Defence Budget


Federal Budget for the fiscal year 2014-15 was presented on 3 June 2014. The total outlay/expenditure of the budget is Rs. 4,302 billion, which is 7.9% higher than the previous budget. The budget has been presented at a time when economic indicators appear to be appearing promising. Before I go on to the defence budget, I will discuss the salients of the announced budget for meaningful understanding of the readers. For the current budget, total current expenditure, excluding repayment of long term foreign debt, is divided into: debt servicing of Rs. 1,325 billion, pension Rs. 215 billion, defence affairs and services Rs. 700 billion, grants and transfers Rs. 371 billion, subsidies Rs. 203 billion, running of the civil government Rs. 291 billion, and provision for pay and pension reform Rs. 25 billion. In addition, repayment of long term foreign debt is Rs. 333 billion.

Thus, projected fiscal deficit of Rs. 1,711 billion (4.9%) will be financed through external financing of Rs. 508 billion, domestic borrowing of Rs. 914 billion and estimated provincial surplus of Rs. 289 billion. For 2014-15, the current expenditure will be Rs. 3,463 billion and development expenditure is Rs. 839 billion. The share of current expenditure in total outlay for 2014-15 is 80.5% as compared to 78.8% for 2013-14. The expenditure on General Public Services is estimated at Rs. 2,543 billion, which is 73.4% of the current expenditure. The size of Public Sector Development Programme (PSDP) for 2014-15 is Rs. 1,175 billion. Out of this, Rs. 650 billion has been allocated to provinces. Federal PSDP has been estimated at Rs. 525 billion. Out of Federal PSDP, Rs. 296 billion to Federal Ministries/Divisions, Rs. 176 billion to Corporations, Rs. 12.5 billion to Pakistan Millennium Development Goals and Community Development Programmes, Rs. 36 billion to Federal Development Programmes/Projects for Provinces and Special Areas, and Rs. 5 billion to Earthquake Reconstruction and Rehabilitation Authority (ERRA). The other development expenditure outside PSDP has been estimated at Rs. 162 billion. Bank borrowing has been estimated at Rs. 228 billion, which is 53% lower than 2013-14. Interestingly, whole of the PSDP will be financed by the external resources. Defence Affairs and Services' budget is a portion of the Federal budget that goes to any military-related expenditures. This portion of the budget is spent on paying salaries, training, and health care of personnel, maintaining arms, equipment and facilities, funding operations, and buying new equipment. The budget funds all branches of the Armed Forces: the Army, Navy and Air Force. For 2014-15, a total allocation of Rs. 700 billion is proposed for the Defence Affairs and Services which is 16.27% of the total amount. In real terms the growth of the defence budget is 3.8%. Many critiques do not take into account the effect of inflation when estimating growth, which is absolutely inappropriate.

It needs to be underscored that Pakistan used to spend 7% of GDP on defence in 1988, which came down to 3.9% in 1999-00 and for this year it is 2.4%. Thus, economic burden of military on the economy has sharply gone down over the years due to introduction of austerity measures. Defence budget is broadly divided into defence administration and defence services. Defence services receive 99.7%, while the remaining 0.3% is for administration budget. For 2014-15, defence administration will face a 7% decline in its real budget. Whereas, defence services’ budget in real terms will grow by 3.8%. Defence services’ budget is further divided into employee-related expenses (42.05%), operating expenses (25.81%), physical assets (21.89%), and civil works (10.50%). So the biggest category for budgetary purpose is employees.

The highest budget growth of 9.6% is for civil works whereas the lowest budget growth of 0.7% is for the employees-related expenses. Given such a distribution and growth, the increase in defence budget is just sufficient to meet the requirements of the forces that are engaged in war on terror. Some writers have been critical of classifying military pensions under a different heading along with civilian pensions. It may be noted that the International Monetary Fund's Government Financial Statistics Yearbook collects expenditure data according to a functional classification; functional classifications typically place all pensions within the social security function, healthcare within the health function, etc. Accordingly, many countries report military pension expenditure according to a functional definition. Pakistan is one of them.

Having a look at salient features of the overall budget, the resource 'availability' for the year has been estimated at Rs. 4,074 billion. The revenue 'receipts' (net) have been estimated at Rs. 2,225 billion indicating an increase of 16% over the last year. The provincial share in federal revenue receipts is estimated at Rs. 1,720 billion, which is 14.5% higher than last year. The net capital receipts for 2014-15 have been estimated at Rs. 691 billion against the budget estimates of Rs. 493 billion in 2013-14. The external receipts are estimated at Rs. 869 billion, which shows an increase of 50.7%. This also reflects growing reliance on external resources rather than domestic ones!

During current year, the GDP grew by 4.14% as compared to 3.6% in last year. Exports and remittances grew by 3.2% and 11.9% during 2013-14 as compared with 0.4% and 5.6% respectively during 2012-13. Per capita income has risen from $1369 in one year to $1386. Fiscal deficit has come down from 8.6% in 2012-13 to 5.8% during 2013-14. It is achieved by both a reduction in current expenditure and some improvement in tax collection. Other noteworthy achievements during the year include sale of Eurobonds and auctioning of 3G, 4G spectrum licenses. These achievements indicate of some rebound in the confidence of international investors in Pakistan's economy. Despite above achievements, the state of economic health of the country is not very reassuring as the inflation rate rose from 7.4% in 2012-13 to 8.7% in 2013-14. Tax-to-GDP ratio is hovering around 7.0%, implying that to implement development projects, government borrows heavily. Tax exemptions given mostly to pressure groups increased from Rs.239.5 billion in 2012-13 to Rs. 477.1 billion in 2013-14. Thus, despite rhetoric no serious effort is made to raise Tax-to-GDP ratio.

Agricultural output has slipped by 1.5 per cent points from its target of 3.6%. This decline has eroded farming community's demand for goods produced by the rest of the economy and lower availability of agricultural raw materials for the manufacturing sector. Thus, stagnation in agricultural economy has widespread adverse implications for the entire economy. Hardly any change in the investment rate is recorded. The critiques of the defence budget should ask the government to raise more revenue through taxes instead of suggesting cut in defence budget. Had we properly spent the allocated amount for development, education, agriculture, and health during last six years, the situation must have been much better. The beauty of armed forces is making use of all available budgetary allocations with a planning that encompasses far-sightedness. Government needs to establish effective monitoring mechanisms so that the wide-spread problem of rent seeking is addressed. It needs to ensure that the development budget is spent rightly and its benefits equitably reach all sections of the society. Only then people will be motivated to pay taxes cheerfully!

The writer is a Professor of Economics at School of Social Sciences and Humanities at NUST, Islamabad.
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