Fiscal stress and cash budgeting By Dr Abdul Karim

HE government’s fiscal position is a major problem as reflected in the yawning fiscal deficit. The federal government accounts for the bulk of it. To deal with this issue, an attempt has been made to set a ceiling on deficit-GDP ratio under the Fiscal Responsibility Act.

More important is the discipline imposed by the IMF Standby arrangement. One of the important IMF conditionalities is the fiscal deficit-GDP ratio to be observed not only at the end of the fiscal year but on a periodical basis to qualify for the release of loan installments.

Pakistan has an interesting history of abiding by that conditionality. Instead of tightening the belt, the authorities often turn to postponing payments and advancing receipts and other accounting devices to show compliance. If that did not do in the past, they do not hesitate to resort to figure fudging.

The current IMF Standby stipulates the limit for the fiscal deficit and this is expected to be observed by reducing development expenditure. Accordingly, the PSDP for the current year is being reduced sharply. Even so, it has been difficult to live by the Fund conditionality. Waivers have been sought and given by the Fund.

The fiscal problem has reached the point where it is obstructing the normal functioning of the economy. The telling poof of it is the current acute energy crisis. A major contributory factor is the circular debt and large arrears of electricity charges. The arrears of the public sector, particularly of government departments, are large and even reach the Presidency.

The hard fact is, nobody either in the government or outside, knows the actual liabilities of the public sector. In fact, there is no system to determine that. budget is prepared on “cash basis”, which means that government transactions are recorded when cash payment is made and this need not coincide with actual use of real resources.

In other words, receivables and unpaid bills are not taken into account. At the same time, money drawn to avail the lapsable budgetary provisions and put in the bank is shown as expenditure. The government deposits with scheduled banks account for 11 per cent of the total deposits. They are 44 per cent in time deposits, 33 in saving accounts and 21 in current accounts.

The cash basis of budgeting may facilitate cash management but undermines fiscal management, hence the mess. For better fiscal control, budgeting needs to be shifted from “cash” to “accrual” basis. That it takes into account liabilities as and when they are incurred and receivables the moment they become due to establish the claim.

This provides a complete balance sheet. Pakistan would not be the first country to try this method but would join many other countries. This will certainly give a better handle but would not eliminate fiscal deficit for which other measures would be required.

The fiscal deficit indicates that the government is not living within its means It can certainly increase its means by additional taxation but there is a limit set by the nature of the economy and country’s tax culture. Pakistan’s tax-GDP ratio is not only very low but has declined in recent years despite economic growth. Without playing down the importance of the revenue side of budget, attention is here focused on the expenditure side which does not receive due attention.

The public expenditure reflects national attitude towards public money which, in turn, is determined by the moral fibre of the society or its values. It is a painful fact that greed has become predominant making foul fair and fair practically foul. In this perspective, public money, which in fact, is “poor tax payers’ money”, is taken as nobody’s money and is up for grabs by any means. Public also begins to look up to government to do every thing for them. The result is increase in government expenditure regardless of resources.

In Pakistan, public office is sought not to serve the public, verbal claims apart, but to satisfy the ego to rule and to advance personal economic interests. The spoils are shared to curry favour of those who are considered indispensable for continuance in office. This mindset must change for ensuring financial and economic stability.

The first and foremost requirement for effectively dealing with the current fiscal mess is to reduce the size of the government, starting with the cabinet. Austerity should be the basic rule and leaders should be first to set an example. Free and practically unlimited facilities available to some government functionaries, often grossly misused, should be replaced by appropriate specific cash allowance. This would not only relieve the budget but also save real resources unnecessarily consumed in the process.

At times, government expenditure is incurred not as a function of the state but to woo some groups. Performance of Haj pilgrimage at the state expense was introduced by late General Zia-ul-Haq to win over religious minded Muslims. There is no justification for this and must be stopped. Haj is no doubt obligatory for Muslims but for those who can afford. The Quran says, “And pilgrimage to the House is a duty which men-those who can find a way thither-owe to Allah.” (Al-Imran, 3:98)

The government expenditure can be saved through public-private partnership. Two important areas worth trying are education and health. Buildings for these purposes cost a lot even if there is no corruption. Locals should be made responsible for construction of buildings and their upkeep, if need be on self-help basis, while government provides teachers and doctors along with the necessary equipment. In order to make the best use of buildings, schools should run two shifts, one for boys and the other for girls.

In sum, the fiscal mess can be cleared only if there is full realisation at all levels that public money comes from “poor tax payers” and it is sincerely treated as a sacred trust not to be squandered away. This demands strict financial discipline not only by way of living within the budget provision but also in terms of cost effectiveness.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/fiscal-stress-and-cash-budgeting-940