A flawed budget
By Javid Husain
July 16, 2021 01:46 AM
PTI government’s budget for 2021-22, passed by the National Assembly last month, is deeply flawed because of its unrealistic assumptions, misplaced priorities, and likely failure to steer the country on the path to rapid and sustainable economic progress. There is thus the real risk that as the current financial year comes to a close, the GDP growth rate target of 4.8 per cent would be missed, inflation, unemployment and poverty would remain at high levels, health and education sectors would continue to suffer from governmental neglect, the fiscal deficit would climb up, the country’s total debt would witness another steep rise, and, if the national saving rate is not increased substantially, the country would have to face again a rising current account deficit.
For an accurate evaluation of the budget for 2021-22, a quick look at the state of the economy in the preceding year is essential. According to the Pakistan Economic Survey 2020-21, Pakistan’s GDP grew at the rate of 3.94 per cent during the current financial year as against the target of 2.1 per cent. There are some questions about the accuracy of this estimate. Even if the official claim about the GDP growth rate for 2020-21 is accepted, Pakistan’s GDP in 2020-21 was estimated to be $296 billion as against $315 billion three years ago in 2017-18. This was the direct result of the massive devaluation of the Pakistan rupee by about 35 per cent and a sharp decline in the GDP growth rate from 5.5 per cent in 2017-18 to 2.1 per cent in 2018-19 followed by the negative growth rate of 0.5 per cent in 2019-20.
Our national investment and saving rates, the two main determinants of economic growth, were estimated to be 15.2 per cent and 15.3 per cent of GDP respectively for the period from July 2020 to March, 2021. The virtual balancing of the national investment and saving rates helped in the elimination of the huge current account deficit that the PTI government had inherited from the preceding PMLN government in 2018. By way of contrast, in the year 2017-18, the huge current account deficit was caused by the excess of the national investment rate of 17.3 per cent of GDP over the national saving rate of 11.3 per cent of GDP.
National expenditures on education and health were estimated to be only 1.5 per cent and 1.2 per cent of GDP respectively in 2019-20. The latest Economic Survey does not give the relevant figures for the year 2020-21 but there is no reason to expect any substantial improvement over the preceding year. The low expenditure on education is particularly disappointing as education is the premium mobile of economic progress. While UNESCO requires the allocation of at least 4 per cent of GDP to education, developed countries and fast-developing economies allocate much higher percentages of GDP to education at the national level.
The country continued to suffer from high levels of unemployment, inflation and poverty during 2020-21. The unemployment rate is reported to have risen from 5.8 per cent in 2017-18 to about 15 per cent currently leading to the loss of 5 million jobs. The inflation was estimated to be about 9 per cent during 2020-21. High rates of unemployment and inflation over the past three years have pushed about 20 million people below the poverty line.
According to IMF, 40 per cent of the people may be living below the poverty line now as against 24.3 per cent of the population in 2015. Going forward, the budget for 2021-22 is likely to miss some of its targets because of its unrealistic assumptions. For instance, it is highly unlikely that the FBR, keeping in view its poor performance in the past, would be able to achieve the ambitious tax revenue target of Rs.5829 billion in 2021-22 reflecting an increase of Rs.1139 billion over the preceding year.
As against the estimated federal net revenue receipts of Rs.4497 billion, after the deduction of the provincial shares, for the financial year 2021-22, the budget envisages current expenditure amounting to Rs.7523 billion. So the government would have to borrow Rs.3026 billion just to meet its current expenditure in 2021-22. If we add the proposed developmental expenditure of Rs.964 billion, the total size of the fiscal deficit would rise to Rs.3990 billion which will have to be financed through internal and external borrowings resulting in a substantial increase in the national debt.
As a result of the additional borrowing of about Rs.4 trillion in 2021-22, the four years of the PTI government’s rule would witness an increase of Rs.15 trillion in the national debt as against the total increase of Rs.10 trillion in national debt recorded during the five years (2013-18) of the preceding PMLN government’s rule. This obviously would place increased debt servicing burden on the shoulders of the governments in the future.
On the development side, the budget allocates an amount of Rs.900 billion for the federal public sector development programme in 2021-22 as against Rs.630 billion spent in the preceding year for this purpose and the amount of Rs.1062 billion spent on development by the federal government in 2017-18. So while there is a welcome increase in the proposed federal development expenditure for 2021-22 compared with the corresponding figure a year earlier, it still remains short of the actual federal development expenditure in 2017-18. Further, education and health unfortunately will continue to suffer from governmental neglect because of inadequate allocation of resources.
Finally, our ability to raise the GDP growth rate to 6-7 per cent per annum, which is necessary for lowering the level of unemployment, without incurring unsustainably high current account deficits will depend upon our success in raising both our national saving and investment rates to 25 per cent of GDP or above as against the current figures of about 15 per cent only. There is no indication that the budget for 2021-22 would help us move in that direction. The country would, therefore, witness a further increase in unemployment in 2021-22 combined with a high level of inflation because of the increased fiscal deficit, thus, aggravating the poverty and misery of the common man.
The writer is a retired ambassador and the president of the Lahore Council for World Affairs. E-mail: email@example.com