Budgets in Pakistan are like promissory notes which can be very easily ignored. At best, it gives a general idea of ​​the direction the government wants to take next year. To read this as an ironclad commitment is wrong. What matters most is what the government will do over the next 12 months.

That said, basically, Dr. Miftah Ismail had two key things to focus on: First, how do we narrow the gap between government spending and revenue? This is a long-standing issue for the federal government due to soaring debt payments (which alone will account for more than 40% of federal government spending next year), tax transfers to provinces and recurrent expenditures for defence, salaries and pensions. What remains is a very small envelope to spend.

How to change this? Well, either decrease spending or increase tax revenue. Dr Miftah believes that more tax revenue – intended to rise from 8.6 to 9.2% of GDP – will come from improving tax administration and taxing banks, city properties, cars, super-rich, etc. Enough to offset the increased income tax threshold – again a promissory note. The most promising is the urban property tax which, if properly implemented, can correct a massive misallocation of capital in Pakistan. The least likely is the oil tax, unless world oil prices crash.

Part of the increase in the value of tax revenue will occur anyway with the increase in inflation. But there are big ifs: how will this be possible if imports, which account for a large share of tax revenue, decline? How will tax administration be improved? Will they go after people who don’t pay taxes? How will major landowner compliance be achieved? Only time will tell.

Reducing expenses is more difficult. The government has increased overall budgetary expenditure by about 10% compared to last year. Some of the tax exemptions – equivalent to more than 30% of last year’s tax revenue – have been reduced, but many remain. The easiest (and worst) place where further cuts can be made is to drastically reduce the public development budget – or PSDP. The government says it will spend 800 billion rupees on this. He will most likely not succeed, just like last year. What about pensions, the Achilles heel of public finances in Pakistan? A small fund will be created to prevent it from being funded directly from the budget each year – a very small step, but something.

Second, how to cushion the impact of the rising cost of living for ordinary people? The government says it can reduce inflation to 11.5% through a “mix of fiscal and monetary policy”. They can’t do that given the world prices of oil and wheat. The direction will likely be the other way with inflation likely to exceed 20%. Expanded targeted support through cash transfers is a good thing, but a drop in the bucket. Many people will be helped by the increased income tax threshold for people earning at least one lakh rupees per month. Again, not enough to offset the rising cost of living. A fund for national investments in public transport would have helped a lot, but the Minister of Finance mentioned roads instead. Perhaps the provincial budgets in the coming weeks will compensate for this omission.

What does all this mean? The government has tried to strike some sort of balance between a “hard” stabilization budget that the IMF wants and a budget aimed at providing targeted support that maintains decent economic growth at home ahead of the election. The overall growth objective of 5% is unrealistic and it is better not to reach it given our trade deficit. The government probably knows that. But promissory notes can be ambitious.

The real test begins now. The government has two key criteria on which it must be judged: First, how does it handle Pakistan’s import bill payments? If the IMF is happy with this budget and takes over the program, the coverage of the import bill should become more manageable. What won’t help is the world scenario. Energy and commodity prices are rising, especially wheat, thanks to the pandemic and the war in Ukraine. On top of that, high-income countries are raising interest rates, which increases borrowing costs for developing countries like Pakistan. A perfect storm is brewing.

The second much tougher test will be whether the government will undertake deep economic reforms in taxation, energy, transport and governance to improve the productive capacity of the economy. So the next time our growth exceeds 5%, the economy will not collapse. Ordinary people are about to witness a significant increase in the cost of living – no budget can prevent this. It will be deeply unfair to them if the government does not reform this economic system which benefits a small extractive elite. If not, this budget is like a house running on borrowed time.