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Wednesday, June 10, 2015

Why this year’s budget is not as bad as you think

Why this year’s budget is not as bad as you think

With the revelation of the Pakistan Economic Survey 2014-2015 ─ essentially a scorecard of the economy’s performance over the current fiscal year ─ and the much-awaited presentation of the FY15-16 budget to the cabinet, there has been a lot of talk about missed targets.
Sure, we may have missed a variety of ‘targets’ last year ─ and one of the government’s more popular rationale for doing so is the four-month-long country-wide sit-in by the Pakistan Tehreek-i-Insaf last year ─ but I believe the government’s performance over the past year has been, on the whole, fairly good, with what seems to be a similar forecast for the upcoming year.
Why? Let’s look at the data.

Growth matters?

The PML-N government has typically set ambitious growth targets for itself over the course of its tenure ─ which the previous government also did ─ and while both governments have missed their growth targets, the gap between the expected and achieved growth rate is much wider during the PPP government than during the PML-N’s tenure. To be fair, though, the previous government had to deal with the aftershocks of a global financial crisis.

Despite missing GDP growth targets, the current government has maintained a consistently higher GDP growth rate over the past two years, while the previous government’s growth rate has seen severe fluctuations.
It is worth mentioning, however, that the government's current projections for a 7 per cent growth rate by the end of their tenure are somewhat far-fetched, as successive governments have regularly touted the magical number seven as a GDP growth target.
I feel it’s silly to criticise a government solely on the basis of GDP growth. GDP growth, in general may display a decreasing trend as a country becomes more developed ─ or display erratic behaviour, increasing over a period of a few years, then decreasing, following a typical boom-bust type of cycle.
An example of the above is Pakistan’s own average GDP growth, which in the 60s was 6.8 per cent, 4.9 per cent in the 70s, and 6.5 per cent in the 80s. One could also look to China which has, after years of admirable growth, begun to experience a slowdown.
When it comes to the budget outlay, the previous government typically over-spent, and the outlay rose sharply over their tenure, while the current government appears to be making an effort to stick to the budgeted outlay ─ which also rose at a slower rate during the two years the PML-N has been in power.
In fact, the fiscal deficit was controlled this year, the PES 14-15 says, because expenditure was controlled by the government.
Despite fiscal control exerted by the government, one may observe a handful of capital-intensive projects worked on this fiscal year ─ for instance, the new Metro bus in Islamabad everyone is raving about. Pakistan and China also signed a landmark $45 billion deal for the development of the China-Pakistan Economic Corridor, as well as the Rs 165 billion Lahore metro train project.
The government has also had to step up army operations in the form of Zarb-i-Azb and the National Action Plan in order to combat terrorism within the country ─ Rs 45 billion has been allocated just to Zarb-i-Azb in the upcoming fiscal year.

Why we love to hate the government

An observation I’ve made over the past few years is that people love to hate the government for their defence budget allocation; this happens every year. It’s the one statistic everyone keeps an eye out for.
Our defence budget may have increased 11 per cent in FY15-16, taking up 16.6 per cent of total expenditure, but it still lags behind general public services (28 per cent of total expenditure) and debt services (31 per cent of total expenditure).
Comparing absolute values reveals a sharp disparity between defence and education expenditure ─ a comparison many people are quick to make ─ with defence expenditure rising to an estimated Rs 781 billion for the coming year, while education has been allocated Rs 75.5 billion.
Data taken from Budget in Brief publications.
Data taken from Budget in Brief publications.
While it may, on the surface, seem entirely unreasonable for defence to be allocated such a large portion of the budget compared to education, it is important to consider the context within which these funds have been allocated for the budget.
Pakistan has been ‘fighting wars on many fronts’ for many years now ─ but it is only recently that the government and the army seem to be taking counter-terrorism seriously, as evidenced by the recent surge in operations in various sensitive areas of the country, the implementation of Zarb-i-Azb and the National Action Plan, as well as cracking down on terrorism in urban areas ─ more specifically, Karachi ─ as was noted in a recent meeting of military top brass.
Another reason it doesn’t make sense to inject a whole lot of funds into education right away is the law of diminishing marginal returns ─ those funds will only be as useful as the infrastructure and systems that utilise them ─ and those systems are far from perfect at the current time.
Plying education with a large portion of total expenditure may result in inefficiency and misuse of funds across the board due to institutional problems in the sector that need to be addressed before the money can be used the way it should be.
Comparing budgeted education expenditure for the forecasted year with historical data, we find that estimated education expenditure has increased steadily over the 2008-2016 time period.

Percentages show us a slightly different story, however.
The increase in budgeted education expenditure in FY14-15 is the lowest increase in education expenditure over the course of a single fiscal year from 2009-2016, but has risen again in the FY15-16 budget.
Education expenditure as a percentage of the GDP has historically been on the lower side ─ last year it was just 1.67 per cent of the GDP ─ but the government intends to bring it up to at least 4 per cent of the GDP this year. Funnily enough, our literacy rate fell by two percentage points last year.
Ishaq Dar’s budget speech notes that the majority of the education expenditure is the responsibility of the provinces, so it is interesting to see how the provinces are faring in terms of literacy.

One of the most worrying trends is that literacy in each province fell in FY13-14 ─ except in Khyber Pakhtunkhwa, where it rose ─ primarily due to the increase in literacy in urban areas.

Promise of a better life?

Despite the government’s emphasis on an infrastructural growth model, I think this year’s budget shows the government’s attempts to improve socio-economic indicators, as well as infrastructure.
Dar’s budget speech also proposed tax reforms to increase tax revenue.
It is worth noting that, for the second year running, funds have been set aside for the Millennium Development Goals.
The MDGs budget for FY14-15 was apparently utilised in its entirety.
According to the United Nations Development Programme, Pakistan is on-track to achieve targets on nine indicators, while it remains off-track on 24 indicators. There was also talk in April of a uniform curriculum being introduced.
The government has been cracking down on seminaries with ambiguous sources of funding, and those that preach hate speech. This year’s budget also allocated development funds to the Higher Education Commission of Pakistan.
While minimum wage was increased from Rs 12,000 to Rs 13,000, government employees also received jumps in compensation and pensions.
According to a World Bank study, poor infrastructure is a hurdle to growth in Pakistan ─ and the government is set to spend Rs 250 billion on infrastructure next year.
A number of water, power, rail and road projects are in the pipeline. The China-Pakistan Economic Corridor ─ one of the biggest projects that came up this year ─ is expected to help build the under-developed areas of Balochistan.
This year’s budget specifically mentions investment in a new ‘Gwadar International Airport’, and a water treatment facility. Approximately 10 per cent of the current PSDP projects being undertaken by the Ministry of Planning, Development and Reforms are based in Balochistan (compared to Punjab’s 39 per cent and Sindh’s 15 per cent).
Development in the information technology sector has also been targeted by the PML-N government which has plans to lay down Rs 2.8 billion worth of fibre optic cables in 128 tehsils on a fast-track basis to improve connectivity in remote areas.

But why should I pay taxes?

But spending money is tough when you don’t have money, and that’s why the government has taken up the task of reworking existing taxation regulation ─ in order to increase revenues.
One reason I have frequently heard people use as a justification for tax avoidance is “our politicians don’t pay taxes, why should we?” amidst concerns that the average taxpayers hard-earned wages go towards bolstering the lifestyles of the rich and powerful. Those aren’t invalid concerns.
But I would like to point out that the latest version of the Parliamentarians’ Tax Directory shows our politicians paid Rs 553,202,514 in taxes over FY13-14, as compared to FY12-13’s figure of Rs 258,630,039 ─ an increase of 114 per cent over one fiscal year.
While announcing the PES 14-15, Dar said tax collection increased by 3 per cent over the past 11 months.
Indirect taxes on certain items have been increased ─ cigarettes and mobile phones two of the more ‘well-known’ items on which a greater sales tax has been imposed.
Discriminatory tax exemptions in the form of special regulatory orders (SROs) have also been slashed by 33 per cent.
The Finance Minister’s speech also mentioned anti-corruption measures to tackle non-compliance with tax laws. While it is unlikely that the government will meet its revenue targets this year, it seems even less likely if tax reform is not implemented to the letter.
It is a credit to the current government that they have attempted to balance growing defence expenditure by trying to be fair to socio-economic sectors as well.
However, the problem of a slow release of funds for development projects must be tackled as funds are generally released in the third quarter of the year, when the propensity for creating an impact is limited.
While we still have a long way to go when it comes to the socio-economic state of affairs ─ Pakistan has remained at 146 of 187 countries on the Human Development Index for the past two years ─ I, being stupidly optimistic, am of the opinion that Pakistan may finally be on its way to better days.
I may have voted for change in the last elections, but if the Nawaz government lives up to its promises by the conclusion of its tenure, I wouldn’t think twice about voting for them in 2018.