Budget's targets for 2011-12 - I

The budget for the fiscal year 2011-12 sets an entire range of macroeconomic targets: growth 4.2 percent, deficit 4 percent and inflation 12 percent. An increasing number of Pakistanis has begun to regard these forecasts as an exercise based on grossly misplaced optimism - an optimism into its third year, running.
Why does any government feel the need to indulge in presenting incredible forecasts? The fact that favourable macroeconomic statistics can and are used as a barometer of any government's performance and therefore its popularity on which political fortunes can be made or lost is, perhaps, the primary objective, or so maintain skeptics. At the same time, governments want to manipulate market perceptions that may act as a deterrent to growth - perceptions that are acknowledged in economic theory as critical to improving private sector economic activity - be it in the manufacturing sector, the agricultural sector or the money markets. Perceptions are particularly relevant in a market economy with a predominance of private sector activity over state-sponsored activity.
Perceptions, however, cannot be manipulated by rhetoric alone but require key policy measures in various stages of implementation. In marked contrast, senior members of the Pakistani government, past as well as present, spend an inordinate amount of time at international fora, maintaining what a great investment place this is and how cheap labour is in this country. However, these claims are not backed by any improvement on the ground. It is little wonder that the international investor perceptions about Pakistan as an investment destination have not changed.
The Pakistan government released the forecast of 4.2 percent growth rate for the next fiscal year. Two elements need to be highlighted in this forecast. First and foremost, the statistic is taken from the medium-term budgetary statement (MTBF framework) that appears to be an exercise in outlining ideal objectives, rather than a focus on what is realistic or doable from an economic as well as a political perspective. Pakistan's MTBF outlined three main objectives: (i) to further strengthen fiscal discipline by creating an orderly framework for the management of the annual budget over the medium term; critics maintain that the word 'further' is inappropriate in this context and the country continues to suffer from fiscal indiscipline; (ii) to strengthen the alignment of federal resources by the government to the government's policies and strategies; fire-fighting remains the major point of focus of our economic managers and there appears to be little in the way of policy or strategy reflected in the failure of the government to comply with several key International Monetary Fund conditions under the Stand-By Arrangement (SBA), leading to a stalling of the programme; and (iii) to build the capacity in the federal ministries to prepare and manage their budgets in a manner which provides cost-effective service delivery (outputs) and efficient use of public funds (value for money). The number of ministries, as well as the performance of most of the ministers is hardly a source of comfort to the public.
Thus, these three objectives remained largely unachieved in 2010-11. Not a single target set in the federal budget for 2010-11 with respect to tax and non-tax revenue collections was met and a whopping 139 billion-rupee revenue that was envisaged to be generated through tax and non-tax revenue was simply not realised in 2010-11. There was a shortfall of 99 billion rupees in collections under tax revenue, 76 billion rupees shortfall in non-tax revenue and 36 billion rupees shortfall in provincial share relative to the budgetary targets (as identified in the budget documents).
The situation was the reverse with respect to current expenditure. Thus barring housing and community amenities, and recreational, cultural and religion allocations (with environment as the only item receiving an allocation equivalent to what was specified in the budget) there was an increase in allocations in 2010-11, relative to what was specified in the budget. Interest payment on domestic debt rose by 14 billion rupees, actual defence allocation was higher by 2.5 billion rupees, and public order and safety by 7.4 billion rupees relative to budgetary allocation. The biggest rise however was evident in subsidies that received 269 billion rupees more than what was budgeted. This increase in subsides was no doubt a violation of the agreement under the SBA, an agreement periodically reaffirmed through the issuance of Letters of Intent (LoIs) - a fact that no doubt contributed to the stalling of the SBA.
Public Sector Development Programme (PSDP) in marked contrast witnessed a massive slash - 100 billion rupees - from what was originally budgeted. In other words, the accruing benefit that was expected from the MTBF, with respect to improved service delivery and results, was compromised.
The remaining five benefits that were identified in the MTBF were as follows: (i) Policy objectives determine the overall framework for the budgetary process; (ii) Individual budgetary allocations are more clearly linked to strategic priorities; (iii) Policies are considered in a medium to long term context.; (iv) There is greater predictability in the budgetary process; and (v) Opportunities are created to harmonise recurrent and development spending.
As matters stand today questions about the budget's strategic priorities in terms of expenditure allocations or indeed in terms of revising the tax system to render it more equitable and less anomalous remain. The outlay appears to follow trends similar to past budgets. The reasons given by Dr Hafeez Sheikh's predecessor Shaukat Tarin were simple: the Finance Ministry is engaged in fire-fighting and until and unless the fire is put out, strategies or policies cannot possibly be medium or long-term. That fire fighting is continuing is evident from the budget estimates of 2010-11 and the revised estimates: growth rate was envisaged at 4.5 but actual realised was 2.4 percent. Claims that the reasons were external to the economy (including a world-wide recession especially in countries, which import Pakistani products) lose relevance when one considers the massive increase in growth in India and China.
Additionally, the inflation rate was expected to come down to 9.5 percent but the actual rate registered for 2010-11 was 15.5 percent - this is due to the government's failure to access pledged assistance (for reasons ranging from the government's inability to satisfy donors that it was implementing programmes in a transparent manner and in terms of raising taxes on the rich) compelling it to rely on domestic borrowing.
(This article is the first of a two-part series on the budget targets and whether they are achievable.)