An analysis of Pakistan's 2004 Budget suggests that while the government has presented this as a growth and employment budget, a budget for the people, the policies do not reflect that.

The Pakistani government presented the 2004 Budget on June 27th, led by then Finance Minister, Shaukat Aziz, who has since taken over as the Prime Minister. This budget was exuberantly welcomed by various sections of the Pakistani Media as the most forward-looking budget. The uniqueness of this budget was perhaps best highlighted by Shaukat Aziz’s opening remarks; he called it an employment generating as well as growth and investment oriented budget – exactly the same terms he had used to introduce the 2003 Budget.

In terms of numbers, it was a budget that expected spending of Pakistani Rs 903 Billion (57.5 PRs = 1$) with a deficit of PRs 280 Billion, which is less than 4% of the GDP. Compare this to the 2003 Budget that presented spending of PRs 805 Billion with a deficit of PRs 179 Billion. PRs 194 Billion of the 2004 Budget was earmarked for defence (up by 21% from 2003), 202 Billion for Public Sector Development Program and total poverty related expenditures are expected to be about 277 Billion. Over 40% of the budget is earmarked for debt servicing with Pakistan’s total debt being 95% of its GDP ($35 Billion in external debt and $30 Billion in internal debt). There has been an increase in trade in the last year and the Pakistani economy looks stronger. Asian Development Bank reports suggest that exports went up by about 20% to about $11 Billion and imports have also gone up by the same amount. The ADB analysis articulates that improvement in the global economy, greater access to European markets and improvement in relations with India are major reasons for the economic upturn.

Vis-à-vis various programs and policies, Shaukat Aziz had stressed that this budget focused on consolidation of economic reforms. Privatization of national savings centers were affected based on the rationale that private corporations with investment in diversified mutual funds would provide for more optimal returns on investment. The budget also reduces tariffs on electricity (10% reduction for domestic use, 25% for commercial use and a whopping 58% for industrial use). There is further relief provided to the industrial sector with reduction in inspection requirement and checks to industrial practices, abolition of unannounced inspections, relief in sales tax (though this is being presented as relief to the common citizen), as well as reduction in duties for import of industrial equipment, machinery and goods. The rationale behind such subsidies seems to be that the industry must be provided with some relief before the beginning of the WTO regime in January 2005, after which such subsidies will be banned.

It is with the same rationale, perhaps, that increased subsidies were also given to the agricultural sector. While this was presented as further relief to the poor farmers, it is not clear how subsidies given for heavy farm machinery and processing equipment will help the poor farmers, most of whom cannot afford any of these. Subsidies were also given fertilizers. Interim relief is to be provided to government employees and pensioners through relaxation in taxes. In addition, under popular demand, the threshold income slab for payment of personal income tax has been raised to PRs 100000. There is an addition 10% reduction in excise for low-income housing; this was in reaction to severe housing problem in Pakistan.

The Asian Development Bank, commenting on the critical situation of Pakistani economy had recommended that measures are necessary to reduce the gap between the rich and the poor in Pakistan. While the government rhetoric does address that need, it is not clear how policies do. Given the dire straits of the economy, it is necessary that the Pakistani government embrace fiscal discipline. At the same time, the government must invest in the industry in ways that will cause economic growth. While it can be argued that measures such as investment in IT and in institutions for specialized education address are targeted at such growth, the other subsidies are certain not. While subsidies to the poor make sense, especially in addressing the economic divide, subsidies to the upper classes and to the industry do not. Most of the tax breaks have been provided to this section of the Pakistani community.

There is some relief to the middle class and lower middle class through tax relief and reduction in housing duties. However, for most part, most of the poorer sections get nothing out of this budget. Clearly, the policies have been driven by the interests of the industrial sectors. While traditional economists might have argued that such policies will aid the poor through some trickle-down phenomena, most experts have already dismissed those theories as impractical. How this budget is the first step in driving Pakistan out of its economic quagmire, let alone being a forward looking budget that is unlike any other in the past, is unclear.