The budget has already taken shape, but it is also gaining substance. While taxation measures have yet to be finalized, the development budget is being pitched at Rs 1 trillion, even though Rs 3 trillion had been demanded. That means that the development budgets of all departments, as well as the provinces, have already faced a drastic downward revision. True, the demands adding up to Rs 3 trillion included an element of wishful thinking, but a budgeting process which leads to the requests being slashed by two-thirds has got to be an inefficient one. The heavy hand of the IMF can be detected, but more usually, the reductions take place in the course of the financial year as the government tries to meet budgetary targets.
Finance Ministers can probably have the greatest effect by defending the development budget. With the current budget tied to an anemic growth of 4.3percent for the coming fiscal year, it is all the more important that the development spending be maintained. It should be remembered that growth targets are usually optimistic, indeed over-optimistic. Another threat to growth, though one not necessarily incompatible with it, is inflation, which has finally undergone an uptick, reaching a level last seen in December. This had been predicted, but it now means an end to the chances that the State Bank’s Monetary Policy Committee will lower the interest rate. Indeed, the business community should be satisfied if MPC keeps the rate where it is. By the nature of things, the government cannot do much about the inflation rate, but a lower rate would mean a lower interest rate, which should in turn mean lower debt servicing costs. The budget is as much as Rs 1 trillion below last year’s because of savings in debt servicing.
The problem with cutting the development budget is that it reduces investment and thus the GDP growth. Pakistan already faces a low rate of savings, which has a particularly negative effect on the economy, because already job creation is not keeping up with inflation. Pakistan’s growing population, and the inevitable youth bulge, will only be of use if jobs are found for the young people reaching employment age every year. Therefore, perhaps the most important function a Finance Minister, and a Planning Minister, can play is to defend the development budget.
