Crossing the debt ceiling

While this is not a desirable situation, it is nonetheless a useful policy option that is rendered illegal by the law

At least it was honest enough to admit it this time. The government has long been flirting with breaching the debt limits set in the 2005 Fiscal Responsibility and Debt Limitation Act and has at long last crossed them. Analysis from the State Bank of Pakistan suggests that this breach may have, in fact, taken place much earlier, so perhaps we should be grateful for the government’s candour in at least admitting its faults this time. But the crossing of this milestone is not a good thing and the government’s failure to prevent the debt-to-GDP ratio from exceeding the 60 per cent benchmark is but the latest sign that Islamabad’s lack of fiscal discipline serves to act as a drag on the rest of the economy. Unto itself, public debt reaching 63 per cent of the total size of the economy is not a particularly disturbing fact. But in Pakistan’s case, coupled with anaemic tax collection rates and staggering debt-financed budget deficits every year, these numbers can start to look alarming.

Yet, far from taking measures to alleviate the problem, the Nawaz Administration, particularly Finance Minister Ishaq Dar, does not appear interested in cracking down on tax evasion, the root cause of Pakistan’s high and growing debt. By all measures, growth in revenue collection has fallen to the single digit, compared with growth rates exceeding 15 per cent even in most years of the otherwise lackadaisical Zardari Administration. We would call on the government to redouble its efforts to collect more taxes, particularly from the absconding economic elite, but that would imply there was an effort in the first place. However, even as we find fault with the government breaching the Debt Limitation Act, we do believe it to be an unwise law that the government should probably repeal. Fiscal policy can be a useful countercyclical tool that the government can use to revive economic growth during recessions, an action that can sometimes justifiably requires higher, albeit temporary deficits that can run up the national debt for a few years. While this is not a desirable situation, it is nonetheless a useful policy option that is rendered illegal by the 2005 law. Hence, while this breach is a useful reminder of the need to crack down on tax evasion, the law itself is perhaps, not the best way to achieve fiscal responsibility.

Published in The Express Tribune, February 6^th, 2015.

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