Professor Sheikh's tutorial

Next, a little mollified by my humble demeanour, he resumed in his usual tutorial tone - the tone which he had adopted in his new-found role of perceptor. The above lines are an excerpt from Fyodor Dostoyevsky's Poor Folk.
Federal Finance Minister Dr Abdul Hafeez Sheikh, in his post budget press conference, not only responded to some of the criticism on Budget 2011-12 but also provided a tutorial on the subject with a view to creating clarity in the complexity of budget-making process. A little miffed at some media persons' not-so-humble demeanour, Dr Sheikh ably used the occasion to show his dexterity in explaining the philosophy behind the budgetary proposals. According to him, "all the issues which have been built in 62 years cannot be tackled in one budget." His argument sounds quite plausible. However, a sustainable move to keep expenditures in check and some new initiatives and endeavours to fully exploit revenue potential leading to lowering of fiscal deficit do provide a 'positive outlook'.
He referred to two charged expenditures - defence and debt - on which the Finance Ministry exerts no control. He emphasised that the present security situation of the country demands higher expenditure as life and liberty of the whole nation is involved. The minister, however, conceded that expenditure controls through checks and balances are desirable in the defence budget. Citizens expect from both the executive branch and the parliament to increase their oversight so that ostentatious lifestyle of the top brass strictly conforms to the living standards of the working middle class and not that of the feudals or the very rich businessmen. Definitely, there is a scope for bringing in more efficiency in defence expenditure; there is also an urgent need to strike a delicate balance between the teeth and tail, ie, the capital expenditure on equipment and the wage bill. Building splendid golf courses and operating marriage halls on military estates, even if they are not built from the defence budget, nevertheless compromise their security in the current environment.
Although, the minister only named repayment of debt as a committed expenditure, we believe that defence is another such expenditure. "Debt has piled up over the decades and is not restricted to this government," says Dr Sheikh. Again, his is a valid argument. But the government must not lose sight of the fact what is needed to be whether the foreign currency debt repayment is rising or falling as a percentage of our exports. It is increasingly clear that repayment is going up from 10 to 15 percent. Similarly, the revenue collection needs to be in surplus of current expenditure (it is, however, in the negative this year). Each year, the fiscal policy is announced in the budget speech to compliment the economic vision. For the last five years, the sizes of fiscal deficits announced in budget speeches have been found to be notably less than the actual. This clearly shows that the Federal Board of Revenue projections have been unrealistically optimistic or over-estimated. And, Ministry of Finance estimates of expenditure understated. We appreciate that expenditure has been found to be much more controlled in 2010-11 than in previous year. However, we would like to remind Dr Sheikh that his optimism on FBR's performance is based on May 2011 collection. But one swallow does not make a summer. We would be truly genuinely happy if the target of Rs 1,588 billion is achieved by end-June.
The potential to collect revenue within the existing rules is estimated at Rs 700 billion by experts outside the FBR. This is only possible if the capacity within the Revenue Division is enhanced in an effective and meaningful manner. The introduction of presumptive tax regime since 1985, coupled with withholding and Final Tax regimes, has turned into 'a pervasive addiction'. Despite five years of TARP programme funded by the World Bank, there has been no real progress towards desired results. Nadra can identify potential taxpayers based on their lifestyles. So are the assets of people in the service sector (specially retailers in posh localities) visible to FBR officials. Political protection in some cases as well as tax exemptions encourage non-filers or under-filers to camouflage their real income. However, these excuses are not tenable. Third party data is and can be made available. However, this information is of hardly any consequence if a genuine or scrupulous effort to go after under-filers or non-filers is not there as you can take a horse to water but cannot make him drink.
Even if FBR is able to achieve Rs 1,588 billion by end June 2011, Rs 1,952 billion FY12 target would still look a distant possibility. The relief already given and additional taxation measures may militate against each other. Will the revenue target to be realised from nominal growth of GDP alone?
Minister Sheikh, in the media interaction, explained that budget-making is a collective effort of various divisions under his charge. These are: finance, revenue, economic affairs, planning and statistics division. These function in strong collaboration with an autonomous State Bank of Pakistan. Besides the annual budget, according to him, economic management involves trade policy, determination of price administratively rather than by changes in supply and demand (administered prices) and procurement of sensitive food items such as wheat and sugar. Administered prices fall in the domain of water and power and the petroleum ministry, supposedly monitored and audited by Ogra and Nepra. Trade and procurement policies are managed by the commerce ministry. State Bank is entrusted with monetary policy to provide liquidity at a price which ought to keep inflation in check. Economic Co-ordination Committee of the Cabinet is expected to employ these policy tools for effective and desired co-ordination. Economic transactions and proposals are approved at the level of ECC. What is lagging is the job of mapping out these policies and addressing their contradictions at one point. Planning Commission is the right forum to undertake this task. Is it happening now? No! Why not? Because most of our political leaders have traditionally been found more interested in seeking handouts or providing dole to their constituents. They do not understand growth and development nor do they bother about good or bleak economic prospects in any given fiscal year. Prime Minister Gilani appears to be more interested in projects for the Multan Division than anywhere else. He has yet to show his acumen towards reduction of poverty through development. Award of pet projects (such as construction of a road or a bridge or even a school or a college), which are clearly under the ambit of a local government or a provincial government, and distribution of jobs in sheer disregard of merit and fair play are the real preserve of our politicians. The unstructured way we have expanded the electricity or piped natural gas network, based on demands of our political leadership rather than any coherent policy, has a direct bearing on the present energy crisis and chaotic economic and political conditions in the country. Things have started splitting at the seams. Economics - a social science concerned chiefly with description and analysis of the production, distribution and consumption of goods and services - teaches us how to calculate the cost as well as the return of the choice we make. Perhaps, Dr Abdul Hafeez Sheikh needs to give our political leadership a tutorial on the importance of growth and development and finally act as an agent of change.