Needed: an objectives-based and mission-oriented budget

‘…which is outcomes-based budgeting. First ask ourselves what needs to be done. What does it mean to tackle climate change with the same level of seriousness that we tackle wars. You know to do it because it’s hard not because it’s easy… But what does it actually mean for example to forge these symbiotic partnerships by for example creating conditionality.

So, instead of just having this kind of, you know, reining down of subsidies, guarantees, and bailouts, what would it look like if every penny that say government gave to different types of sectors that are important in the economy, came with certain types of conditions attached that really allowed us then to always build forwards better, right, not just after a crisis.’ – Excerpt from a June 2021 interview by renowned economist, Mariana Mazzucato at World Economic Forum’s ‘Jobs Reset Summit’

Pakistan, like many developing countries, is in a very difficult economic situation. The country was already in primarily stabilisation phase when the pandemic hit the world in early 2020. Lockdowns, and overall recession-causing pandemic needed providing strong stimulus to the economy, and for welfare needs of the most vulnerable.

Although some reasonable amount was provided in this regard, this was nowhere near the amounts that were needed, but could not be provided in the wake of no significant debt moratorium/ relief, and provision of little enhanced SDR allocation from International Monetary Fund (IMF). Pledged amounts for climate finance for developing countries were also not received in any significant way, not to mention vaccine hoarding by many rich, advanced countries created a much slower economic recovery path for developing countries like Pakistan.

Having said that, overall counter-cyclical policies meant that Pakistan recovered in terms of economic growth over this and last fiscal year. Such recovery, however, remains quite non-inclusive, and balance of payments situation, and fiscal deficit also need management in the wake of primarily lack of financial support that the country needed during the pandemic, coupled with rising oil prices, and overall global commodity supply, which was made all the more acute since the start of war in Ukraine by Russia in February.

In addition, it strongly appears that climate change has hit Pakistan, and this region overall, and the severe heat wave has badly affected wheat crop, which comes with an added worry since global wheat supplies have also fallen short due to the war in Ukraine.

So, to say that these are difficult times for the economy would be an understatement. In this context, the upcoming Budget holds exceedingly high importance; through carefully planned counter-cyclical policies, it needs to strike a good balance between stabilisation and growth, while it is also hoped that greater debt relief and fast and meaningful level of relocation of SDRs from last August will provide a much-needed cushion for the already stretched usage of macroeconomic policy instruments.

In addition, as indicated in the quoted remarks of Mariana Mazzucato, policymakers need to understand the need for laying the Budget on well-targeted objectives for the economy, and the steps needed in this regard through policy focus in the Budget should highlight a strong sense of purpose, or a mission-oriented approach.

The Budget needs to be outcomes-based, and any subsidy, support, tax, needs to be well-founded in the face of striking a good balance between stabilisation and economic growth in the overall context of such important aspects as climate change, pandemic, high inflation, and inclusive growth. So, on one hand, the Budget should not be pro-cyclical in nature, while on the other, it should not be a list of rather random set of sectoral allocations.

Overall, there needs to be a strong sense of cogently defined purpose, and an overall mission-oriented approach, reflected in the Budget, where Mariana Mazzucato defined this approach in her book ‘Mission economy: a moonshot guide to changing capitalism’ as ‘Public purpose must lie at the centre of how wealth is created collectively to bring stronger alignment between value creation and value distribution.’

Among some of the important areas, and steps within, that define the overall objectives that the upcoming Budget should play its part in supporting the overall policy direction of stabilization and recovery, include first of all import rationalization so as to prioritize imports, and disincentivizing non-essential items. Secondly, export enhancement should be incentivized through strong support through providing subsidy/tax incentives, but with conditions, as Mariana indicates should be put in place to link support with performance of a particular sector.

One specific area of focus could be to target higher yields of wheat crop for next year, in an effort to both help global wheat shortages, and to enhance export earnings for much-needed support for building-up foreign exchange reserves.

Another important step, in the spirit of overall proactive, mission-oriented approach, should be that the government should pick up one area, for instance, steel, and incentivizes the steel SOE, and shapes the market here but including private sector not as privatisation, but on the lines of mixed-ownership enterprise (MOE) — like China did — keeping majority decision-making in its own hand. Like wheat, steel supply has come also come under a lot stress in the wake of war in Ukraine, since Russia and Ukraine together were the second biggest supplier of steel globally before the war.

By taking this initiative, the government would make a much-needed statement that the role of government is not just market-fixing, or taking the role of only facilitating the private sector, as the neoliberal had us, and many countries, believe as sound economics.

The government should do the hard thing; it must step in where needed and create a symbiotic relationship, and neither let private sector unsupported in sectors that require strong role/investment of government like in steel, nor should leave the private sector reap all the profits — like in the pharmaceutical industry for instance. After all, the basis of such profits is depended heavily on taxpayers’ money.

Thirdly, LSM momentum needs to be sustained for overall growth, while incentives should be placed for better enabling environment for SMEs sector since growth badly needs inclusivity. An important step in this regard is to decrease the policy rate to single digits, since inflation is mainly imported/ supply-driven/ cost-push inflation. Of course, this is the prerogative of SBP, but the government should try to bring central bank to this understanding so that the Budget could highlight this understanding through incentives planned for industry and oil/energy sectors in the Budget. So, it would make sense that once this understanding is reached, SBP through public announcement gives a timely schedule for quick and meaningful reduction in policy rate.

While counter-cyclical policy stance in the Budget would require not burdening the already taxed incomes, tax burden needs to be reduced through actively shifting towards more direct taxes through an overall set of tax broadening initiatives. More generally, a much meaningful wealth tax should be imposed.

An important step in particular, imposed in a temporary way, so as to deal with the impact of pandemic, and supply shock, could include, firstly, applying a strong ‘windfall tax’ on those sectors of the economy, like earnings in stock exchange, IT sector and pharmaceutical industry.

Climate change is another important area that requires a mission-oriented approach, since while it is a global issue of existential concern, Pakistan remains one of the top ten countries to get most affected by climate change and global warming. In this regard, the government should allocate huge amounts in many areas, but particularly in the area of solar panels, and in provision of green buses.

Finances for this should be allocated on the basis that strong pursuing will take place of rich, advanced countries to provide pledged climate finances, along with asking China to provide cheap resources and technical assistance in both bringing solar panels and green buses to reduce the need for reliance on fossil fuels for electricity generation, and transportation related oil consumption. This is also important indeed for reducing costs from a major import item in the shape of oil, along with increasing insulation of energy sector for exogenous shocks from the oil sector, for instance price spikes and supply shortages.

When the pandemic hit, like most governments — developed and in particular developing — Pakistan was ill-prepared in terms of a strong public health sector, and also in its capacity to discover/manufacture vaccines. Budget should make strong allocations in this direction, and provide support/allocations in such a way of planned conditionalities that allow both public and private sectors to benefit.

Water security, and proper provision is another area that needs attention, given rising climate change needs and lack of proper governance. Budget should ensure that steps are taken to provide meaningful protection/upgradation of this sector.

Another exceedingly important area that needs support from Budget, is the education sector, to put in place initiatives to bridge the education gap on account of pandemic-related disruptions, and in improving the quality and preparedness in terms of digital/remote education in the times of possible future pandemics, and other hazards/ emergencies. When the current pandemic hit, like many countries, the country was ill-prepared in these directions of the education sector.

Copyright Business Recorder, 2022