A good annual budget should, ideally, aim to rectify any structural imbalances in the economy while incentivizing capital formation, creating jobs, improving living standards (especially for the poor) and reducing inequalities in wealth. But this budget 2022-23 falls short on some counts. It doesn’t sufficiently redress the structural imbalances in the economy like unsustainable current and fiscal account deficits that fuel inflation and exchange rate depreciation and excessive unproductive expenditures on “defense”, administration and subsidies that gobble up a large chunk of tax revenues. Worse, it actually reduces the rate of job creation, increases the cost of living for all and expands the gap between rich and poor.
But, if truth be told, the fault does not lie with Miftah Ismail, the finance minister of the PDM government which has inherited a shipwrecked economy from the ousted PTI regime that will require painful long term overhaul to set things right. In fact, Mr Ismail’s core difficulties stem from two salient facts not of his own making: first, the PTI government had already signed on the dotted line with the harsh conditionalities imposed by the IMF to bail out Pakistan and he could not renege from these without plunging the country into financial default; second, the PDM government has, at best, no more than fifteen months to salvage the mess and, at worst, barely one month before it might be compelled to face the wrath of the electorate. Attempting to make a suitable budget within these fearful parameters was a formidable and unenviable task.
Therefore, kudos are due to Miftah Ismail for braving the challenge and surviving to talk about it. There will be no financial default because the IMF is sufficiently appeased by the budget and the finance minister’s commitments going forward, and will return to Pakistan to help bail it out next month, followed by dollops from sympathetic international financial institutions and friendly Middle Eastern countries.
To be sure, not everyone will agree with Mr Ismail’s matrix of prescriptions. More here and less there can always be argued, depending on one’s perspective of political economy. For instance, he has tried to offset the blow to the poor from significantly higher energy rates by providing direct relief via the Benazir income Support Program to the tune of PKR 364B to 14m households, an increase of nearly 33 percent over last year’s outlay. He could have put more money into poverty alleviation and project development at the expense of the “defence” budget, but that would have provoked the ire of the ubiquitous and all-powerful Miltablishment. He has increased taxes on luxury imports but reduced them on core medicines, agricultural machinery, solar cells, etc. He has increased the minimum taxable income of the lower middle class person from PKR 50k to PKR 100k per month but offset it by increasing the tax rate on the income, dividend and property of wealthy individuals and institutions like commercial banks. He has brought the small retailer into the tax net by indirectly levying PKR 3000-10,000 per month without triggering any significant backlash. And so on.
Still, some omissions are inexplicable. He should have done away with the 5000 rupee bank note which is the single most important transmission source of “black” money in the economy. This would have compelled increased banking transactions and verifiable money trails, thereby facilitating the tax collector and expanding the tax base. He should have slapped a progressive tax on inherited wealth and death duties which mostly relate to the very rich. He should have scrutinised the pros and cons of economic growth based on the speculative parking of black money in the construction sector and made policy accordingly. He should have abolished subsidies on the domestic sugar industry and various export industries since devaluation has now given them a distinct competitive advantage. And now that the Miltablishment is no longer opposed to it for strategic “geo-economic” reasons, he should have made bold to open up trade with India on core items at least to alleviate the inflationary impact of speculative hoarding and unexpected shortages of everyday stuff. And so on.
But we are not yet dusted and done. Miftah Ismail has been candid enough to warn that the IMF Board will meet mid-July to consider these budgetary offerings and is forecast to insist on some additional “hardship” measures. These will necessitate a mini budget a few months down the line.
Meanwhile, politics is gearing up to take a further toll of state and society that could jeopardize a revival of the economy. Imran Khan is threatening to exploit the popular discontent from inflation and joblessness to oust the PDM government next month and plunge the country into general elections in October. Such a course of action would halt the IMF program in its tracks, with disastrous consequences. It would cost about PKR 200B which would send the budget reeling. And, in all probability, it would exacerbate the political crisis if Imran Khan refuses to accept the result or if its leads to a weak coalition government that is unable to stick to the hard IMF program.
This PDM government has clearly put national interest over party political interest. Its political interest lay in dissolving parliament and going for a quick election when Imran Khan was down and out without soiling its hands trying to clean up the stink left behind by the PTI. In fact, by doing the Miltablishment’s unequivocal bidding in the “national interest” (it’s the economy, stupid) at this stage, it has hurt its own narrative of “vote ko izzat do”. But if the Miltablishment should now succumb to Imran Khan’s pressure to hold elections rather than enable this PDM government to try and deliver the goods by October 2023, it will have only itself to blame for the disastrous consequences that are bound to follow.