Austerity bounces back on reforms agenda

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VIAJawaid Bokhari
SOURCEDawn News
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A combination of austerity, revenue mobilisation and fiscal consolidation measures envisaged in next year’s budget can help bring much needed financial discipline if the three components are in the right proportion.

It will be a difficult and uphill journey for the prime minister’s financial team which has been described as ‘a face of change’ by PTI leader Jahangir Khan Tareen. However a confident advisor on finance and economic affairs Dr Abdul Hafeez Shaikh sees the next fiscal year as ‘the year of stability’.

Addressing a press conference in Islamabad on May 28, Dr Shaikh assured the nation that God willing, the civilian government, the army and the private sector will stand together on the issue of austerity. The coming budget will unveil measures to reduce government expenditure.

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Also Read: Austerity at PM House saved Rs147m

Efforts to tackle this issue have so far remained confined to symbolic gestures. In the nine months of this fiscal year the current expenditure has swelled to Rs4.798trillion compared to Rs4.075tr a year ago, with galloping debt servicing, fast rising defence spending and substantial duplication of functions at the federal and provincial levels.

The awareness on economising on expenditure is very low. There is a lot of waste and corruption which can be curtailed by streamlining systems/procedures and digitalisation.

Though an imperative for reducing fiscal deficit, cost cutting efforts are being made more difficult by surging headline inflation moving northwards towards double digit growth. The Sensitive Price Index has already increased by 13.96 per cent year-on-year for the week ended on May 23.

‘It would be simply impossible to achieve 34pc growth in revenue in a single year when the economy is already in a shambles’

Dr Farukh Saleem says a study spread over 37 years and 21 states shows that countries with successful fiscal reforms, on average, closed 85pc of the budget gaps with spending cuts. On the contrary, when nations try to solve a crisis primarily by tax recovery they fail.

On the face of it, the revenue target appears to be as ambitious for a single year as the PTI’s manifesto is proving to be for the party’s five-year tenure in office.

The projected revenue target has been set at a record high of Rs5,550tr or 35.4pc more than the revised estimate of Rs4,100tr for last year. The Federal Board of Revenue (FBR) has underperformed owing to faltering economic growth as well tax breaks. The mobilisation of an additional Rs1.5tr appears to be a Herculean task.

“It would be simply impossible to achieve 34pc growth in revenue in a single year when the economy is already in shambles,” says Dr Abdul Hafiz Pasha, arguing that such an abnormal increase has never happened before.

Dr Ashfaque Hasan fears that revenue target will further choke the economy, and the next year’s budget may go out of control.

One may add that the overambitious revenue target will put the prime minister’s team of technocrats to a critical test with business confidence further shaken by the proposed sweeping withdrawal of tax exemptions/concessions and no incentives in sight to arrest deindustrialisation for pushing up economic growth.

Fiscal consolidation will depend on revenue mobilisation, austerity measures and provincial efforts to raise their tax revenue to a targeted 1.5pc of the GDP.

This requires full implementation of the 18th Amendment and transfer of taxes to the provincial and local bodies where revenue mobilisation can be maximised because of local knowledge and ownership.

The PTI’s local bodies’ reform has many positive aspects — such as setting up panchayats and neighbourhood entities. But they fall woefully short of financial, administrative and legislative powers provided to the local bodies under the 1973 Constitution.

The country is in the grip of cyclic and structural crisis as also indicated by the International Monetary Fund (IMF) statement issued after the staff agreement with the government.

It noted that “the current situation reflects the legacy of uneven and pro-cyclic economic policies in recent years aimed at boosting economic growth but at the expense of rising vulnerabilities and lingering macroeconomic and institutional weaknesses. A strong structural agenda will support economic policies to rekindle economic growth for improving living standards.”

Over time the worsening structural crisis has made recoveries more fragile and less convincing. Taking an optimistic view of things, the 39-month IMF programme may at best address the cyclic crisis which needs a much shorter time frame to get resolved as seen in the case of global financial crisis and the Great Recession of 2007 -2008.

But since then the global recovery has remained fragile because of unaddressed deep seated global structural imbalances which, to quote development economists, may require decades to be effectively tackled. Pakistan is no exception.

Yet another issue is that the IMF programme has turned out to be politically more divisive than in previous cases and lacks the broad-based ownership for its effective implementation. The PTI style of governance is also not helping build a consensus.

Dwelling on the price of reforms in one of his articles prior to his appointment as FBR chairman, Mr Shabbir Zaidi advised the prime minster to take tough decisions that will shake up the system and create more trouble in the short and medium-term … But it is the only way out.

“Tax reforms in effect mean destroying the current economic edifice and creating a new one,” Mr Zaidi elaborated.

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His observations are in line with the recent statement by the special assistant on information Dr Firdous Ashiq Awan that the prime minister was working to ‘end the old system of politics and governance in the country.’ The national reconstruction agenda is still essentially in the initial stage.

Published in Dawn, The Business and Finance Weekly, June 3rd, 2019

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