Apr 20, 2010

Monetary mismanagement

The internal and external debt will keep on rising unless we go for all-out economic revival
By Huzaima Bukhari and Dr. Ikramul Haq

Former Finance Minister Shaukat Tarin, on assuming charge, issued an official communiqué to all federal government ministries, divisions, and attached departments to reduce non-development expenditures by 20 percent as a measure to bring down fiscal deficit to 4.5 percent -- the agreed level with International Monetary Fund (IMF). He miserably failed to get it implemented. On the contrary, such expenses rose to 25 percent by the time he quitted his post and paved way for Abdul Hafeez Shaikh.

Our rulers should realise that Pakistan cannot afford wasteful spending. We need to downsize our mammoth governmental machinery and reduce spending on "elected" representatives. Expenditure on the staff and household of the President has registered an increase of over 400 percent in the last ten years -- from Rs75 million in 1999 to Rs390 million in 2009. Ten years back, the army of ministers, advisers and special assistants cost the exchequer Rs24 million; now they cost Rs3 billion, that is an increase of 12400 percent.

In 1999, total expenses for the National Assembly were Rs250 million which have now jumped to many billions. Interestingly, the traveling allowances alone come to Rs645 million. In 2008-09, the Prime Minister was allocated Rs958 million for foreign travels alone, but ended up spending Rs1.2 billion. In 2008-09, the President's foreign travels cost Rs760 million. For his "security reinforcement", a hefty amount of Rs200 million was spent by the President House and Rs40 million for personal residence. Senators spent over Rs45 million on foreign trips in 2009.

According to holders of public office, any cut in their expenses will not improve the health of economy substantially or positively. They plead for more taxes but are not ready themselves to pay any. They speak about big reform agendas for long-term fiscal stability, sustained economic growth, rapid industrialisation and social mobility for deprived segments of society, but have no idea to implement them.

The other day, Fauzia Wahab, spokesperson of PPPP, in a TV talk show, pleaded for more expenditure for the "welfare" of civil-military bureaucracy and public office-holders. She said that "in a cash-starved economy, the measure of reducing non-development expenditure of federal government departments will have an insignificant effect of around Rs150-200 billion".

It is shameful that our current expenditure for 2008-09 was Rs1493 billion (74.3 percent of total budget outlay) This year it will cross the figure of Rs1700 billion. For Public Sector Development Programme (PSDP), which is already less than Rs550 billion, the government is willing to go for more cuts. It should have been the other way around. This could only be possible if we reduced the size of government machinery by one third and monetize all the perquisites and benefits of civil servants.

Successive governments -- both civilian and military -- have never bothered to go for down-sizing of the gigantic administrative set-up. For civil-military clique, any cut in expenditure makes no difference as higher echelons are enjoying extraordinary perquisites in kind while the poor clerks and police constables are forced to perform duties under very pathetic conditions. The government is ready to borrow more and more to meet its day to day current expenditure, largely meant for foreign tours and lavish lifestyle. A big chunk of the borrowed money is spent for generals' comfort.

Slow economic growth coupled with lavish government spending is pushing Pakistan deeper and deeper into debt-trap. Our domestic debt is now over Rs5 trillion while external debt has reached to over $50 billion. Even if the Federal Board of Revenue (FBR) manages to achieve the target of Rs1380 billion, it will be offset by much faster growth of 30 percent in current expenditure. More taxes are thus not a plausible solution to solving the existing problems.

The internal and external debt will keep on rising unless we go for all-out reforms, blue-prints of which have been elaborated by Nadeem ul Haque, former Vice-Chancellor of PIDE in his article, "Reform or face fundamental ascendancy". Haque has aptly emphasised that "the state must first provide the social contract, i.e. good law and order and security of life. It must dismantle the rent-seeking that protects the rich... Rent-seeking relies on three main components: state subsidies, licensing and regulation; special perks and privileges for ministers and army and civil service employees and land distribution system that allows the poor man's land to be acquired for the elite, especially the army and civil service".

Dr. Hafeez Pasha, Chairman of a panel of economists appointed to advise the government should consider the points raised by Nadeem ul Haque while preparing report for budget for 2010-11. The new economic policy, besides curtailing non-development expenditures, should also emphasise reforms for economic growth and social justice. In the new budget, the government must do away with all the perquisites and benefits of government servants by monetising them, sell off all the state land for industrial and commercial purposes, reduce the size of defence budget by 30 percent between 2010 and 2014 and cut down the number of posts entailing pension in the government and semi-government departments from 350,000 to 120,000.

Our governments have failed to bridge the gap between current expenditure and tax collection. We can never overcome revenue deficit unless rulers drastically cut wasteful expenditure. Erratic taxation at the expense of the poor is not a solution but part of the mega-problem. It is an established fact that despite resorting to all kinds of highhandedness and unjust withholding taxes, the FBR has failed to improve tax-GDP ratio, which is hovering around 9 percent for the last 10 years.

The burden of taxes since 1991 has been shifted from the rich to the poor. The sole stress on indirect taxes has destroyed our economic growth, besides widening income inequalities. The have-nots are the ultimate sufferers of these despotic tax measures; proposed VAT is a classical case in point. There is no will to tax the income and wealth of the rich and mighty and reintroduce progressive taxes, abolished by the military dictators.

The men in power argue that 63-year-old problems cannot be solved in a few months or even in 5 years' term for which they have been elected. Their main problem is failure to deal with powerful bureaucratic machinery, which is not only inefficient but is a self-perpetuating corrupt apparatus. The bureaucrats control and guide the ministers and politicians at large. On their recommendations, the parliamentarians pass bills for increase in their emoluments and benefits. Through this method bureaucrats ensure the continuity of luxuries like government-maintained houses, vehicles for family, domestic servants and what not.

Unscrupulous businessmen, with the 'help' of their political and bureaucrat friends, indulge in massive tax evasion but escape punishment. This triangular of corrupt politicians, powerful bureaucrats, and greedy businessmen has made Pakistan a rent-seeking state. Bureaucrats please their political masters who, in turn provide protection to them and overlook their administrative excesses and corruption. No positive change can ever be possible unless all the untaxed assets of politicians, bureaucrats, businessmen and others are confiscated. The public auction of such ill-gotten-untaxed assets would eliminate the state's debt burden once and for all. If the ruling trio is taught a lesson, the rest of the nation would follow suit.

The big absentee landowners should be brought into the tax net. Instead of VAT of 15 percent -- most hurtful to the poor -- we should go for single-stage simple sales tax of 2 percent across the board. It will yield more tax and close all the doors of corruption. If we stop wasteful expenditure, bring total expenses to the level of Rs1500 billion and collect taxes of Rs4 trillion, which is our real potential, there will be budget surplus instead of a deficit.

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