Policy philosophy correction budget needed–I

A budget is not just a mere accounting exercise of expenditure and revenue, but reflects a commitment to economic policy in terms of taking forward the governance, and incentive structures, under overall economic policy ‘directions.’ Taking special note of directions is all the more important when faced with serious challenges, as is the ongoing case in terms of climate change crisis, related ‘Pandemicene’ phenomenon, and elevated level of conflict situation.

Moreover, the budget should be cognizant of needs to ameliorate particularly difficult economic realities; for instance, currently in terms of water resource management and security, energy sustainability, poverty, unemployment, and high interest payments facing the country.

Also, the budget reflects economic policy ‘orientation’ – which principally reflects the needed economic directions – decided in the International Monetary Fund (IMF) programmes; currently two in terms of extended fund facility (EFF) programme, and resilience and sustainability facility (RSF). Last, but not the least, in a federation, as is the case in Pakistan, the centre and federating units should overall have a unified budget direction. Overall, budget should be a seriously thought-out mix of financial realities, needed economic ambition, and creative policy mind-set.

There is also a notion going around for quite a long time now that whether it is a macroeconomic stability providing budget or an economic growth budget, which is a wrong claim to make if seen through the lens of any time horizon beyond the very short-term. The important thing to focus on here is the length of time involved. Any aggregate demand squeeze policies to rein in inflationary pressures, and accepting economic growth sacrifice has to be over one, or at most two budgets, or fiscal year cycles, which should be an appropriate amount of time to lay sustainable basis of macroeconomic stability, and also not unnecessarily hurt economic growth in the process, which over this period of time should be put on a stable, upward trajectory.

Stability, and growth being on a sustainable pathway, would have resulted because of better targeting of productive, and allocative efficiencies through a non-neoliberal role of government and non-austerity policy, resulting in turn adoption of a ‘balanced approach’ on the aggregate- demand and supply-side. Moreover, this approach will likely enhance level of public and private investments. Overall, this policy approach would also likely enhance the build-up of resilience, diminishing, in turn, the impact of exogenous shocks if they appear.

Short of this balanced approach, especially in developing countries like Pakistan, where inflation generally is equally a fiscal phenomenon, and not just significantly caused and controlled by mainly monetary-side tools, it is even wrong to say that macroeconomic stability is reached, as is being claimed. Even in developed countries the efficacy of monetary policy as a principal tool in reining in inflation is no more the case due to changing global economic environment being more prone to significant aggregate supply-side shocks. Here, it needs to be mentioned that even in developed countries, previously overboard efforts to reduce inflation through monetary policy (or monetary austerity) resulted, in general, in lack of inclusive economic growth and did not allow reaching needed build-up of resilience for instance, in terms of greening the economy, or being more prepared against the ‘Pandemicene’ phenomenon.

A May 29, Project Syndicate (PS) published article ‘Central banking in an age of global supply shocks’ pointed out in this regard: ‘Monetary policy is operating in a new environment, under conditions that are fundamentally different from those in which modern inflation targeting was designed. The orthodox framework was built for a world in which most macroeconomic shocks affected demand, aggregate or sectoral supply disruptions were small enough to “look through,” and central banks could rely on a stable Phillips curve linking aggregate labour-market slack to weaker inflation. Unfortunately, none of those assumptions are fit for a geopolitically fragmented world characterized by frequent supply shocks.’

Therefore, any stability, which is not based on an appropriate level of correction of both demand, and supply-side factors – in Pakistan in general traditionally, and in particular in the wake of Covid-19 pandemic, Ukraine War, and recent conflict in middle east (ME) has primarily an aggregate supply-side determination of inflation, and more broadly macroeconomic stability, which, in turn, then likely feeds a strong negative shock to economic growth – is not stability but a very unstable status quo, which is nothing more than a very temporary stability projection, given it has very fickle basis; any attempt to loosen the noose of aggregate demand, or any exogenous aggregate supply shock, and this so-called stability quickly dissipates.

In that sense, budgetary attempts for a number of years in one direction claiming to be stability first, and mainly focusing on aggregate demand side factors, are highly unlikely to keep the damage relatively optimally low with regard to economic growth sacrifice, and also will likely never find a meaningful level of stability to complement stability with growth objective. This is most likely the reason why subsequent budgets over the medium-term, coming with the approval of being in line with IMF’s core policy design thought-process, reflecting, in turn, quite a harmonious approach of both authorities and IMF programmes apparently, have not been able to achieve any stability that is worth relying on, as made quite clear in the lack of confidence of policy consistently looking to not loosen the aggregate demand side squeeze in any meaningful way.

For instance, when inflation came quite a long way down, even in single digits, the real interest rate remained quite significant, indicating active imported-, and cost-push inflationary channels actively feeding into inflation, which required even negative real interest rate (or non-monetary austerity) for greater private investment, and lesser burden on fiscal space in terms of interest payments, resulting in greater support, and direction to private investment in terms of a non-neoliberal role of government using this fiscal space to a meaningful extent to enhance public investment.

Moreover, targeting of primary surplus (fiscal austerity) together with monetary austerity policy framework further diminished the extent of development spending. The budget should instead focus on putting fiscal deficit on sustainable grounds in terms of keeping elevated levels of development expenditure target for revenue, growth, and exports enhancement, which, in turn, would signal policy to align with budget’s policy correcting orientation, and adopt non-neoliberal, and non-austerity approach. From the revenue side, the budget should target greater income-based taxation, and less consumption-based taxation – which would result in broad-basing income taxation, while in terms of indirect taxation there is already very wide base - to bring sustainable macroeconomic stability and growth, and build-up of resilience at the back of greater investment that it will likely lead and reinforce budget targets in this direction in subsequent budgets.

The question that economic policy should therefore address and that needs to be reflected in budget orientation is whether a neoliberal, and austerity pathway will continued to be followed, which, of course, does not make sense, given how will doing the same will deliver different results, when the consequences include sharp rise in poverty, unemployment, and inequality, not to mention the lack of reform on the supply-side, including with regard to enhancing resilience by greening the economy, especially its energy base in terms of meaningfully shifting towards renewable/alternate sources of energy. The upcoming budgets – federal, and provincial – therefore need to understand the shortcomings of neoliberal, and austerity budgeting over the years – at both the centre, and federating units levels – of mainly squeezing aggregate demand side, and thinking it will deliver macroeconomic stability has not worked, and even after paying (unnecessarily) a lot of economic growth sacrifice. Stability and growth both need a relatively balanced policy approach, which this budget should provide, reflecting through expenditure, and revenue targets that allow focus on both the demand side, and the supply side.

(To be continued)

Copyright Business Recorder, 2026