June 9, 2023
ISLAMABAD – In its simplest form, a budget is an estimation of expenditures and income for a defined period of time, typically a year. When this exercise is undertaken on a national level, it must account for a host of both internal and external factors, including but not limited to the existing economic conditions, political situation, security-related issues and infrastructure requirements.
In Pakistan, a budget is the government’s financial plan that outlines its proposed expenditures and the means of financing them for a single fiscal year (July 1-June 30). It serves as a policy document that sets out the government’s priorities and objectives, and is presented every year in parliament by the federal government, followed by each of the provincial governments in their respective assemblies.
But who makes the budget? Who decides how much money will be allocated under what head? Who decides how much tax will be levied? Who decides what new development schemes will be launched and what will be scrapped?
The budgeting process in Pakistan usually consists of six stages.
- The first stage is where the national and respective provincial cabinets set out the budget priorities, policies, and initiatives.
- The second stage is budget preparation, where spending departments prepare and submit their estimates of expenditure and receipts, and the Ministry of Finance reviews and consolidates these estimates.
- The third stage is authorisation, which involves submitting the Annual Budget Statement (ABS) before the assembly. This consists of two sub-stages: approval by the assembly after it is debated and discussed, and authentication by the prime minister and chief ministers of the respective provincial legislatures. The approved budget is referred to as the ‘Schedule of Authorised Expenditure’ (SAE), which is then submitted to the president/governor for assent.
- The fourth stage is execution. This is where the Ministry of Finance communicates the budgets to the spending ministries, administrative departments, and respective accountants general’s offices. The spending departments can now carry out their planned activities and incur expenditures within the authorised limits.
- The fifth stage is reporting and monitoring, where actual expenditure/revenue are recorded and reported by the spending departments to facilitate monitoring of progress against budget allocations throughout the fiscal year. Expenditure is recorded by the accountant general’s office.
- The final stage is the periodic review, which covers the review of financial performance and the achievement of policy objectives by spending departments. This also includes audit reviews by the auditor general’s office as well as by the Public Accounts Committee. Standing committees of the national and respective provincial assemblies are also authorised to review expenditures of ministries under their jurisdiction.
Annual Budget Statement
One of the key documents in this entire process is the ABS. It provides a financial plan for the next fiscal year. It also shows, separately, the sums required to meet “charged expenditures” and “voted expenditures”. The statement includes receipts, expenditures, demand-wise summaries segregated into ‘charged’ and ‘other than charged’ expenditure, and object-wise classification of budget estimates (for example, showing pay and allowances, operating expenses, etc).
After the presentation of the ABS, the national assembly (NA) debates the statement for a few days, and then a general discussion is held on it. The NA then sends the statement to the Standing Committee on Finance, Revenue, and Economic Affairs for further review and discussion. The committee presents its recommendations to the NA, which then passes the Finance Bill, which is a part of the ABS.
The Finance Bill is then presented to the Senate, which reviews and debates the bill. The Senate can suggest changes to the bill, and if any changes are made, the bill goes back to the NA for approval. If the NA approves the changes suggested by the Senate, the bill is sent to the President of Pakistan for assent. Once the president signs the Finance Bill, it becomes law, and the budget is implemented.
Federal Consolidated Fund
The Federal Consolidated Fund (FCF) is a fund maintained by the federal government. It is a pool of all revenues received by the federal government, including taxes, fees, and other receipts. All expenses incurred by the federal government are paid out of this fund, including debt service payments, employee salaries, and other expenditures. The fund is regulated by the Constitution of Pakistan and is subject to the oversight of the federal parliament.
Voted expenditure and charged expenditure
The ABS is divided into two categories of expenditures: voted expenditure and charged expenditure. Voted expenditure refers to those expenditures on which the NA votes during the budget making process. It is a discretionary expense, meaning that it is subject to the availability of funds. If there is not enough money available in the FCF to meet the voted expenditure, then it may be reduced or rejected. These expenditures include, but are not limited to development projects, defence expenditures, and subsidies. The national assembly has the power to approve, reject or modify these expenditures.
Charged expenditure refers to those expenditures which are met from the FCF, but are not submitted to the NA for voting. It is a mandatory expense that must be met regardless of the availability of funds. These expenditures are predetermined by the Constitution and include the salaries and allowances of the president, the prime minister, judges of the supreme court and high courts, the auditor general, and other constitutional office holders. They are charged on the consolidated fund, meaning that they do not require approval by the NA.
The main difference between voted and charged expenditure is that voted expenditures are subject to the NA’s approval, while charged expenditures are not. Voted expenditures can also be modified or rejected by the NA during the budget making process, while a charged expenditure is predetermined by the Constitution and cannot be altered.
A comparative analysis of budgeting processes
The budget making process in the NA is dominated by the Executive and the federal bureaucracy. This is partly a function of the system of governance inherited by Pakistan from the colonial administration, and partly the type of democratic system we adopted in Pakistan — a parliamentary form of government.
In parliamentary democracies, the Executive has historically been more developed than the parliament and political class, and this is particularly true in less developed (and previously colonised) democracies such as Pakistan.
In parliamentary forms of government, the separation of powers between the Executive and the legislature is not as strict or marked as it is in presidential systems such as the United States. This is because the Executive is responsible to the legislature and is answerable to it for its policies and actions. The Executive is also dependent on the legislature’s support to remain in power. As a result, the Executive and the legislature work together more closely in parliamentary systems.
In practice, this means that budgeting is an Executive-driven undertaking. This is in marked contrast to the classical Hamiltonian division between the Executive and legislature, where the legislature controls the purse while the Executive wields a sword. It is due to this difference that parliamentary conventions in British tradition dictate that if a government loses a vote on a budget bill in parliament, it is deemed to have lost the confidence of the House. This is also what was alluded to by the SC in its response to the federal government’s plea that the NA had rejected the demand for money. The government, anticipating possible adverse action based on this observation, took a vote of confidence from the NA.
However, it is important to note that the fundamental process is similar in both the parliamentary and presidential systems. What makes the real difference is the role played by the parliamentary committees in scrutinising financial demands and expenditures. Comparative models, especially from the UK and the US, show that parliamentary committees play an essential role in scrutinising financial demands and expenditures.
For example, in the US, the budget making process involves the Office of Management and Budget (OMB), the president, and the Congress. The OMB prepares the budget, and the president submits it to Congress. The House and Senate budget committees review the proposal and set overall spending levels for the various areas of the federal government. The budget committees then send their recommendations to the full House and Senate for approval.
The next step in the process is for the various House and Senate committees to review the president’s budget and make their own recommendations for spending priorities in their respective areas of jurisdiction. These committees then send their recommendations to the House and Senate appropriations committees, which are responsible for drafting the spending bills that fund various government agencies and programs.
The appropriations committees hold hearings and markup sessions to determine the final spending levels for each agency and program, and then send their bills to the full House and Senate for approval. Once they pass their respective spending bills, a conference committee is formed to resolve any differences between the two bills and come up with a final version that can be passed by both chambers and sent to the president for approval.
Throughout this process, there is a significant role of the legislature in setting spending priorities and overseeing the budget. In addition to the various committees that review and recommend spending levels, there are also numerous opportunities for public input and oversight. For example, the president’s budget proposal is subject to public comment and review by the Congressional Budget Office, which provides independent analysis of the budget’s economic and fiscal impact.
The budget proposals are reviewed by the Congressional committees, and after debate and voting, the final budget is approved by the Congress. The US Congress plays a very active role in the budget-making process, especially in the review of budget proposals. In the UK, the Chancellor of the Exchequer presents the budget to the House of Commons. It is actively scrutinised by the Treasury Committee, and then debated and voted on by the House of Commons. In the US, the president presents the budget proposal to Congress, where it is scrutinised by the budget committees, and then debated and voted on by the House of Representatives and the Senate.
The problem in Pakistan
In theory, the Pakistani system is not very dissimilar, but the reality is that the Executive and federal-government-dominated role in the budget making process leaves little room for meaningful parliamentary scrutiny or debate. In fact, there are several formal and informal constitutional and political constraints that discourage meaningful participation by parliamentarians in the budgeting process. Two of the most significant formal constitutional constraints include (i) the threat of disqualification of rebel members under Article 63-A and (ii) supplementary grants.
Additionally, the time allocated to the parliament and provincial assemblies to review the budget is often very short — sometimes just a few days — which makes it difficult for members of parliament to fully understand and analyse the budget proposals. This can also limit the ability of the public to provide input on the budget process, as there may not be enough time for them to review the budget and provide feedback to their elected representatives.
Following the party
Article 63-A of the Constitution stipulates that a member of parliament may be disqualified if they vote against the direction of the parliamentary party to which they belong in relation to the money bill. Specifically, the article states that a member of a parliamentary party who votes or abstains from voting against the party’s policy will be liable to disciplinary action by the party, including a possible disqualification from being a member of parliament.
With the SC’s latest interpretation of Article 63-A in the Pakistan Tehreek-i-Insaf (PTI) members Punjab Assembly disqualification case, the room for bargaining or revolt by individual parliamentarians has been eliminated. Now, if the parliamentarians fail to vote on a money bill in line with the directions of the party head, not only will they be disqualified but their vote will not be counted either. This provision and its interpretation essentially means that individual parliamentarians have a very limited role in the budget making process, and the heads of the political parties enjoy tremendous control over the process and money bills.
Recently, the non-provision of funds, through supplementary grants, to the Election Commission of Pakistan (ECP) to conduct general elections in Punjab and Khyber Pakhtunkhwa proved as a stark reminder of the non-democratic and non-participatory nature of the existing budget-making process. What was different [ and ironic] here was that the Executive used parliament to protect itself.
The Supreme Court had ordered the federal government to release the funds through supplementary grants and obtain post-facto approval of the parliament later, as is usually the case. The federal government and the parliament, however, both emphasised the parliamentary prerogative regarding authorisation of expenditure from the FCF. The federal government, therefore, sought the national assembly’s approval before releasing the amount. The NA not only refused to grant the amount, it even forbade the federal government from doing so.
Since the SC had ordered the federal government to grant the funds through the supplementary grants mechanism available to the government bypassing the parliament, it is important to examine these tools in detail.
Supplementary grants are additional funds provided by the government during the financial year to meet unforeseen expenses that were not included in the original budget. While the supplementary grant mechanism can help address unforeseen and urgent expenditure requirements, it has several issues associated with it.
First, there is a lack of transparency, oversight, and accountability in the allocation and utilisation mechanism for these grants. They are approved by the government without going through the parliamentary approval process. The government also often does not disclose the reasons for the additional spending, raising concerns of corruption and mismanagement of funds.
Second, the frequent use of supplementary grants may cause fiscal slippages which occur when government expenditure exceeds its revenue. This can result in a budget deficit, which in turn can lead to inflation, a decline in the value of the currency, and other macroeconomic problems. Supplementary grants also undermine the integrity of the budget process due to unplanned and uncoordinated spending. This makes it incredibly difficult for the government to achieve its policy objectives and reduces its credibility in the eyes of citizens and investors.
Finally, supplementary grants can lead to unplanned spending, which is both wasteful and inefficient. In some cases, the funds may be allocated to projects or activities that do not contribute to the overall development goals of the country in any way.
Ministry of Defence is the largest benefactor
The opaque supplementary grant mechanism has also proved particularly advantageous for the defence sector, as it allows additional funding without much oversight or accountability. The defence sector fails to provide a sufficient explanation for why it requires such a high volume of funds on top of what is already allocated to it in the budget.
In the fiscal year 2021-22, the Ministry of Defence received a whopping Rs153 billion or 11.8 per cent additional money in the fiscal year over the revised budget of the previous year. This did not include Rs395 billion allocated for pensions of retired military personnel and Rs463 billion for the armed forces development programme as well as other essential expenditures.
The disproportionate allocation of resources to this sector without proper oversight undermines the principles of democratic accountability and transparency and makes it crucial for the parliament to have a more significant role in the budget-making process, especially concerning defence expenditures.
Considering the current economic crisis in the country, the budget-making process is in urgent need of reform. Parliamentary committees, especially the Finance Committee, should be empowered to scrutinise financial demands and expenditures. Measures such as ex-ante scrutiny, which would require the Executive to seek parliamentary approval before authorising financial expenditure, should also be considered.
Article 84, which deals with supplementary grants, also needs to be amended to limit the scope of permissible supplementary grants. The existing text of Article 84 grants almost unlimited power to the federal government to authorise expenditure on the Consolidated Fund, “whether the expenditure is charged by the Constitution upon that Fund or not”.
This essentially means that the government has the power to circumvent the entire budget-making process. The process of deciding when a supplementary grant is approved must be subject to heightened parliamentary scrutiny to sift out any unnecessary expenses.
For the reform to be effective, the people of Pakistan also need to be more involved in the decision-making process. One of the ways in which this can be done is participatory budgeting (PB).
This is a democratic process in which citizens have a direct say in how public funds are allocated to different projects and programmes. It is a way to promote transparency, accountability, and citizen engagement in the budgeting process. It has been implemented in many countries, mostly in the developed world, and is also gaining popularity in developing countries. It is important to keep in mind that implementation of this model in developing countries such as Pakistan, may yet present several challenges that need to be addressed.
One of the challenges is the low levels of civic engagement and political awareness among citizens; citizens lack the knowledge and skills necessary to participate effectively in the budgeting process. Efforts must be made to educate citizens about the budgeting process and the importance of their participation in ensuring maximum benefits.
Another challenge is the lack of institutional capacity to implement it effectively. Many developing countries have weak institutions and inadequate resources to facilitate the implementation of participatory budgeting. Building the institutional capacity of local governments, civil society organisations, and other stakeholders involved in the process is therefore necessary.
In many developing countries, marginalised groups and minorities are often excluded from the budgeting process, and their voices are not heard. There needs to be an active effort to ensure that their participation is facilitated, and their perspectives are considered to make the model be inclusive and representative of all segments of society.
Despite these challenges, participatory budgeting has been successfully implemented in several developing countries, such as Brazil, Mexico, and South Africa. In Brazil, for example, it was introduced in 1989, and it has since become a fundamental part of the country’s democratic process. It has been credited with promoting social inclusion, reducing corruption, and improving public services in Brazil.
Mexico too introduced it in 2000, and it has since become a widespread practice in the country. It has been credited with promoting transparency and accountability in public finance management and improving the quality of public services in the country. It was also introduced in 2001 in South Africa, and has been used as a tool for promoting citizen engagement and participatory democracy. It has helped in improving the allocation of resources to poor and marginalised communities and in promoting social inclusion in the country.
Participatory budgeting is thus a promising approach to promote transparency, accountability, and citizen engagement in the budgeting process in developing countries. Its successful implementation in several developing countries offers a model for others to follow. By promoting citizen participation in the budgeting process, it can help build trust between citizens and governments and improve the quality of public services.