Pro-poor spending

The provisional figures for the whole year, 2016-17, and for the first quarter of 2017-18 of public spending on pro-poor expenditure have become available. These estimates are made by the Poverty Reduction Strategy Paper (PRSP) Secretariat of the Federal Ministry of Finance and include the spending by both the federal and provincial governments. The PRSP Secretariat has made a major effort at collecting the relevant data and putting together the head wise expenditure, both current and development. This process have been on-going quarterly and annually since 2002. There is a need to appreciate and commend these efforts.
A very broad view has been taken of expenditures which are considered to be pro-poor by the Secretariat. There are, in fact, four categories of the expenditure included. First, there are income supplements, like the Benazir Income Support Program (BISP), which are exclusively targeted to the households below the poverty line. Also included in this category are subsidies which involve price reduction on goods and services consumed by the poor. A prime example of this is the large subsidy offered to small electricity consumers. In addition, there is also a subsidy in the procurement of wheat.
The second category includes services which primarily benefit the poor. This includes services like primary and secondary education, vocational training, preventive and curative health, water supply and sanitation. The third category comprises of services which do benefit the poor somewhat but are of greater value to upper income households like expenditure on law and order, justice and rural development. The last category consists of expenditure on roads and highways which cannot be characterized in any way as being pro-poor. For example, a poor family is unlikely to ever travel on the exotic Lahore-Islamabad motorway. As such, this last category is excluded from pro-poor expenditures.
Based on this categorization, pro-poor expenditure, according to the PRSP Secretariat, aggregated to Rs 2.5 trillion in 2016-17. The growth rate over the previous year was 9 percent. This is significantly lower than the growth in overall public expenditure of 17 percent. However, the growth in pro-poor expenditure in the first quarter of 2017-18 has been, more or less, the same as of total public expenditure, at 13 percent.
Total pro-poor spending in 2016-17 is estimated at 37 percent of overall public expenditure and equivalent to 7.8 percent of the GDP. It is disappointing to note that the level has fallen from 9 percent of the GDP in 2012-13. A comparison can be made with the actual outlays on debt servicing and defense services. These aggregated to 8.6 percent of the GDP in 2016-17, up from 7.3 percent of the GDP in 2012-13. Therefore, it appears that pro-poor expenditures are being 'crowded out' by other major public expenditures like on debt servicing and defense.
The share of pro-poor expenditure on the above three categories also leads to some significant findings. The share of income transfers and subsidies accounted for a share of 27 percent in 2016-17. It was significantly higher at 38 percent in 2012-13. Therefore, the priority attached to expenditure of maximum benefit to the poor has declined during the tenure of the present Government. Instead, the share of the third category, including law and order and justice, has gone up from 29 to 33 percent. The share of the second category of expenditure, primarily on basic social services, has also gone up from 33 to 40 percent. This is, of course, a welcome development.
An important question is the share of the Federal and the Provincial Governments respectively in pro-poor expenditure, especially in the aftermath of the 18th Amendment. The Federal share is approximately 25 percent and consists mostly of outlays on the BISP and subsidies. The combined Provincial share of 75 percent is on education, health, water supply and sanitation, law and order, agriculture and rural development.
The next focus is specifically on expenditure on education and health. The primary motivation here is to see if the level of such expenditure has increased following the generous 7th NFC Award. There does appear to have been a jump. Prior to the Award, the outlay in 2008-09 was 1.8 percent of the GDP on education and 0.6 percent of the GDP on health. This has gone up to 2.2 percent and 1 percent of the GDP respectively by 2016-17.
Unfortunately, this has not been adequately reflected in any significant improvement in social indicators like the literacy rate, which remains low at 60 percent. Perhaps the major reason is the dominant share of current expenditure at over 80 percent on these services. Only 20 percent is being devoted to improvement in quality of service and expansion of coverage. The rise in the share of current expenditure is largely attributable to the generous increase in emoluments of Government employees after the NFC Award.
There is need also to recognize that while outlays on education and health are increasing in relation to the growth in GDP, they are still low by international standards. While Pakistan is now devoting 2.2 percent of the GDP on education, the corresponding magnitude is 3.8 percent in India, 3.3 percent in Indonesia and 4.8 percent of the GDP in Turkey. Similarly, the expenditure on health is less than two-thirds of the level in comparable countries.
Turning to priorities within education, there has been very low growth in expenditure on primary and secondary education in 2016-17 of only 2 percent as compared to the growth of 12 percent in higher education. This is a reflection of the political economy of education allocations, with higher education catering to the more vocal middle class in urban areas. This has created a mismatch between demand and supply. While the output of graduate and higher degree workers is expanding annually by over 8 percent, there is currently an unemployment rate of as much as 17 percent in the case of such workers. Clearly, there is a much stronger case for focusing on secondary, vocational and technical education.
Overall, the conclusion is that pro-poor public spending has shown only modest growth in recent years. Such expenditure is being crowded out by relatively fast growing expenditures on heads like debt servicing and defense. Also, there is a case for changing the priorities within pro-poor expenditure. As described above, the focus must shift more towards income transfer programs like BISP, which covers only one third of the national poverty gap currently, and to basic services like water supply and sanitation, preventive health, technical and vocational education.
Finally, in a country like Pakistan, with a large youth bulge it is truly amazing that the outlay on Youth Affairs is only Rs 418 million. Further, even with a huge backlog of housing units, the expenditure on low cost housing is only Rs 422 million. These remain the two most neglected areas of pro-poor expenditure.
(The writer is Professor Emeritus and former Federal Minister)