Rise in budget deficit

Public finances of the country continue to be in a very poor shape. According to the latest data released by the Ministry of Finance, budget deficit during the first quarter of FY11 has climbed to Rs 276.2 billion or 1.6 percent of GDP as compared to Rs 223.7 billion or 1.5 percent of GDP in the corresponding period of last year.
The widening of deficit was both due to a decline in total revenues from Rs 427 billion to Rs 400.1 billion during July-September, 2010 and an increase in total expenditures from Rs 650.9 billion to Rs 676.3 billion in the first quarter of FY11. However, tax revenues rose to Rs 317.3 billion in July-September, 2010 from Rs 298.8 billion during the corresponding period last year. While the current expenditures reached Rs 566.7 billion, including debt servicing cost of Rs 161.6 billion and defence expenditure of Rs 93.2 billion, development spending was mercilessly cut by 42 percent to Rs 62.8 billion from Rs 109 billion to help the flood victims and contain the budget deficit. The overall budget deficit was met by domestic and foreign sources to the extent of Rs 219.3 billion and Rs 56.9 billion respectively.
Seen from every angle, further deterioration in fiscal accounts of the country during July-September, 2010 is a highly negative development and, in a way, underscores the futility of the government's efforts so far to improve the public finances of the country. Almost every year, solemn promises are made in the budget documents to reverse the worsening trend but as the year progresses these are generally violated, on one pretext or the other. Even the agreements with the IMF now no longer carry the sanctity, they once did. Considering the ongoing trend, for instance, the budget deficit for the current year could reach 6.5 percent of the GDP. Tough measures, both on the revenue and expenditure side that could actually deliver the agreed target of 4.7 percent of GDP, are nowhere near the implementing stage even in the middle of the year. The fiscal developments during the first quarter of FY11 are also unsatisfactory for other reasons.
Tax revenues have increased only by about 6 percent and, if this trend continues, the tax-to-GDP ratio during the current year could decline further because of higher increase in nominal GDP. A drastic cut in development spending as witnessed in the first quarter of 2010-11 could jeopardise the chances of recovery and undermine growth and employment prospects in the coming years. Paucity of foreign funding and heavy reliance on domestic sources to finance the budget deficit would not only deprive the private sector of its credit needs but would also be highly inflationary. In fact, the consequences of such a policy of fiscal mismanagement are already evident in the form of high inflation, which, as measured by the CPI, has ballooned to an 18-month high of 15.48 percent in November, 2010 and averaged 14.44 percent during the first five months of FY11 as against the annual target of 9.5 percent fixed in the beginning of the year. One needs not to be an economist to visualise the impact of such a high rate of inflation on the standard of living of ordinary people, exchange rate of the rupee etc.
It is thus more than obvious that immediate measures need to be vigorously pursued and implemented to bring down the budget deficit to a sustainable level by reducing expenditures and mobilising much higher level of resources. Sadly, however, while the realisation for such a shift in fiscal management is there, practical steps towards the desired direction are lacking due either to political expediency or the clout of vested interest groups to evade taxes and other levies.
On the expenditure side, while defence spending and debt servicing are almost inflexible, items due to the existing security situation and mounting stock of debt, Federal and provincial governments do not seem to be making even token efforts to reduce current expenditures under other heads. So far as the revenue side is concerned, the recent debate on the RGST has exposed the hollowness with which the country's policy-makers approach our national problems.
The RGST, which was supposed to be the main plank of the country's tax mobilisation efforts, hardly stands any chance to be imposed even in a diluted form in the present environment. Finance Minister Dr Abdul Hafeez Sheikh seems to be the only crusader, but a day may soon come when he will get tired of carrying the cross against heavy odds. How long it will take to levy comparable taxes on agriculture incomes and remove other exemptions, only God knows. In short, there needs to be a sea-change in our attitudes and a great deal of resolve on the part of everybody including the government to ensure an equitable tax regime and sound fiscal management of the country. The main political parties of the country, in particular, have to muster the courage to act in greater national interest, desist from point scoring, and come up with workable plans with a view to resolve this lingering issue. Balancing the budget is undoubtedly of utmost importance if the country wants to avoid the risk of default and follow the objective of a balanced growth.