Rising budget deficit: No solution in sight?

The budget deficit rose to 4.2 percent of Gross Domestic Product (GDP) during the first nine months of the current fiscal year. The International Monetary Fund (IMF) has projected total budget deficit for the ongoing year at 7.2 percent, rising to 8.7 percent in the next fiscal year, declining to 8 percent in 2021, 7.8 percent in 2022 and 7.6 percent in 2023, if the economic policies at present continue. These projections are similar to those being made by other multilaterals which is more indicative of their attempts towards harmonization rather than the outcome of independent research.
Be that as it may, the IMF clearly remains the lead multilateral in terms of economic analysis and hence its projections need to be taken seriously by the Khan administration. In the event that the country goes on a Fund programme, and in recent days key members of the cabinet have stated that the country is embarking on such a programme, it is safe to assume that there would be time-bound structural benchmarks for each year of the programme to bring the deficit to sustainable levels; however, the details of these benchmarks would be firmed up when the mission arrives for negotiations next week.
The question that must be raised is how accurate are these projections? While the projection for the current year may be right on the mark to project the deficit for the next four years is perhaps an exercise in futility as the administration's attempt to deal with the rising gap between expenditure and revenue has not been factored in at all. Given that former Finance Minister Asad Umar did not focus on containing the deficit by either raising revenue through realistic measures or reducing current expenditure yet the new man in, Dr Hafeez Shaikh, a qualified economist, is unlikely to allow the deficit to rise irrespective of the IMF bailout package.
Asad Umar took three major decisions that widened the gap between revenue and expenditure: (i) first amendment finance bill envisaged revenue from sources that had proved to be unsuccessful in the past, for example, raising over 70 billion rupees from technological advancement; (ii) second amendment to the finance bill envisaged incentives to the industrial sector at a cost of over 140 billion rupees as per independent economists; and (iii) Umar was unable to contain the rise in current expenditure particularly on defence and exceeded the budgeted amount by over 22 percent during the first half of the current year.
The usual practice (during the previous administrations as well as the incumbent) is to contain the deficit through slashing development spending. And this is precisely what Asad Umar did. In this context, it is relevant to note that State Bank of Pakistan's (SBP's) second quarterly review acknowledged that "given that public development spending, a key driver for private sector industrial activities, is unlikely to pick up anytime soon, the full year outlook for manufacturing activities remains subdued." In other words, the effectivity of the second finance bill at considerable cost is being challenged by the SBP report. It is also important to note that any decline in development spending has a direct negative impact on GDP growth rate which, in turn, further depresses revenue collections.
One would sincerely hope that Dr Hafeez Shaikh who has never engaged in negotiations on behalf of a government (though he has negotiated on behalf of a multilateral) has the capacity to ensure that the deficit reduction benchmark agreed with the IMF does not compromise growth while at the same time, he needs to negotiate with the major recipients of current expenditure in an attempt to minimize the reduction in development spending. It is a daunting task but as they say someone has to do it and Dr Shaikh has accepted the challenge. When Imran Khan said 'jump' Dr Shaikh said 'how high'.