Debt obesity

With the inflationary dragon tamed for now, the focus of upcoming budget would be to spur investment and generate growth while keeping the fiscal deficit within permissible limits.
The policy framework is to focus on how to incentivise domestic and foreign investment; investment-to-GDP ratio is at abysmally low level which should be gradually brought up to 20 percent of GDP within next five years. The focal point of investment in coming few years is going to be investment in energy sector and ancillary infrastructure.
But Ishaq Dar and company should be very careful in the sustainability of that growth framework i.e. to bring the fiscal house in order.
There is a dire need to ensure that budgets primary balance is in surplus. At this point government expenditures minus debt servicing are higher than the government revenues generation. This is not sustainable and will bring the debt to alarming levels.
"Revenues are proving to (be) increasingly inadequate in even financing current expenditure," noted economist Hafiz Pasha wrote in a research paper published by the Social Policy and Development Centre, adding that, "in effect a large part of current expenditure is being met through borrowings." Based on this observation, the veteran economist has concluded that the country is effectively in the debt trap.
In the long-run, governments only have two options for footing the bill for running the state or developing its economy: tax now or tax later. And that is why it is important to assess where the borrowed funds are spent.
Sooner or later, loans have to be paid back, whether borrowed from international or domestic sources. But while spending of such funds on development projects enhances an economys future potential to generate returns and hence pay back its debt, spending on non-developmental expenditures creates no such future boons.
And therein lays the debacle for Pakistan in its practice of borrowing exceedingly spending on non-developmental expenditures. Two third of government borrowing (primarily though domestic channels) is to manage the current expenditure while the remaining is to fuel in development spending. Five years back the balance was tilted towards latter; the foremost challenge for PML-N is to revert back to it.
Then there is a need to bring more sectors into the tax net; the objective might not be to collect taxes immediately but to enhance the documentation. Now with PML-N in power both at centre and in Punjab, it has the right platform to impose income tax on agriculture. The retail segment which contributes 16-18 percent of GDP is paying mere 2-3 percent of taxes. That gap has to be shrunk.
The newly formed government has no time to formulate, strategize and implement these policies in the budget to be presented later this week, as the bureaucracy might have already made all the proposals and Dar is just going to unfold it. But what Dar should do at the very least is to set the tone in right direction for the next five years.
Malnutrition, it is said, can lead to obesity. When people do not have nutritious food, they fill their bellies with cheap food that leads to obesity. Pakistans economy has a similar problem; failure to raise the nutritious tax revenues, the country has filled its belly with debts. And the sooner the PML-N turns this situation around, the better it is.