Saturday, June 25, 2005

Politics of budgeting

Politics of budgeting
By Kaiser Bengali
THE budget is a political document. It determines how much money will be taken out of whose pockets and how much of that money will be put into whose pockets. Clearly, these decisions are largely determined by the balance of political power of the various groups in society.

In a perfect democratic polity, all groups command some leverage through the electoral process and are in a position to stake some claim on the distribution of national resources. In an undemocratic dispensation, powerful groups that control the levers of state power command a degree of monopoly over decision making and are able to determine the distribution of tax burdens and expenditure benefits without meaningful reference to the people at large. The latter scenario applies to Pakistan.

Pakistan’s political arena is dominated by an elite that comprises the military officer class, civil service executives, large landowners, large traders and industrialists, up-market professionals, capital market dealers, politicians as well as the ulema. To this lot may be added a new breed of Islamabad-based middlemen, who specialize in cultivating high-level contacts and can broker any deal for a price. Collectively, they might all be labelled as the ashraafia. At the other end of the spectrum are the people at large or the awam. The ashraafia has traditionally dominated the country’s polity and economy; however, the degree of their control has gained added strength under military dictatorships.

The euphoria among the ashraafia whenever there is a military takeover and the subsequent support extended to the dictatorships need to be understood in this context. The policies pushed forward by the ashraafia over the last half a century has created two parallel economies in the country: one of the ashraafia and one of the awam. The present military-dominated political dispensation led by General Musharraf is the most pristine representative of the ashraafia in Pakistan’s history. This is indicated by the budget for the year 2005-06, which caters almost entirely to the requirements of the ashraafia and blatantly ignores the needs of the poor.

There are two unique features of the budget for the year 2005-06. One is the tax measures relating to the textile industry. They are certainly bold and highly commendable. Faced with stiff competition from China, in the wake of the abolition of textile quotas from January 2005, the measures can be expected to enable Pakistan’s textile industry to fare better in the international market.

Given that cotton and textiles have a dominating role in Pakistan’s agriculture, industry and exports, the measures can be expected to sustain the growth momentum in other sectors as well. In fact, such measures need to be extended to other industrial sectors in order to enable the manufacturing sector to emerge as the engine of growth in the national economy.

The corresponding revenue losses can be made up through taxation of wealth and through reduction of current expenditure. That, however, would require a paradigm shift in the thought processes of the ashraafia.

The other unique feature of the budget is the rank insensitivity to the plight of the poor. The absence of consideration for the poor is part of a systematic pattern in the policy choices made by General Musharraf’s economic managers; with the bulk of the cost of macroeconomic adjustment of all economic policies pursued since October 1999 being placed on the poor. Not surprisingly, seven million people fell below the poverty line in less than three years; rendering it the fastest growth of poverty in the country’s history.

Analysis of available data over 1999-2002 has shown that while the purchasing power of the richest 10 per cent of the population rose 33 per cent, that of the poorest 10 per cent declined by nine per cent. The opposing movements in purchasing power trends between the rich and the poor has widened the income gap, with the richest 10 per cent of the population expropriating 34 per cent of national income and leaving less than three per cent for the poorest 10 per cent.

The insensitivity to the poor is again evident from the fact that despite a near tripling of the inflation rate over the year, the budget proposals are devoid of a single inflation control fiscal measure. At the least, one expected a modest reduction in gasoline taxes in order to mute inflationary tendencies in the economy. Given that households earning less than Rs3,000 a month face an inflation rate that is about 10 per cent higher than the average inflation rate, such a measure would have certainly helped the poor. And given that the rate of food price inflation is about 45 per cent higher than the average inflation rate, a pro-poor orientation of the ruling ashraafia would have provided for a wheat flour subsidy and public investment in a nation-wide distribution system. No such relief for the poor is in the offing.

Perhaps, government’s economic managers have chosen to absolve themselves of the responsibility for dealing with inflation on the grounds that it is imported through higher international oil prices. This is only partly correct. Partly, responsibility for fuelling inflation lies with the State Bank of Pakistan. It may be recalled that, till recently, commercial banks in the country were loaded with excess liquidity. Funds lying idle with banks are a recipe for losses; while they have to pay interest to depositors, they are not earning interest on loans that could have been extended to borrowers. The State Bank came to the rescue of the banks with a credit policy that opened the floodgates of credit for consumer purchases, houses, etc.; resulting in a record 21 per cent growth in the banking and insurance sectors during 2004-05.

The liberal flow of credit was instrumental in escalating land and stock prices by a factor of two to three over a period of just one year. It needs to be noted that the credit flow placed money in the hands of the rich and the upper middle class, given that only they could qualify for bank conditionalities for obtaining credit. The poor and the lower middle class remained excluded from the process. However, the credit expansion led to the aggregate increase in money supply and in the velocity of money, which fuelled inflation, with the larger part of the cost borne by the poor.

The income-demand driven inflation that Prime Minister Shaukat Aziz is prone to highlight is demand for goods and services by the credit-rich ashraafia and not by the income-poor awam. The link between the balance of political power in the country and the nature of economic decision-making emerges clearly. The unrepresentative nature of the Musharraf regime and its links with the world of international finance — characterized by the fact that the regime’s economic team is led by ‘imports’ from the international financial and banking world — ensured that the demands of banking sector profitability prevailed over the imperative of economic security of the poor.

The 2005-06 budget is also silent on the employment front. The omission is meaningful, given that the 2.3 per cent growth in employment during 2004-05 has been cancelled out by the 2.3 per cent growth in the labour force. The stock of employed, concentrated in greater numbers in Balochistan and rural Sindh, remains constant. Elementary macroeconomics textbook dictum that growth must address the backlog of unemployment as well as cater to the employment needs of those entering the labour force appears to have been ignored. A regime committed to providing livelihood to the poor would have been induced to provide for some specific employment generation measures in the budget.

The cause of employment generation can be furthered through public investment in labour-intensive public works programmes that would also rehabilitate and/or create economic infrastructure. Unfortunately, the record of the regime in terms of development expenditure is dismal.

Democratic governments during 1988-99 were constrained by shrinking fiscal space, caused by the lagged debt servicing burden imposed by the erstwhile military regime of General Ziaul Haq and subsequently aggravated by the ill-conceived financial liberalization in the early 1990s. General Musharraf’s regime was blessed by the post-9/11 largesse from Washington, which provided much needed fiscal space. The year 2002-03 saw fiscal space of Rs59 billion on account of lower debt servicing expenditures and higher import duty and surcharge collections. Yet, not one single rupee of this fiscal space was devoted to development expenditure.

In fact, development expenditure during the year was Rs14 billion lower than budgeted, while (non-development) current expenditure net of debt servicing was Rs98 billion higher than budgeted. General Musharraf’s finance minister then attributed the failure to utilize the entire budgeted amount for development expenditure to ‘the absence of absorptive capacity in the economy’. This was preposterously ludicrous, given that the country’s rural and urban infrastructure needs are crying out for funds. One rural water conservation project in any one province or one urban renewal project in any one city could have absorbed at least 10 times the unspent amount.

The year 2004-05 has closed with nearly half the development budget unspent. The budget for the year 2005-06 has allocated Rs272 billion for development. However, this is merely of academic value, given that the amount is unlikely to be spent. On the current revenue-expenditure side, there is an over Rs. 100 billion deficit that is assumed to be met through improved revenue collections. If past experience is any guide, it is more likely to be met through cuts in development expenditures.

Statements have already been made to the effect that, if General Musharraf’s verdict on the NFC award necessitates additional resource transfers to the provinces, the amounts would be provided from the development budget. The pattern of behaviour with respect to development expenditure shows that the regime is committed almost exclusively to the goal of promoting the economic agenda of the ashraafia and has little or no commitment to development programmes related to the needs of the people.

Pakistan is a resource rich country and, among all the south Asian countries, is alone capable of abolishing mass poverty within the span of one generation. This would require a restructuring of the entire fiscal framework so as to ensure that resources are allocated equitably. However, the prerequisite for carrying out such an exercise is a reconfiguration of the balance of state power itself.

(Source: DAWN,


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