A first look at the Federal expenditure budget for 2017-2018 reveals that it has all the right ingredients. First, overall expenditure has been fixed at a level which, given the revenue projections, will lead to some reduction in the fiscal deficit in relation to the likely level this year. Second, the right expenditure priorities have apparently been set. The growth of current expenditure will be severely restrained in order to enable the diversion of resources towards a 'big push' in development spending.
The targeted growth of total expenditure is 11%. This is equivalent to 13.1% of the projected GDP for 2017-18. In 2016-17, it is estimated at 13.4% of the GDP. Therefore, total expenditure is expected to decline as a percentage of GDP.
The revenue and expenditure projections imply that the Federal fiscal deficit will be 5.0% of the GDP, in comparison to the projected level this year of 5.1% of the GDP. Therefore, the first objective of containing somewhat the fiscal deficit at the Federal level can potentially be achieved.
The truly major effort proposed is in limiting the increase in current expenditure. At Rs 3.5 trillion in 2017-18, it will represent a growth rate of only 2%. This compares favorably with the average growth rate in current expenditure of almost 7% in the first four years of the PML (N) Government.
The Federal PSDP has been fixed at Rs 1 trillion. Other development expenditure will be below Rs 0.3 trillion. This indicates that the size of the Federal budget for 2017-18 has been set at Rs 4.8 trillion.
The size of the Federal PSDP has been increased by an impressive 40%. This was expected given the need for higher allocations to highway, water, power sectors and to CPEC on infrastructure projects, as they get implemented.
The fundamental question relates to the feasibility of the expenditure targets for 2017-18. In particular, have the different components of current expenditure been understated? Does the proposed economy in current expenditure impact negatively on the provision of services? Are there adequate financial resources to implement the substantially larger development programme? These questions are addressed below.
Current expenditure The largest head is interest payments on public debt. These are likely to grow by 8% this year. However, it is indeed remarkable that expenditure under this head will show zero growth in 2017-18 at Rs 1363 billion. There is a high likelihood that this outlay has been significantly understated.
First, public debt will rise by 9% in 2016-17. Second, the reliance on relatively expensive external commercial and short-term borrowing has increased and will continue in 2017-18. Third, as the rate of inflation rises next year, mark-up rates are likely to respond. As such, the cost of debt servicing may exceed the budgeted amount by almost Rs 100 billion.
The defence budget is projected to grow by over 9% and reach Rs 920 billion in 2017-18. This is less than the likely growth rate of 11% in 2016-17. As such defence expenditure may be somewhat higher due to the on-going Radd e Fasaad operations and more intensive patrolling of the borders, given the regional security situation.
Salaries and pensions expenditure is currently projected to also remain, more or less, unchanged in 2017-18. However, the package of increases announces by the Finance Minister in the budget speech will imply, as indicated, the additional payment of Rs 125 billion.
Significant growth has been shown in grants of almost 13%. This will be primarily due to increased provisioning against contingent and other liabilities and higher grants especially to AJK government. It is not surprising that a large grant of Rs 40 billion is proposed to Pakistan Railway to meet losses, in the presence of falling income, despite claims to the contrary.
Subsidies are projected at a lower level of Rs 138 billion, a reduction of Rs 30 billion in relation to 2016-17. Bulk of this is due to the elimination of the subsidy of Rs 25 billion on fertilizer, along with the corresponding reduction in taxes. The big issue relates to the quantum of the power tariff differential subsidy to Wapda/Pepco and K-Electric. It has been kept unchanged in 2017-18 at Rs 118 billion. This could represent significant under provision, as estimates are that the minimum subsidy required annually is close to Rs 150 billion. Further, in the election year, the Federal Government may want to ensure enough liquidity in the sector for, more or less, uninterrupted supply of electricity. As such, it is likely that the tariff differential subsidy will be higher by up to Rs 100 billion.
The last major component in current expenditure is the operations and maintenance cost of public services, excluding defence. It is surprising that allocations for law and order and economic affairs have been reduced with a likely negative impact on the quality of services provided. Consequently, there will be pressure during the forthcoming budget to increase the respective budgetary allocations. Overall, the conclusion is that the budgeted Federal current expenditure for 2017-18 has been significantly understated by as much as Rs 300 to Rs 350 billion.
Development expenditure Development expenditure of the Federal Government consists of the PSDP, other development expenditure (including the BISP) and net lending. The anticipated PSDP spending in 2016-17 is Rs 715 billion, representing a growth rate of 21%. This is being pushed up to Rs 1001 billion in 2017-18, effectively a large jump of 40%. It will constitute almost 80% of total development spending.
What are the development priorities in next year's PSDP? Given the emphasis on highways/motorways, it is not surprising that the largest allocation is to NHA of Rs 319 billion, with a growth rate of 52%, in relation to likely spending in 2016-17. Other relatively large allocations are to Water and Power Division, Pakistan Railway, Higher Education Commission, PAEC, vertical programmes of health and population planning, etc.
The big surprise is the cut in allocation to Wapda/Pepco for the highest priority hydro-electricity projects and for improvement and expansion of the transmission and distribution system. The spending in these areas is projected at Rs 134 billion from the PSDP in 2016-17. It will be reduced by 55% in 2017-18 to only Rs 60 billion. This appears to a major retreat from the commitment to eliminate power load shedding by 2018.
However, deeper analysis reveals that the real explanation for this cut is the assumption that Wapda/Pepco will be able to 'self-finance' the projects. The PSDP actually shows proposed spending of Rs 377 billion, implying 'self-financing' up to Rs 316 billion from outside the PSDP. This self-financing is actually direct borrowing, mostly with Government guarantees. It should be part of the overall borrowing reported by the Federal Government. Therefore, the development spending by the Federal Government will effectively go beyond Rs 1 trillion to over Rs 1.3 trillion.
The saving in PSDP allocations, by diverting bulk to self-financing directly by Wapda/Pepco, is being used to expand special programmes. Many of these programmes are of a populist nature, with a degree of pork barreling. They are also amenable to discretionary spending. Some even impinge on functions of the Provincial Governments, especially after the 18th Amendment. The total proposed outlay on these special programmes is as much as Rs 235 billion in 2017-18, as compared to Rs 73 billion in 2016-17.
The basic conclusion is that the initial positive impression about the Federal budget of 2017-18 is misplaced. The MoF has skillfully underestimated both current and development spending so as to report a lower deficit and exhibit considerable economy in current expenditure in 2017-18.
Overall, combined with the bloated revenue projections; the consolidated fiscal deficit could approach 5.5% of the GDP in 2016-17 and to 6% of the GDP in 2017-18. The major worry is that in both years there will be massive deficit financing by borrowing from the SBP by printing of money, with severe inflationary consequences. However, the expectation is that a big jump in the rate of inflation will largely happen after the elections. Meanwhile, a more favorable outcome may be ensured in the elections by a larger quantum of populist spending.
(The writer is Professor Emeritus and former Federal Minister)
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