Concerns about inadequate resources to plug the budget gap continue to occupy our economic managers during the budget month - June. There have already been two extensions to the date of the budget announcement - from June 7 to June 10 and, more recently, to June 11.
While political pundits claim that the one day delay is to ensure that the budget does not coincide with the day of the lawyers' protest march, yet delays coupled with last minute shuttle diplomacy by Prime Minister Gilani seem to be a reflection of the yawning gap in the budget.
According to some media reports, the budgetary gap is expected to be around Rs 0.75 trillion with total outlay estimated at Rs 2 trillion and total revenue at Rs 1.25 trillion. The rise in taxes, according to Naveed Qamar, currently holding the portfolio of Finance, will "hit only non-food, non-oil and non-raw material items and import duty will be enhanced on luxury items." This statement is designed to ease mounting concerns amongst the poor and the lower middle to middle-middle income families and to assure them that the budget will not impact on their standard of living.
Be that as it may, Qamar must be well aware, even if his constituency is not, that the total deficit envisaged and the means to be employed to plug it reflect policies that will have an inflationary impact not limited to the rich and the upper income families alone but would trickle down to the poor as well.
That the expenditure items have already been earmarked is evident from the recent statements by the team of economic managers currently engaged in the arduous task of attempting to satisfy the International Monetary Fund's budget deficit requirements - which in turn, as per usual practice, would entail giving the green signal to extend lending to Pakistan from other international financial institutions. This accounts for Prime Minister Gilani's visit to Saudi Arabia where he will be supported by the leader of his party Co-Chairman, Asif Ali Zardari.
While political pundits may well assert that the need for this support gives the lie to the oft repeated claim by the Prime Minister that his office is distinct from that of the party leadership with clearly distinct functions, yet the visit itself reflects one important fact: the government needs friends who will not only defer payment of its major import - oil - but also inject considerable sums as budgetary support, preferably in the form of grants, but, if not, then as loan which would bring the deficit down to a level acceptable to the IMF. This, in turn, will, lead to the release of $3 billion, as promised by the international financial institutions.
The trip, therefore, of Prime Minister Gilani to Saudi Arabia is extremely critical to the economic health of the country for the forthcoming fiscal year 2008-09. According to some sources the Prime Minster is not only seeking $3 billion in deferred payment for our oil imports from the Kingdom for a period of at least one year but also an additional $3 billion for budgetary support. Such is the condition of the economy that this government has inherited; what is extremely disturbing are continuing claims by the stalwarts of the former government including President Musharraf and Shaukat Aziz refusing to accept their own role in this abysmal state of affairs.
It is, therefore, hoped that the newly elected government forms a committee to assess what happened to the economy and under whose command. While this would not end the current economic impasse, yet by laying the blame on those responsible the government may set an important precedence, whereby economic mismanagement (as opposed to corruption and nepotism) is an offence in itself. Critics may well argue that the price of this mismanagement has been paid by the former economic managers but accountability requires a bit more than losing elections, especially given the price that the country is paying for past mismanagement.
The budget deficit of 0.75 trillion rupees is to be plugged by external assistance and one would assume some deficit financing as well. At the same time the revenue base identified by the government has, in the past, nine times out of ten, been over ambitious and targets have rarely been realised at the end of the year. There are now reports that the government is considering extending the capital gains tax exemption on the stock exchanges till 2010.
If the CGT is not to levied on the stock exchanges there will be more pressure on the government to levy new taxes. The most likely tax is a 30 to 35 percent duty on the purchase/sale of property - a business that appears to have flourished tremendously during the past decade or so. Few would dispute the levy of such a tax, especially as there is talk of the tax being payable by those who purchase/sell property within a period of three years. Business of whatever kind has to be taxed and the real estate business has emerged as the most lucrative business of all in recent years.
But this is not likely to generate the amounts that are required to meet the revenue targets from domestic sources. There is, therefore, a need for the government to ensure that other taxes are imposed that would have the capacity to minimise reliance on external and internal borrowing, highly inflationary policies.
There is also a need for the government to consider curtailing expenditure. This is a politically sensitive topic but the major beneficiaries of the budget must remain the poor and all other interest groups need to suffer a cut in expenditure during these trying times. Within this context it is highly commendable that the forthcoming budget would present details of the defence expenditure, on the same pattern as the Indian budget.
At the same time slashing the defence budget is critical today given the fact that the common man in Pakistan is labouring under severe economic constraints which may only be partly relieved by the proposed Benazir card. It is also hoped that the government considers ending the incentives given to various industries, including the textile sector, and to other interest groups like those consumer manufacturing operated by the armed forces.
Our budgets have been marked by sacrifices made by the common man - sacrifices forced by the economic managers. Interest groups have very effective lobbyists who ensure that taxes remain minimal and that other incentives, be they in the form of a subsidy on raw materials or export rebates, continue. The government, instead of keeping the status quo in terms of expenditure and revenue generation, must try to break away from the past.
Interest groups - be they members of the armed forces, industrial groups or rich landlords - are aware of the economic deprivations of the masses and one would hope they would be willing to subordinate their own economic interests to those of the common man for a period of two decades. Let the budget focus on education and health care for all which would end the security concerns for all times to come and thence would flow foreign investment that this country so desperately needs. One can only hope that this doesn't remain a pipedream.
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