Growth
is the main target of the policymakers. If growth is inclusive then the
benefits of growth are distributed among all the groups of society. However in
case of non-inclusive growth the redistribution of benefits will trickle down
effect of growth. Nevertheless, the trickle down effect is insignificant in the
short run.
Several
policies have been made by the government and then affiliated departments
support government to achieve that announced level of growth. Among those
several departments Federal Board of Revenue has significant importance. Every
year an impossible task is given to the FBR which sabotage the reputation of
FBR.
Along
with taxation, the other significant part is expenditures which everyone wants
to do without any restriction. However, everyone faces the income constraint
which at macro level comes from the revenues government generated from people and
the income from the investment they have made. Unfortunately, government
entities are not in habit of earning profits thus subsidized heavily by revenues
collected by FBR.
Government
invests where markets fails, for example it involves in services industry such
as PIA and Railways in our case which provide facilities to the general public
because private sector does not invest in non-profitable or lesser profitable
ventures. Despite these two sectors, government invest in all those activities
which are used by general public or in other words which can be called a public
good such as parks, defense, police etc. Public goods are provided without
considering the profits to all segments of the society. It is worth to mention
that Metro Bus service is a public good, which is subsidized by the government
and used by the general public. Although in more technical terms this kind of public good is known as club good since it is not totally free. However, since
it is used by few people in the society that is one of the reasons it is highly
criticized by the opposition, though the beneficiaries are praising it.
Coming
back to the main point that growth is the target agenda of policymakers then
why are we following lower inflation (stabilization) and lower fiscal deficit
policy (fiscal consolidation) from the last several years. Although several seminars
and reports prepared by Institute of Policy Reforms suggested that growth is
necessary. Dr Pasha repeatedly said that the stabilization is achieved and now
its time to shift to higher gears of growth. But unfortunately IMF’s agenda is
above the wail of national economists and think tanks.
A
recent paper by PIDE suggested number of things. One of the major findings it
has is that fiscal consolidation leads to growth which is in accordance with
the IMF agenda. However, how it should be achieved is very interesting.
There
are several components through which fiscal consolidation is done. As discussed
earlier the two major components are revenues and expenditures. Thus it can be
done by increae in revenues or decrease in expenditures. For the last 25 years
several ineffective policy measures are taken to increase tax revenues but tax
revenues as percentage of GDP had declined from 13 percent in 1990 to less than
10 percent in 2014.
Literature
on fiscal consolidation explicitly says that consolidation is only effective
when it is done by cutting down expenditures. A noteworthy question is what
expenditures? These can be classified into capital/development as well as current
expenditures. Capital expenditures or development expenditures are those which
will payback in future while current expenditures, although very important but are
those those expenditures which do not pay back in future. The definition may be
debatable because employee’s salaries are current expenditures. However, if
school/college/university teachers are paid then it is also known as investment
because government is investing in existing knowledge to produce further knowledge
(students) which is the crux of endogenous growth theory of Paul Romer.
One
of the important conclusions of PIDE’s paper is to reduce interest payments. In
the current budget Rs.1328 billion is the estimated budget deficit and Rs.1280 billion
is interest payments. If interest payments are zero, which is almost impossible
with the high debt and high fiscal deficit, then the total budget deficit comes
to Rs.48 billion. In this way government can spend rest of the money to produce
further knowledge, i.e. spending on Research and Development, which is low to an
embarrassing level. The interest payments can only be curtailed by reducing the
overall debt, which is close to impossible, in the current scenario.
It
has also been revealed that higher growth episodes are strongly related to the
higher capital/development spending. Nonetheless, the trend of capital spending
has been declining for the last 2 and half decades. This implies that fiscal
consolidation, if it is followed in few years, is done by cutting in
development expenditures. This is the worst form of fiscal consolidation. It
affects the growth negatively.
It
is high time to identify the leakages in the system, which will give us more
fiscal space to invest in development projects. Finding an efficient way of
doing the mega projects is very necessary. The recent worst example is metro
bus system which according to Dr Farrukh Saleem cost us Rs.2 billion per KM. This
cost is 8 times of the cost of building Indian Metro and more than double the
cost of building Turkish Metro (0.88 billion per KM).
In
conclusion we may say that since we are facing huge debt and deficit problems
and we are scarce in resources to fund our development projects thus (i)
leakages and over spending should be avoided by carefully examining every
project, thus we may have more fiscal space to allocate funds on other
development projects (ii) prioritize the projects according to the need of
public (iii) give importance to Paul Romer’s theory of endogenous growth and
allocate sufficient fund for research and development.
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