IMBALANCE BETWEEN DEVELOPMENT AND NON DEVELOPMENT EXPENDITURE

Current expenditure

Current expenditures are those expenditures which a government uses to currently fulfill the needs and demands of the public.

Current expenditure is a purchase from national account by government to meet the need of masses collectively for the time being.

Current expenditures include Defense interest payments expenditure on law and order public administration etc. the current expenditures do not create any productive assets which can bring

income or returns to the government are non-development expenditure. The increase in current expenditures is considered as the biggest problem of the

country after inflation.

• Pakistan’s economy has GDP growth of 4.2 percent in FY2014/15 as in FY2013-14 it was 4.0 percent.

• .• This limitation relies only on 1.3 percent of GDP

decline in current spending while development spending is expected to increase by 0.3 percent of GDP.

• In terms of GDP, federal development expenditures are budgeted to increase from 2.0 percent of GDP in FY2014/15 to 2.3 percent. As more than 80 percent has been allocated under the budget 2015/16 Public Sector Development Programme (PSDP).

Interest Payments

• Interest payments include interest payments on government debt including long term bonds, long term loans and other debt instruments to domestic and foreign people.

• In Pakistan for the fiscal year of 2009 10 about 31 percent of total revenues were ‐consumed for the payment of the national and international debt.

• On June 30th, 2014 it was estimated that Pakistan’s public debt stood at 63 percent of GDP.

• The domestic debt of Pakistan is higher because of three main reasons: 1. because of its security and economic problems, Pakistan does not have an easy

access to relatively inexpensive financing from international financial markets.• (ii) Budget support from international donors remained hanging for a long time

period because of the unfavorable fiscal situation• (iii) For the government, the fiscal cost of borrowing from the central bank has

large interest rate which imposes a huge cost on the economy.

• On the average, more than 53 percent of federal government’s expenditure is on interest payments on debt, defense spending and salaries and compensation.

• According to the World Bank Pakistan Interest payments are 34.12 which were measured in 2013.

• In the fiscal year 2015 Pakistan is overloaded with permanent and floating debts.

• The extreme cut in interest rates in the second half of the fiscal year 2015 had an impact on the coupon rates reduced in the Pakistan Investment Bonds.

Grants

• The federal government transfers some amount to the provinces in the form of grants. In the fiscal year of 2009-10 the federal government transferred Rs. 82 billion to provinces.

• The federal government picks a bulk of losses by giving grants from the budget to State Owned Enterprises (SOEs) which were declining. E.g. PIA Pakistan steel miles

Subsidies• Subsidies are the benefits which are given by the government to groups

or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public. Subsidies, grants, and other social benefits include all unreturned, no repayable transfers on current account to private and public enterprises.

• According to the World Bank in Pakistan the last measured of subsides was 16.66% in 2013.

• In the fiscal year of 2008 when internationally the prices of oil increased sharply the government then increased subsidies on oil and electricity.

• The Federal government’s expenditure about 29 percent is on subsidies and grants mostly including subsidies on electricity and oil has greater than before as from 1 percent of GDP in FY 2002 to more than 2.5 percent in FY 2014.

• In Pakistan during the FY of 2009 10 the government subsidized ‐the power sector by a large amount. Out of a total subsidy of 83.8 percent were granted to WAPDA and KESC.

• Some of the recent examples of subsidizes from the government are: the government of PML N has started the direct subsidy that will be given to the poorest families of the province through Punjab Khidmat Card Programme. As the Punjab Khidmat Card is a public welfare and revolutionary programme of the government under which Khidmat Cards are issued to the poorest families for their financial assistance while education and health facilities are also provided through these cards under a phased programme.

• The Ramadan the government gave subsidies for the general public of Rs 6 billion through the Utility Stores Corporation. In the fiscal year of 2007 08 24.7 percent of revenues were used ‐up in providing subsidies in Pakistan.

Defense• The geographical, political and strategic position of any country on the

map plays an important role in the allocation of defense expenditure .• As Pakistan is enclosed with threats and the government cannot

ignore defense expenditure no matter whether they are developed or not.

• Due to the disputed territory of Kashmir Pakistan faced three wars with India. As a result Pakistan has to spend a larger share of GDP on defense.

• The defense expenditure of fiscal year 2008 as a percentage of GDP was 18.1% and in the fiscal year of 2015-16 is being increased to 780 billion (US $7.8 billion).

• The defense expenditure is necessary because of the National Security of the country.

• The defense expenditure was being increased in view of the security situation and requirements of the armed forces

OVERVIEW• In case of Pakistan it seems that non-development expenditure is out of

government’s control. Tax collecting agencies are the main hurdles in tax returns submission, adding that tax collection could increase by Rs1, 500 billion by creating clarity in taxation system and eradicating corruption. Reduction in expenditures and increase in income directly benefited the public.

In Pakistan income is being spent on subsidy, defense and interests on debt payments while the government needed loans to run other affairs.

• The disparity between income and expenditures is upsetting development. Government has to play a vital role by making policies for reduction in non-development expenses and foreign loans besides eradication of corruption for which effective taxation system is required.

• Pakistan has to spend a larger share of GDP on defense. One of the biggest challenges is to reallocate the resources from defense expenditure to social development in order to reduce poverty, hunger and preventable diseases.

•

DEVELOPMENT EXPENDITURE

• expenditures that promote economic growth and development.

• expenditure on infrastructure development.• In the fiscal budget 2014-15 Infrastructure has

the biggest priority in the development budget.• Infrastructure has to receive the highest 55 %.• highways together with power projects are

projected to make up 70 percent of the total infrastructure allocation

• create balance between revenue and expenditures to help the governments to avoid high deficits.

• of unplanned expenditures floods, security related issues, high interest payment, untargeted subsidies expected tax collection

• Infrastructure spending is considered government investment .

• save money in the long run, • and thereby reduce the net present value of

government liabilities.• government spending on social infrastructure,

such as preventative health care, can save several hundreds of billions of dollars per year in Pakistan

• For the FY2015/ 16 total PKR 43 billion has been allocated for development projects in special areas of Azad Jammu and Kashmir (AJK),

• Gilgit Baltistan (GB),• Northern Areas • and Federally Administered Tribal Areas (FATA)

• those are otherwise not included in the

resource distribution framework of the federation

• An interesting question arises how a developing country like Pakistan where masses are subject to absolute poverty can afford such a heavy expenditure on defense?

• What impact the military expenditure exert on poverty?

• Is the military expenditure pro poverty or anti poverty. • It is hypothesized that military expenditure is

positively associated with poverty. Two thoughts are central in the literature. Some believe that the military expenditure has very strong positive relationship with the growth of the economy. Others disagree that military expenditure is negatively related to the growth of the economy.

• To provide aids to the poor public the development expenditure can play very important role. The government is borrowing heavy amount for non-development expenditures like army operations and debt servicing that should be directed to development expenditures like investment in energy.

• The government needs to reduce subsidies and cut its non-development expenditures. The government must bring down inflation and creates fiscal space to overcome major economic problems. Due to the government debts and borrowing from external sources the fiscal deficit is pushed up. As presently the government is heavily spending on army operations and debt servicing which are all non-development expenditures. Until the government start spending on development expenditures the country cannot achieve her manufacturing growth and investment will automatically come into the country which will result in reduction of inflation.

• If the government increases the development expenditures it will be helpful in the economic growth of a country. It will generate employment opportunities, rotate capital in the economy and will create development activities etc. the most important initiative the government must take is the establishment of basic infra structures of the country that acts as a catalyst for the domestic and foreign investments.

• Trends in components of expenditure

Conclusion• The government needs to reduce subsidies and

cut its non-development expenditures.• Due to the government debts and borrowing from

external sources the fiscal deficit is pushed up.• Until the government start spending on

development expenditures the country cannot achieve her manufacturing growth.

• The government must increase the tax to GDP ratio in the long run and increase its capacity to spend on development projects.

• If the government increases the development expenditures it will be helpful in .

economic growth of a country. It will generate employment opportunities, rotate capital in the economy and will create development activities etc.• Pakistan’s long term productivity is declining.• Our study concludes that discrete spending

will stay insignificant in Pakistan until its current expenditures are too high as compared to development expenditures.