Prime Minister Imran Khan has tasked the finance minister with breaking the 6 percent growth barrier, something that was last achieved in 2005. The previous government achieved 5.5 percent in 2018 before it all came crashing down. Every election cycle we see the same pattern of reckless government spending, which gives a short-term boost to growth at unbearably high long-term cost to the public. Will it be any different under Imran Khan’s government?

The Budget FY2021 is expected to outline Finance Minister Shaukat Tarin’s roadmap in terms of accelerating growth. He has hinted at new stimulus measures with a focus on higher investment spending through scaling up the Public Sector Development Program (PSDP). Mr Tarin has categorically stated that no new taxes will be imposed, and subsidies on power sector will be increased as consumers are shielded from rising cost of power generation.

These are populist measures that will keep the budget deficits high, at a time when public debt is already at a dangerously high level of 84 percent of the GDP. The economy has achieved stability in 2021 after tough reforms aimed at reducing both the fiscal and trade deficits. The current account deficit (CAD) tuned into an $800mn surplus (0.3 percent of GDP) in 2021, compared to a large $20 billion deficit in 2018. The budget deficit is projected to decline to 6.5 percent of the GDP in the current year compared to 8.9 percent in 2019.

The reforms undertaken over the past two years are showing significant gains to the economy. GDP growth has accelerated to 3.94 in 2021, compared to -0.5 percent last year. Pakistan has outperformed global and regional economies with the IMF forecasting a 3 percent contraction in the global GDP; India has just posted a 7.3 percent contraction in 2021. More importantly, the quality of growth achieved in 2021 has been significantly better with external debt build-up the lowest in the last six years. In the first nine months, the external debt build-up was $3.3 billion, compared to $11.8 billion in 2018, the year PML-N government achieved 5.5 percent growth.

Will the current government go the way of PML-N and start reckless spending and borrowing in pursuit of higher growth? Or will it continue with the reforms programme and achieve quality growth built on a sustainable public policy? An important thing to understand is that a high growth rate does not automatically translate into more job creation. During 2008-2013, the economy grew at 2.8 percent and created 7 million jobs. During 2013-2018 the economy grew at 4.7 percent and created only 5.7 million jobs (Labour Force Survey, PBS).

The government also needs to reduce its cost of borrowing. Banks have a monopoly over government debt.

To put the economy on a sustainable growth path, the FY2022 Budget must tackle key areas of tax reforms and expenditure management. Under the IMF programme, the government has agreed to reduce the FY2022 budget deficit to 5.5 percent of the GDP, down from an estimated 6.5 percent in FY2021. To achieve this the FBR must collect Rs 6 trillion in taxes, compared to an estimated Rs 4.7 trillion in the current fiscal year.

The tax reforms targetted for 2021, including harmonisation of the GST under a unified tax rate, must be accompanied by a plan to reduce the tax rate to 12 percent (from 17 percent). The FBR will oppose this tooth and nail as this will force them to step out of their comfort zone and work to enhance compliance, rather than burdening existing tax payers. However, the gains to the economy will be significant as this will drive inflation down and drive growth.

On the expenditure side, the key reform expected is the implementation of the Pay and Pensions Commission recommendations. The federal pensions bill increased to Rs 480 billion in 2021, from Rs 150 billion in 2011. According to donor reports, the federal government’s unfunded liability currently stands at around Rs 3 trillion. After the 7th NFC award, the provincial governments’ pensions bill has also increased exponentially to Rs 500 billion in 2020, from Rs 75 billion in 2011. Studies suggest that with no changes to the existing pension arrangements, the federal pensions bill will rise to Rs 750 billion by 2023. Provinces are likely to face the same challenge. The FY2022 budget will outline steps to reduce the build-up in the pension liabilities over the medium to long term.

The government also needs to reduce its cost of borrowing. Banks have a monopoly over government debt. More competition, especially from retail consumers, will force banks to lend at lower rates. The National Savings programme needs to be expanded with a focus on leveraging technology and bringing new products, especially long term Islamic saving products. The government can raise Rs 500 billion over the next two years by expanding the scope of NSS instruments.

The author is a senior banker and is a visiting faculty member of IBA Karachi