A populist budget?
Monday,JUNE 11, 2007
The federal budget for the year 2007-08 presented in the National Assembly on Saturday by the minister of state for finance is ostensibly populist in nature because subsidies on several essential items such as pulses, cooking oil, rice, sugar and tea and basic medicines have been introduced, albeit at the retail level, pensions have been increased as has the minimum wage and salaries of government employees. The consolidated budget of Rs1.874 trillion has an ambitious tax collection target of Rs1.025 trillion and defence expenditures for 2007-08 allocated Rs 275 billion, 10 per cent higher than last year. Incidentally, defence is again a one-line item, over which there is sure to be no debate in parliament ñ and the minister could have done without the needless rhetoric when he announced this figure. However, one striking aspect of the budget is its massive deficit, estimated to be at Rs 398 billion which the government says will be bridged by domestic and external borrowing. This is bound to become controversial because of simple economics: financing a deficit means that the governmentís debt burden will increase and eventually —- in the longer term ñtaxes may have to be raised to finance the increase in the debt. So this seemingly populist measure, presumably to make things easier for the ruling party in an election year, will only have short-term consequences.
It would be fair to assume that the governmentís populist plan to subsidise certain essential food items at the retail level through utility stores is perhaps the major reason for the significant deficit. As pointed out earlier, in addition to these food items, many of whose prices have been beyond any kind of government control in the past (particularly sugar), the plan also includes the subsidized sale of basic medicine. The latter in itself seems quite ambitious because even at government hospitals, where medicines are supposed to be provided free of cost, patients often have to pay market rates. The whole scheme of making available food items at subsided rates merits close examination because it seems to be the centerpiece of the 2007-08 budget.
The subsidized products, it is proposed, will be sold at government-owned utility stores and the plan is to have one such store in every union council within the next four months. Past experience has shown that selling subsidized good at utility stores is riddled with many problems such as pilferage/embezzlement of products by store staff. The network of stores is also not very comprehensive. Even setting all this aside, a target of one store in every union council in the country seems unrealistic to say the least. Apart from that, the whole nature of this subsidy is not sound on purely economic grounds. For instance, the fact that subsidy is being levied at the retail level and not at the production stage means that the whole scheme is to show to the electorate ñ most of whom are obviously not economics-savvy ñ that they will be able to buy some essential food items at controlled rates (with the difference being picked up by the government). However, a far more useful approach to a subsidy package would have been to levy the assistance at the production stage. This would have been better because it would have a potentially longer term positive effect on prices, since production would increase and help reduce chances of any shortages arising in the long term as well, which is the primary reason why food prices have been rising of late.
Furthermore, a subsidy at the retail level does not do anything to generate employment opportunities, something that would happen if it were levied at the production stage. Given all this, the only plausible reason that one can think of why the government would have chosen this particular approach ñ which is nothing really but a cosmetic quick fix to a problem requiring a solution that works through to the long term — is that it may achieve some results in the short term for the ruling party. It also should be noted that the bulk of the subsidies are meant for sectors which seem hardly in need of any assistance ñ such as textiles, oil marketing companies and refineries ñ or are going to white elephants like KESC and WAPDA whose inefficiencies are yet again going to be paid for by taxpayers.
Moving on to revenue collection, the estimate for 2007-08 is almost 22 per cent higher than the estimates for 2006-07 and it remains to be seen to what extent this ambitious target is met given that there has been no significant widening of the tax net. As usual, this will be done by subjecting salaried persons and the corporate sector to more indirect taxes ñ which are regressive especially for those from low- and middle-income backgrounds. In fact, according to the budget figures 60.4 per cent of the total tax revenue will come from indirect taxes. If the poorer sections of the population are to be helped in any significant way, this percentage needs to be reduced, to increase the share of direct taxes since they are more progressive and carry a bigger burden of payment on the rich. On other fronts, there seems to be little initiative to move the inflow of capital and funds into generally non-productive sectors such as real estate (particularly sale and purchase of plots) and stocks and shares. In fact, a proposal to create a trust where small-scale investors may invest to reap profit from investment in real estate seems unjustified given that this non-productive sector has already diverted a lot of funds that could have been better utilized elsewhere, in increasing the economyís productive potential and in generating employment. As far are the proposal to increase the salaries of government servants by 15 per cent is concerned, it may well have just the opposite effect on the majority of Pakistanis who do not have a government job in that their tax rupees will be used to pay for this raise. What ordinary Pakistanis would have wanted is not quick fixes that may or may not offer them the promised benefits but some longer term planning to prices of essential items in check. As for key social sectors such as health and education, the funds allocated to them remain far too little given the amount of work that needs to be still done to raise literacy rates and the quality of healthcare available in the country. One other issue that seems to have escaped policymakers for now ñ and the need for this has never been more acute given the current loadshedding crisis ñ is the matter of increasing the countryís water storage and power-generation capacity with only small amount of funding set aside for this meaning that no significant headway has so far been made in building a dam.
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