The Military Government's First Budget
By Nayyer Ali, MDShaukat Aziz, Pakistan’s Finance Minister in the military government presented the first budget for the government on June 17, 2000. Many others have already written about the budget, but let me add my thoughts on the government’s program.
The budget on its face is in general a good program. Its main thrust is a substantial increase in education spending, which is sorely needed. There was a 10% increase in defense spending, and that is unfortunate. I was hoping that the government would keep spending on defense in line with inflation (about 4%), but given India’s 28% boost in its defense budget, it is difficult to see how Pakistan could have avoided an increase to some extent. The development budget as a whole jumped 19%, with much of that spending going to education. Hopefully this signals the government’s intent to substantially reduce illiteracy. If Shaukat Aziz can keep boosting education by 25% a year each of the three years this government is supposed to remain in office, he will have doubled spending on education. That alone will be ample justification for Musharraf’s coup.
The budget is keyed on several major assumptions, but its biggest one is that the Central Board of Revenue will be able to boost tax collections by 25% from 350 to 440 billion rupees. The current struggle with the Bara markets and documenting businesses and the economy relate to this key assumption. Aziz is going for a strategy of increasing the government’s take of the economy, with the hope that a better government will allow the economy to grow faster.
If these assumptions work out, Aziz is predicting 6% economic growth rate for the next 3 years, with the budget deficit dropping from 5% to about 3% of GDP and the trade deficit shrinking to about .5% of GDP.
Critics of the government, and the usual crop of cynics who always believe that Pakistan is driving over a cliff, latch on to the high revenue assumptions as being unreachable. They may be right in the short term. The government may not completely win its struggle against the small traders, and certain compromises may be made. However, even if they fail to meet this year’s target, the government should be more successful in the next two years as its revenue collecting ability improves. The institution of a real agriculture tax is a key test of how serious this government is. Given that the government takes only 13% of the GDP in taxes, compared to 18% in other poor countries and 30-50% in developed countries, it is hard to say that Pakistanis are overburdened with taxes. What is true is that up to now the tax burden has fallen heavily on those who are unable to avoid it, while many of Pakistan’s elite escape entirely. Except for agriculture, the budget does not propose any new taxes, just better collection of taxes that are already the law of the land. The rich must pay for the government, it cannot be financed on the backs of the poor.
The real story is not how many rupees the CBR collects this year or next, but whether Aziz’s policies can revive vigorous economic growth. Strong growth will heal all wounds and allow the government to balance its books while increasing needed social spending. Strong growth will also give merchants the financial success that will make taxes a tolerable price to pay. It is Aziz’s pro-growth agenda that is far more important than his revenue projections. It is the vigorous growth of the last 5 years that turned years of US budget deficits into the current huge surpluses. If Pakistan wishes to develop, it needs to generate consistent 6-8% per year economic growth. Next week I will look at what Aziz is doing to foster economic growth.