Making budget in hard times By Khaleeq Kiani

THE exercise for making the next year’s federal budget is going on these days in an ‘auto-pilot mode’ as the country’s economic managers have yet to receive policy guidelines from the political leadership about its priorities.

There are, however, clear indications that development programme would remain frozen, more or less, at the curtailed size of current year, mainly because of uncertain foreign inflows, stagnant revenues, rising security spending and higher debt servicing costs.

The federal budget has lost its usual significance over the last few years because of deregulation and privatisation. As a result, the utility prices – like those of natural gas, electricity, oil, telecom and commodities – are no more part of the federal budget and are fixed separately on quarterly, monthly and even fortnightly basis.

Except for the increase in salaries and pension of government servants, the general public should not expect any major relief or measures for improving living standards. The federal budget now mainly gives a broad idea of the government’s income and expenditure profile for the year, that at best, could be described as projections or targets that are seldom realised at the end of the year and hence lose the sanctity required for fiscal discipline and economic prudence.

To an extent, however, these targets serve to reign in ambitious line ministries and extravagant politicians to remain within certain fiscal limits, while the public sector development programme (PSDP) becomes the first casualty of higher than targeted non-development expenditures.

Take for example the fiscal deficit. The original deficit limit for current year was set at 4.9 per cent of GDP. This has been revised to 5.1 and was likely to go beyond 5.5 per cent when annual accounts are finalised. The next year’s target set under the MTBF and IMF programme was 4.2 on the basis of current target of 4.9 per cent. When base year estimates are not met, the outcome for the subsequent years looks uncertain.

On the revenue side, the Federal Board of Revenue (FBR) is working on a couple of collection models (a) in case value added tax is imposed as committed to the International Monetary Fund, different rates of VAT on different items and, (b) in case the GST continues to remain in place for the time being in view of differences with Sindh government over VAT collection.

The FBR chairman, Sohail Ahmed believes that the tax machinery would end up with a net gain of Rs125 billion next year even at a lower tax rate of 15 per cent if the GST was replaced with VAT from July 1, but it was for the federal and provincial governments to decide about the VAT.

Over a period of 3-5 years, the VAT has the potential to increase overall tax collection by 3-3.5 per cent of the GDP, he estimates. That would mean about Rs300-400 billion additional revenue in two to three years. The finance ministry aims to increase the tax-to-GDP ratio from existing level of 9.3 to 12.1 per cent by the end of fiscal 2012-13.

The revenue advisory committee has begun consultations on revenue requirements, additional measures and adjustments and initial estimates indicate the next year revenue target at Rs1.650 trillion against current year’s Rs1.380 trillion, although the IMF had estimated revenue collection at Rs1.343 trillion.

On the expenditure side, the original targets set by the government are seldom achieved. Even the broad parameters described last year as part of newly adopted three-year medium-term budgetary framework (MTBF) have been unsettled in the first year of implementation.

For example, the PSDP target set at Rs446 billion for current year has been slashed to Rs250 billion. As a result, many projects that were planned to be taken in hand have been dropped and those in progress faced slow downs. According to former finance minister Shaukat Tarin, the cost of PSDP projects escalate by around 100 per cent by the time they are completed.

The problem here is that the performance of development budget is normally assessed by the government merely on the basis of budgetary allocations, financial releases and fund utilisation.

Its performance on the basis of designed objectives and the outcome is seldom analysed, depicting a lopsided picture of the real economic gains and cost benefit ratios. What is forgotten is the fact that the efficient use of funds and a strict monitoring and analysis can check the mismatch between physical and financial targets.

A critical issue that the government obliquely accepts is the corruption factor in the operation and monitoring system. The policy makers do not admit that officials in the executing agencies withhold bills of contractors for payment unless they are paid 5-10 per cent of the bill in advance. And the accounts department would not issue the cheque for payment unless provided with a similar graft. But nobody from the government is ready to talk about the gratification embedded in the system.

The next year’s PSDP is initially estimated at Rs300 billion and it would be a repetition of what happened in the late 1990s when the development spending were frozen in actual terms because of cash constraints in the aftermath of nuclear-related economic sanctions. This year again, the federal budget would be presented as part of another MTBF 2010-13.

There is no denying the fact that the Planning Commission has lost its monitoring capacity over the years and the only thing it can do at the moment is to assess the project performance on the basis of funds releases, funds utilised and the overall progress made. What is the quality of fund utilisation is anybody’s guess. Cost over-runs, late completion and poor quality construction are some of the outcomes known to and seen by everybody in daily life.

It is yet to be seen how the federal and provincial governments grapple with transfer of responsibilities from the centre to the federating units as concurrent list stands abolished and the NFC award increases provincial share in federal revenues from about Rs680 billion this year to about Rs900 billion next year. The federal government estimates to save about Rs60 billion on account of health, education and social welfare that would be transferred to the provinces.

The implementation of federal cabinet decision about four months ago to curtail current expenditure through rationalisation of various ministries and divisions, limiting perks and privileges of the president, prime minister and ministers is still a far cry.

The huge pilferage and loss, estimated at Rs750 billion, through mismanagement of public sector corporations would continue to be a real challenge for the policy makers to address.

In addition, rising poverty, increasing energy gaps and faltering investor confidence would need special attention to ensure reasonable living standards of 180 million population. How the government responds to these challenges will be known in the next budget on May 29.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/making-budget-in-hard-times-240