Fiscal affairs and Constitution – II

In Part-I we had outlined the basic framework governing the budgetary affairs in the constitution. Let us reiterate some of the main requirements contained therein. First, no tax without parliamentary approval; Second, there are two accounts of federation, namely federal consolidated fund and public account, with former requiring all revenues and loans and repayments thereof to be credited therein and the latter requiring all other monies especially those in the nature of trust and deposits with courts be credited therein; Third, there are two types of expenditures, charged and regular.

The former is not a subject of vote by National Assembly while the latter would require such approval; Fourth, Approval of budget means approval of demand for grants placed individually for each ministry/division voted or charged; Fifth, the real document at the heart of the budgetary process is the schedule of expenditures (charged and voted) personally signed by the prime minister and laid before the National Assembly.

Finally, during the year, government has the freedom to reappropriate from different heads, incur excess expenditure beyond sanctioned limit and introduce new spending proposals which would all be subjected to the same approval procedure during the following year as supplementary budget. It is also mentioned that analogous provisions are available for the budgetary framework of all provinces.

There are two more provisions in the constitution, having very significant bearing on fiscal affairs, namely Article-160, which deals with National Finance Commission regulating distribution of tax revenues between federation and provinces, and Article-166 which vests borrowing powers to federal government against the security of the consolidated fund. Article-160 requires extensive study, which we would do some other time, but for now our focus is on Article-166.

Fiscal affairs and Constitution

The Article-166 says: The executive authority of the Federation extends to borrowing upon the security of the Federal Consolidated Fund within such limits, if any, as may from time to time be fixed by Act of Majlis-e-Shoora (Parliament), and to the giving of guarantees within such limits, if any, as may be so fixed.

This provision and the way it has been used since inception is the real bane of our fiscal system. To start-off, note that in Article-77 it was prohibited that no tax will be imposed except under the authority of the parliament. Furthermore, under Article-79 all revenues (tax and non-tax) and all loans and repayments thereof would be credited to consolidated fund.

Given the fact that the money is fungible (indistinguishable whether raised through tax or borrowing) prudence would require that the same sense of propriety should be exercised for each debit to the consolidated fund irrespective of its source. But inherently, the makers of the constitution have not treated them at par.

While raising taxes was subject to a parliamentary act, no such condition was required for borrowings and consequently until 2005, when a benign legislation, called Fiscal Responsibility and Debt Limitation Act (FRDLA), 2005, was enacted the executive authority was unbounded to contract as much debt as it would like.

The FRDLA had set 60% as the debt to GDP ratio limit. It was envisaged if there was an over-run in the limit, the Finance Minister would issue a statement outlining the reasons behind the breach which would be corrected speedily over the shortest possible time.

While this law worked for sometime (by default) in 2016, IMF pushed an undesirable amendment which reduced the limit to 50% to be achieved over a 15 year period. This was completely in vain as under the very Fund program the ratio surpassed 90% but for the revised GDP figures, which has brought it back to around 80%.

To measure the dependence on debt in funding the budget, we look at the share of expenditure financed by debt. During the period 2016-21, on average the contribution of debt in financing the consolidated (federal and provincial) expenditure has been 30% while in some years it was close to 40%.

Evidently, the government has reconciled that tax effort would never be able to support current levels of expenditures. Dr Arshad Zaman, former chief economist of Pakistan, once remarked that privileged classes simply tell the government they would not pay (due) taxes but would happily lend to it.

In fact, things are far worse when we consider the situation of the federal government finances. At the federal level for the same period as much as 53% of budget was financed from borrowing. The net revenues of federation are barely sufficient to meet interest payments.

Given the precarious fiscal conditions, as discussed in our previous articles, in the near future debt accumulation would remain on the rise and therefore the share of debt financed expenditures would continue to rise.

It may also be underlined that debt dynamics depend on interest burden which rapidly rises and contributes to higher debt particularly when interest rates are rising, as at present where rates are the highest in nearly a decade. This is indicative of the fact that on this account also the path of debt accumulation would be rising rapidly unless painful actions are taken to curb the easy access to debt.

It may be mentioned that two useful contributions of the debt law are the debt policy and fiscal policy statements submitted to the parliament each year. They contain a wealth of information for policy makers and researchers but that has nothing to do with the main aim of the law, which has been miserably defeated because of toothless legislation.

Curiously, it is a widespread belief among responsible officers that loans are harmless compared to the use of revenue. They would frequently approach ministry of finance for funding projects while boasting that they have lined up financing and thus it would not cost much to the exchequer.

Evidently, the debt law has failed to reign in debt accumulation within the prescribed limit. Without a provision that would provide for some punitive measures for breach of debt limits, it would be unrealistic to expect any change in fiscal practices.

In our next article we would review the international practices in debt limitation and recommend what is palatable for a country like ours.

(To be concluded)

Copyright Business Recorder, 2022