Development Programme (PSDP). The Defence and Defence Production Divisions are no exception. In the current budget, the development budget of the Defence Division was Rs6.51 billion. Similarly, a development allocation of two billion rupees was made to the Defence Production Division. Defence-related PSDP is not confined to these two divisions. The Higher Education Commission, for instance, makes allocations to the universities managed by the defence authorities. In the 2012-13 budget, the development and recurrent allocation amounted to around Rs1.25 billion. Finally, and most importantly, the current budget of the Defence Division does not include superannuation allowances and pensions, a fudging done by the Musharraf regime in 2000 to show a lower burden of defence expenditure. An allocation of Rs98.218 billion is shown in the budget for 2012-13 for military pensions. It is more than three times the allocation for civilian pensions. To this must be added a proportionate share of Rs26.634 billion out of the provision of Rs35 billion made for the pay and pension reforms. On aggregate, the budgeted defence allocation for 2012-13 is Rs680 billion. As a percentage of GDP, the allocation is 2.9 per cent, not 2.3 per cent.
The computation is based on the information clearly identifiable in the budget documents as defence-related as per the generally accepted definition used by the Stockholm International Peace Research Institute. The World Bank and other databases also employ the same definition. There may be some disguised allocations in the budget — a practice followed in many countries. For instance, last year, on June 5, The Express Tribune reported that an allocation of Rs150 billion made under contingent liabilities included provisions for an armed services development programme. The item appears in this year’s budget as well. Similarly, the budget provided to the nuclear programme is not apparent in the budget. Our calculation of Rs680 billion or 2.9 per cent of GDP does not include any ‘guesstimates’ of the hidden items of expenditure.
Senator Sayed implied that his figure of 2.3 per cent of GDP made Pakistan the 33rd highest spender on defence in the world. International documents use actual expenditure, not budget allocations. In any case, these documents have not yet gone beyond 2010-11, in which year Pakistan spent three per cent of its GDP on defence. Parliamentary oversight of defence spending to ensure transparency and a revisit of the defence paradigm is welcome. A precondition is to have the facts right.
Published in The Express Tribune, October 26th, 2012.
COMMENTS (20)
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@Lala Gee: Your own retired air marshal Asghar Khan who is currently greatly in the news is on record saying that India never initiated aggression.
@gp65:
"Pakistan has been never attacked by India"
You are right. East Pakistan was attacked by Sri Lankan army in 1971, and Lahore and Sialkot cities were attacked by Afghan army in 1965. Further, everybody knows that Siachen is being held by China, while Nepal air dropped commandos in Srinagar in 1947 and is still holding Kashmir at gun point.
@Lala Gee: Some points: 1. Actually I feel India too spends too much on its defense budget. No countries that have so many deprived people as India and Pakistan sjould spend so much on defense. 2. India's defense to GDP ratio maybe comparable to Pakistan's but tax t GDP ratio is about 70% higher which allows India to spend more on education and health than Pakistan 3. India has been attacked by China and has to be mindful of at least some deterrence capability. Pakistan has been never attacked by India 4. ET comment policy allows me to comment so I will - you do not get to tell me where I can speak or not. AS long as I think I am making some bonafide points and not malafide, I will do so.
@Lala Gee: The problem is not the size of the defence budget. Its what is being spent on. Securing the golf course, flat screens for mess halls and then demanding incresed expenses in the name of "national security" is a travesty!
In continuation to my previous post, according to Stockholm International Peace Research Institute (SIPRI) Yearbook 2012, Pakistan stands at 33rd position with defense expenditures of $5.16 billion or $28 per capita, while India is at the 8th position spending $46.8 billion or $36 per capita. The complete ordered list of all countries is available here 'List of countries by military expenditures' (http://en.wikipedia.org/wiki/Listofcountriesbymilitary_expenditures).
@gp65:
"I recall the true defense expenditure would be around 938 billion rupees. In other words around 45% of tax revenues would be consumed by defense related expenses. With over 50% allocated to debt servicing, is it a puzzle why the fiscal deficit is difficult to control?"
So what? You better keep check on your own defense expenses - which is 9 times higher in dollar terms, 44.6 vs. 5.1 billion, and $36 vs. $26 per capita - rather than poking your nose in our internal affairs. You, or any other Indian for that matter, are absolutely not welcome to interfere in our defense matters. As long as our defense budget is less than 5% of GDP, I have no problem with the expenses.
@Nadir: Teeth to tail ratio leaves much to be desired. @meekal a ahmed: Thank you for the correction.
The essential point should be not neccesarily about how much money is allocated for the defence budget itself, but whether the money is actually being used in a transparent and efficient manner. Globally, defence budgets have always been wasteful and inefficient. You can look at case studies of any country and there are glaring examples of waste. The defence budget should be more transparent so that a) there is no hint of any wrong doing b) money actually go's to support troops and not the higher officer class c) if the funds were presented and audited transparently then further allocations can be made if needed.
The status quo is effectively: The generals feel that it is below their stature to make any information public let alone come under any scrutiny. This allows for unnecessary criticism.
@Usman786 talks about Minister luxuries as if Corps Commanders and Lt Generals live the life of poverty. If soldiers on the frontline dont have proper equipment, why are mess halls and corps headquarters hosting gala Eid events for senior officers?
None of the budgetary figures even take account of monies earned by NLC, FWO etc, and all the unit funds and micro business activities in the name of welfare of the troops? They may be well intentioned and actually do a very good job but why cant it be made transparent.
And finally, the real crux of the issue. Everyone is outraged if you ask any questions that seem to "defame" the Armed Forces. But this coming in a country where no one pays their taxes and then expect the state to foot the bill of a massive military establishment.
PT,
A correction:
there may have been plenty of figure-fudging in the Mush years but the shift of military pay and pensions to the civilian side was done when I was around so I know a little of the background and it was not an attempt to fudge. The idea was to use the same definition as India uses.
But in general I agree with you that much is concealed. No one knows or can know the "real" cost ; it is hidden here and there or it is off-the-books. Same applies to India and many (perhaps all?) countries to a greater or lesser degree.
As for Usman 786 wanting the IMF to address the issue of 'luxurious life of ministers', they push hard on containing all components of non-interest current spending and we push back. So our concept of "fiscal adjustment" is to cut development spending instead -- akin to throwing the baby out with the bathwater.
If we want to bring military under the civilian control then the the Parliament must take full control of defense budget. The debate on defense budget in the Parliament should not be limited to the discussion on one consolidated figure but it should include the details of defense expenditure as well. The elected leadership can't discuss the defense budget in Parliament but leader of house has to take permission from military high-ups in normalizing the trade relations between India and Pakistan. What incentive do people have to pay their taxes where their elected representatives can't discuss, approve or disapprove the expenditure out of the collected revenuesas per the will of their electors. Why should people pay taxes when the army is to waste that money in stocks, where army is running cement industries, fertilizers plants, investing in housing soceities etc to strengthen the defenses of the country. The tax to Gdp ratio in Scandinavian counteries is very high because the people who pays taxes know that the expenditures of the taxes would never be affected by the interest groups in those counteries. The citizens of scandinavian counteries know that the govermnent collect taxes to spend on the behalf of the people more efficiently.
Percentage of GDP is just one measure, albeit most common. The point is that even this has not been presented properly to the committee.
Why not this all be charged to CSF because army may be fighting in wana, Swat but it impacts whole Pakistan. Still why govt add new debts. Why does not imf and WB restricts luxurious life of ministers and above while giving loan. There should be a provision in law that any contract in which interest of state is not well kept can be cancelled any time without liability
@Shahid Butt: Thank you for responding at such great length. Greatly appreciate it. I live in USA too.So am familiar with the tax system here - while I could point to some minor correction, I directionally agree with you so will not quibble on details. In fact all the points you stated amplify my point rather than rebut it. Those taxes are paid by people because 1) employment participation rate in (for paid work) in US is much higher) - which leads to employment based taxes 2) Number of people eligible to pay income tax is an order of magnitude higher 3) overall petty corruption is non-existent in countries like US, Canada and Western Europe. No-one for example would dare to offer a bribe to the police if they were caught speeding in US or ask ' do you know who I am'? But these things are the norm in India and Pakistan. Same goes for customs officers and excise officers who can be 'managed' in India but no-one would dream of doing so in US 4) To tax the things that are taxed in US there would be significant changes to tax code impacting vested interests and therefore unlikely to get passed in parliament. This is why I felt that countries where capacity to pay is lower and the honesty/corruption factor is similar but which get much higher tax rates should be benchmarked. Per HEritage foundation, Pakistan collected 10.2% of GDP as tax. Countries like India, Thailand which have similar incomes, corruption, technology infrastructure in government etc and collect 17% (or about 70% higher than Pakistan) might be better benchmarks. US at 26% does collect more but considering the overall level of technology used for purpose, honesty within society and affluence is not that much higher.
I think we both agree on the goals but have minor differences on how to get there.
@gp65: I do not know which country do you live. I live in USA and I have found the IRS to be very efficient.There are number of taxes on earned income, starting from federal tax, state tax, city tax, Medicare tax and social security tax. Then there is capital gain tax. Your claim for 47% is relevant to only federal tax only.Every body has to pay social security tax right from the first dollar of earned income.It does not matter who you are. this tax is 6.2% by the employee and 6.2% by the employer. So total collection to the govt is 14.4%.State tax varies. Range is 4-8%.City tax varies from 2 to 8%. Every body has to pay.Federal tax varies from 10% to 39.5% depending on your income.In general if you make 50000 per yr, your take home amount will be around 31 to 32 thousand.. Now some body making 150000 will be taking around 81000. Only 5% of the people are making that kind of money.Then once you go out and want to spend this money.you will be paying sales tax 7-8% depending where you are living. That means 32000 you took home has buying capacity of around 29000. No sales tax on food and medicines.. So I think western countries are more efficient because of their good tax system. By the way there is another tax called ESTATE TAX.If you leave behind 2-3 million dollars worth of assets ( house, land stocks and bonds) then this tax is applicable. You could end up paying up to 80-90% to federal ,state ,city and district govt before your children could take any money..The good part is you are already gone from this world. You will not be signing the check. Your state administrator will do the job for you. This tax is due within one yr of death. There is a dictum in USA. Only death and taxes are certain in this world. Oh I forgot to mention alternative minimum tax which will take another page. I think I will leave at this point. Thanks for reading it. By the way I am not an accountant.
I think looking at defence expenditure as a %age of GDP is meaningless. The reason is that defence expenditure, like all other government expenditure is a part of the GDP computation. Thus, keeping everything else constant, if defence expenditure increases, GDP increases too by the same amount. So if Pakistan's defence expenditure increases by 76% from its current level, it will still be about 5% of GDP (which is a huge amount, but appears low due to the faulty metric). GDP as a %age of government revenues or a %age of govt expenditure is a better metric for analysis.
@Shahid Butt: "One solution is to increase tax collection as much as possible. They must learn from IRS department of USA regarding tax collection".
Your goal for increased tax collection is a valid one but I would like you to consider the following points : 1. US is not the right benchmark. A country with a similar per capita income but a higher tax to GDP ratio should be looked at. TThe reason is that 53% of Americans ay the income tax and only 1% of Pakistanis do. Even granting that some of it could be tax cheating, it cannot accoutn for the big difference. A big difference coems from the fact that far more Americans are affluent enough to pay income tax. 2. It is not just the tax collection and adinistration policies that need to be relooked at. Also the tax policies need to e relooked at for their distortionary impact e.g. farm income being tax free leads to not just that source of income escaping the net but a lot of other legitimate ncome getting classified as farm income to escape tax net. Anothe thing (a problem also comon to india) is taht forex remittances are not taxed in the hands of the recipients and there are no questions asked about the source of those remittances. Hence many people send their Pakistani black money out through hawala chanel and bring it back as remittance which now is no longer taxable. I seem to recall that experts like Meekal Ahmed saab have questioned the huge rise in remittances and implied that this channel is otentially being used for money laundering. 3. While changing tax administration policy can be done based on executive decision, changing the actual tax policies needs legislative support and may not be so easy since vested interests would be involved - witness the push back that RGST roll-out received not just from opposition but also from government allies.
One solution is to increase tax collection as much as possible. FBR should or must work hard and stop inventing these tax amnesty schemes with no positive results. They must learn from IRS department of USA regarding tax collection.
Sir, I would like to add one more thing. It is not correct to simply look at defense as a percentage of GDP without also looking at tax as a percentage of GDP. Perhaps a country that has a higher tax collection propensity may be able to afford a higher percentrage allocated to defense. In my opinion therefore rather than considering defense expenditure as a percentage of GDP, it would be more appropriate to consider defense as a percentage of tax collection. This ratio would thus come to around 33% for Pakistan.
I obviously do not have access to the raw budget documments of Pakistan but I seem to recollect an OpEd last year which stated that the entire expense related to the supposed 'Global war on Terror' (of around 9 billion per month) is not included in the defense expediture. One may question this exclusion also since the bulk of the expenses relate to fighting a local insurgency by TTP and not in supporting NATO/ISAF goals of fighting the Haqqanis and Afghan Taliban.. If that and the provisional 150 billion were included, I recall the true defense expenditure would be around 938 billion rupees. In other words around 45% of tax revenues would be consumed by defense related expenses. With over 50% allocated to debt servicing, is it a puzzle why the fiscal deficit is difficult to control?