The Budget ritual and compromised growth strategy

The sorry state of a client state

 The federal budget was announced on Friday and by time these words hit the stand, the endless debate on the ingredients of ‘demand for grant’, the budget speech itself and finally the finance bill might be on across the media, post budget seminars and other forums.

The likely content of these debates naturally emanates from the current budget documents; a micro economic analysis with little to offer for the students of macroeconomics; the macroeconomics where regretfully lies much of the baggage of the seven decades, not to ignore the shape of the nation state which came into being in 1947 and for what it stands for now. An analytical path fraught with extremely sharp turns and spots like no-man’s-land.

The budget statement, despite all its claims, as is expected in the modern world of nation states, is supposed to be a mix of the sitting government’s dispensation, the establishment account statement finalized for the previous year and its anticipated resource mobilization statement, expenditure snapshot for the next year.

As in any other working democracy, which depends upon the political narrative of the party in power, the main goal for the budget statement is to visualize in a realistic way a path for economic growth, which not only supports the resource and expenditure but also pushes forward the goal of that economic growth strategy, which at times can be export led.

With the inkling of becoming a client state again; an observation during the on and off negotiations between Iran and the USA, Pakistani academia and intelligentsia might find themselves in the conceptual dire straits or more directly in the desert with no shade or human being to get their narrative noticed. The inefficient state is here to stay at the cost of alienating the ideals it held over seven decades ago

Sensible political systems know well that economic growth goals, if realized, in the process also lift much of the burden from the economy itself and put the system, which includes the political system as well as the economy, on the path of stability.

Towards that goal, it is imperative that the economic managers have the required expertise, vision and the degree of freedom to steer the path of economic growth based on planning in a manner that the budget making is not just the exercise at hand with an accountant’s mind at work, to balance out the sheet, to justify variances or to make sure that the expenditures are met with resources. The ideal manager looks beyond that vision.

The Pakistani budgetary experience for decades has been caught in the accountant’s balance sheet, not because that the accountants presided over the exercise, rather it happened due to the peculiar nature of the state of Pakistan took shape, not what might have been visualized by the founders of the republic rather it was the outcome of what path the nation state took and how it transformed from a promising nation state to one preoccupied with its national security state character. That last mentioned character automatically made it eligible for another role; that of a client state; a relationship which can be a part and parcel with an emerging power like China, or with an already dominant power like the USA. 

The task of the political leaderships and the economic managers in service in such a national security state is not to induce growth in the economy, rather it is more about managing the resources, whether they are foreign exchange reserves, foreign debt, or enough resource mobilization which helps to run the domestic show; of an inefficient state machinery, law enforcement, administration and strategic deterrence.  Experience shows that these imbalances are not just an exclusive domain of struggling nation states like Pakistan; recently US President Donald Trump without mincing words justified his military spendings arguing that national security was above the need of social security, when quizzed by press if too much spending on the Iran war was worth it.

Pakistan has in fact lived through that narrative for seven decades. True the baggage of 1947 was not one to be ignored; to justify an India-centric national policy, encompassing all spheres of society; namely economy, media, government, but it cannot be ignored that the shape the state took has in fact pushed it into a blind alley, due to a single-minded approach, rather an approach based on a collective narrative of the state.

Without going into the nitty gritty of the budget exercise or even the political landscape, not to ignore the political trends not represented in the legislative houses and more visible on the streets, the shape of the state whose expenditure debit and credit statement is debated and passed every June before the end of the outgoing fiscal year is regretfully only geared towards financing a police state or a national security state. Not a state which encourages economic growth or in the process at least hits at the status quo, a very important ingredient of economic planning which has the potential to create an all-inclusive narrative.

To begin with, the over-emphasis on taxation and especially indirect taxation has caused a direct hit to the shrinking pockets of the rural and urban middle income groups. The result has been much less to spend to keep the wheels of industry going at the speed necessary to uplift the standards of living. A view of the economic planning exercise from 1988 onwards when the last big geopolitical contract, the Afghan war, came to an end, the Pakistani economic managers have been under a constant pressure to equalize the resources with expenditures. Unlike the direct tax, which tends to circulate the resources from the rich to the state and then to the poor, the indirect taxation simply hits low at the poor and the middle-income groups. The groups with not much left to spend, the SME sector which can be an engine of growth, the impact of indirect taxation on factor inputs creates a hard choice for the managers of the economy.

 Having enough resource mobilization from the indirect taxes which can support the national security state, or allowing fiscal space for the economy to grow steadily but regularly. The choice falls on the former imperative. Towards that end, it is now a general perception that the budget is a statement for the elite audience of decision makers and the national security state and practically it has nothing to offer to the masses, who are fortunately or unfortunately the prime stakeholder of any nation state. 

As things stand now Pakistan is characteristically an inefficient high-cost economy, where growth is accidental in nature due to the economy of scale; as 250 million mouths had to be fed and that creates demand and supply chains; and of the same number to clothe and provide shelter for. Otherwise, the income generation and job opportunities are not there to provide any relief; as the economy is plagued with stagflation; a term coined by economists to describe the perpetual state of economy. The political system under the cover of establishment has created a rentier class whose income levels are enough to create price distortions due to unnatural concentration of ‘aggregate demand’ factor in the hands of few.

The budget exercise, especially the speech section, best categorized as the sugar-coated part of the document can be a vehicle of deceit, but in real senses, it is just to bring the tempers down; otherwise, the system is geared only to provide enough resources for the peculiar needs of the nation state.

It is nothing short of a ridiculous trajectory of thought process in the hands of the economic managers, that they are promoting excessive indirect taxation to promote an inefficient state, rather than promoting in sincere ways, ways to induce growth in the economy. Due to that short term strategy, Pakistan is firmly engulfed in a vicious circle of dependence upon the foreign resources, budgetary support, foreign exchange support, courtesy IMF, and consequent strategies aimed at further discouraging economic growth.

Consequently, the budget exercise as witnessed now for FY 2025-26 will be another addition to the account statement, with not much change visible in terms of incentive for growth, other than the flowery prose. The nation state regretfully is likely to follow the beaten track on distribution of resources as has been observed for decades. With the inkling of becoming a client state again; an observation during the on and off negotiations between Iran and the USA, Pakistani academia and intelligentsia might find themselves in the conceptual dire straits or more directly in the desert with no shade or human being to get their narrative noticed. The inefficient state is here to stay at the cost of alienating the ideals it held over seven decades ago.