Rise in fiscal deficit

There are various estimates of budget deficit for the current year which was initially targeted at 4.1 percent of GDP in the budget for FY18 a few months ago. Looking at the budget deficit of 0.9 percent of GDP during July-September, 2017, it could be inferred that the budget deficit would not exceed 4 percent of the GDP for the whole year but independent economists project it to be much higher. According to a news item in this newspaper, an anecdotal survey of economists and analysts has shown that the fiscal deficit during the current year may reach the level of 8.5 percent of GDP or the same as inherited by the PML(N) government in FY14 unless a mini-budget is unveiled to meet the growing revenue shortfall coupled with a rising expenditure bill compared to what was budgeted. However, sources in the finance ministry dismissed the possibility of a mini-budget, maintaining that it is not under consideration and it could certainly not be any government's preference during the last year of its tenure. The government had closed last year at a fiscal deficit of 5.8 percent of GDP against an upward revised target of 4.3 percent.
Although, it is too early to forecast precisely the level of budget deficit during the current year, given the limitations of the present government and the assumptions during the remaining part of the current fiscal, the independent economists may not be very much off the mark. The reasons are quite obvious. It would not only be politically inexpedient to raise revenues and contain expenditures near the election time but the economy does not appear to be the priority of the present government due to severe political pressures coming from all directions. In fact, there is even pressure on the present government to revisit the newly imposed/increased regulatory duties on a number of import items which were expected to generate about Rs 30 billion while the PM's export package was also promised to be financed, increasing expenditures in the budget. In the previous years, Ishaq Dar had been quite strict in fiscal management. He had announced one percent increase in sales tax across the board in June, 2013 and unveiled a mini-budget of Rs 150 billion in 2013-14, followed by a Rs 40 billion mini-budget in 2015-16 and a Rs 20 billion mini-budget in the previous year. Expenditures too had been reasonably contained. This year, however, there is no hard task master in the ministry of finance and it would be very difficult to meet the ambitious tax target of Rs 4,013 billion and check the rise in spending with the onset of elections. The provinces are also expected to loosen their purse strings. After the 7th National Finance Commission (NFC) Award, the tilt of resources was shifted away from the federal government to the provinces but the provinces are not generating the expected surpluses to contain the overall fiscal deficit of the country within reasonable limits. The unfortunate aspect of the unfolding situation is that there are no credible checks on the fiscal mismanagement of the country. The FRDL Act, 2005 is violated with impunity while the SBP seems to have adopted a highly accommodative stance. The most effective check in such a situation could be a suitable programme with the IMF which the government would like to avoid till the final days of its present tenure. However, the consequences of such a poor financial behaviour are not difficult to visualise. Inflationary pressures could re-emerge, making the lives of ordinary people much more miserable, rupee could lose its value in the currency market, balance of payments position could deteriorate further, foreign exchange reserves could receive a battering and monetary policy of the country may have to be tightened, putting more pressure on the fiscal position. In a situation like this, one could only hope and pray for a drastic change in the fiscal policy of the government, allowing the country to revert to financial discipline and monetary stability. It is required to ensure solvency of the country and revive growth on a sustainable basis.