Public finance: government role in economy

Great Swedish economist Knut Wicksell (1851-1926), whose work earned him the recognition of ””the economists”” economist””, had profoundly argued: “The science of public finance should always keep…political conditions clearly in mind. Instead of expecting guidance from a doctrine of taxation that is based on the political philosophy of by-gone ages, it should instead endeavour to unlock the mysteries of the spirit of progress and development.”

A half century later, James M Buchanan, a Wicksellian, reiterated the same argument with a renewed focus and articulation in one of his preliminary papers. He called upon his fellow economists to look at the “`constitution of economic policy,”” to examine the rules, the constraints within which political agents act”. In his lecture that Buchanan delivered in Stockholm, December 8, 1986, when he received the Nobel Prize in Economic Science, he also averred: “Stripped to its essentials, Wicksell””s message was clear, elementary, and self-evident. Economists should cease proffering policy advice as if they were employed by a benevolent despot, and they should look to the structure within which political decisions are made.”

The presentation of federal budget 2014-15 by Finance Minister Ishaq Dar has therefore afforded many an analyst a valuable opportunity to think deeply or carefully about the complexities of public finance or the study of a government””s role in economy. The situation therefore gives birth to a profound question: Have country””s economic managers done their job with utmost efficiency and sincerity to weave next fiscal year””s budget into the fabric of government””s economic vision based on a careful examination of the current political situation of the country and the evolving political and economic dynamics of the world in general and the region in particular?

That Dar spoke at length for full two hours was nothing but a litany of government””s achievements-the performance of industrial sector, rise in foreign reserves, improvement in current account, increase in revenue collection and energy. A beaming Dar was so upbeat that he once leaned on left side and quipped in Punjabi: “tainoo kee hoyaa? [What happened to you?]. At no stage of his speech did he, however, concede government””s failure on various fronts, including services, inflation, agriculture and investment. While he loudly showered praise on prime minister Nawaz Sharif for a self-inflicted wound of the Eurobond sale and a seemingly transparent auction for 3G/4G spectrum, he even tried to defend the spike in inflation by not comparing it with the year that preceded 2013-14 but with some other fiscal years. In economics, Mr Dar, you do not operate this way.

The government strategy is fundamentally premised on its growing relationship with two countries: China and Saudi Arabia. Considering Beijing as a game-changer in relation to country””s mid- and long-term economic prospects as Chinese investors are said to be taking interest in investing and have pledged about $50 billion in different projects over the next five years, it perceives China as a regional counterweight to the US and a Narendra Modi-led India. Insofar as Riyadh is concerned, a $1.5 billion `gift”” reinforces the argument that this government has confidence that it can always fall back on the kingdom in time of need. Lifting of arms embargo by Russia has provided this government with an occasion to explore new opportunities of economic and political cooperation with the successor of the Soviet Union.

Seen through the prism of government””s critics, this government, however, has no stomach for dissent or diverse views on economic policymaking. It greatly relies on its past experience of the 1990s rather than generating new ideas and questions. That some reputed economists have upset key ministers by criticising its policies that they are very sensitive about is a fact that has found its best expression in certain ministers”” uncouth and unsavoury response to criticism in recent days as they do not appreciate the fact that criticism is often indispensable. Terming some economists of high repute “pseudo economists”, the government made it clear that it was not seeking any opinion or accepting any advice in relation to its policymaking processes. It has responded with a measure of indecency to the claim articulated by some seasoned economists that the growth rate of GDP in 2013-14 is close to 3.5 percent, and not 4.1 percent, which means the GDP growth rate in the outgoing fiscal year is the lowest in the last four years.

Buchanan, however, offers some guidelines to those who consider themselves critics in the realm of economics and finance. According to him, “[A]ny suggested change [by critics] must be offered only in the provisional sense, and, importantly, it must be accompanied by a responsible recognition of political reality. Those rules and rules changes worthy of consideration are those that are predicted to be workable within the politics inhabited by ordinary men and women, and not those that are appropriate only for idealised, omniscient, and benevolent beings….”

The conjectural question becomes: Has there been any government budget in the history of Pakistan that has not been found to be nothing like an indulgence to keep economists happy? A readily available answer could be: `hardly any””. The same perhaps goes for the federal budget FY2014-15 through which PML-N government has envisaged a variety of difficult fiscal measures on the back of its confidence that it seemingly derives from its `satisfactory”” performance in FY 2013-14. Although, some of the key targets set for the outgoing fiscal year were missed, the finance minister Ishaq Dar in his talk with media persons on the launch of The Economic Survey 2013-14 had the audacity to suggest that government detractors need to appreciate the situation not from `Is the glass half full or half empty?”” standpoint but from `the glass is 70 percent full and 30 percent empty”” perspective.

Last but not least, instead of making an endeavour to unlock the mysteries of the spirit of progress and development-as advocated by Wicksell and others-the government of Nawaz Sharif has borrowed heavily from the doctrine of taxation by setting an ambitious revenue target for the next fiscal with a view to fuelling growth in a country where the rich and the influential do not pay taxes. The collection results of the next two quarters will prove whether or not the government has been able to broaden the proverbial tax net with any measure of success. Widening the size of the tax net, however, does not mean increasing the tax burden on those who are already overburdened by an unfair and injudicious tax system.-The writer is newspaper””s News Editor