The budget this year stands on the knife-edge between hopes of economic revival and the danger of a financial collapse. The Finance Minister can take credit for integrating the budget of 2000-2001 into a coherent three year strategy of economic revival. Yet if he fails to achieve the budgetary targets of the first year he will have to take the blame for scuttling the entire revival programme. It has now been generally recognized that reviving the economy is integral to winning sovereignty and securing the State. It is equally important to understand the initiatives in the sphere of the State that are necessary to achieve the targets of the budget and the revival program of which it is a part. In this essay we will indicate first the linkages between the financial goals of the budget and the revival programme. We will then specify the changes in the functioning of the State that are necessary to enable economic revival.

The logic of the budget 2000-2001 is embodied in two key instruments of economic revival: First an increase in the public sector development programme (PSDP) of Rs. 20 billion compared to the revised estimates of the budget 1999-2000. This increase in development expenditure is planned to be directed to small scale, labour intensive infrastructure projects that are expected to have a multiplier effect on increasing employment and aggregate demand within a short time frame. However the achievement of this objective is critically dependent on reaching the budget targets for tax revenue receipts of Rs. 435 billion. Last year failure to reach the original budgeted figures for tax revenue (Rs. 356 billion) resulted in a short fall in development expenditure of over Rs. 16 billion. In fact the experience of the last decade suggests that failure to achieve tax revenue targets translates itself into a cut in development expenditure and an increase in ad-hoc indirect taxation. It may be pertinent to point out here, that the available evidence on Pakistan shows that indirect taxes reduce the real income of the poor and increase the real income of the rich. This persistent tendency is rooted in the structure of State power in Pakistan as it has been exercised in the past: Those who govern are unwilling to cut the expenditure on running the government, while those who are governed do not trust the government to spend the tax revenue obtained from them in a judicious manner. It is this flawed relationship between the State and the people that results in the failure to reach tax revenue targets and at the same time an imposition of increasing indirect taxation. The poor therefore are caught in a double bind as a result of the peculiar nature of State power in Pakistan: Reduced development expenditure has been a major factor in increasing unemployment, while indirect taxation has played a significant role in further reducing whatever real income poor families could earn.

It is clear that if an increase of Rs. 20 billion envisaged in the PSDP is to be effected, then the target for tax revenue receipts must be achieved. It is equally clear that meeting the ambitious tax revenue targets this year will require more than good intentions. What is necessary is to begin to establish a new relationship between the State and the people. The much trumpeted tax culture cannot take root in the shadow of the gun. The government must demonstrate: a) that it can restructure the CBR to make it into a credible tax collecting institution and (b) the tax revenue obtained from the people will be spent on providing them with improved public services.

The second budgetary instrument for economic revival is the package of tax incentives offered to the private sector for increased investment particularly for the export of high value added manufactured goods. In an important sense reduced dependence on foreign loans and increased revenues both depend on accelerating GDP growth. The key economic determinant of accelerating GDP growth in a market-based economy is increased private sector investment, both foreign and local. In this context it may be helpful to identify the key initiatives within the State structure that need to be undertaken to enable economic revival.

The government must face the fact that investors confidence has been severely undermined by a triple punch: First the freezing of foreign currency accounts by the previous government, which constituted a default by the State Bank against individual depositors. Second the protracted dispute with the IPPs. which became a significant factor in inhibiting foreign investment. Third the lack of finesse by the present government in conducting the accountability drive which created a generalized state of insecurity amongst both domestic investors as well as officials of commercial banks who felt hesitant in giving loans to even genuine investors. The government has done well in its damage limitation efforts by setting up a high powered Committee to deal with cases relating to businessmen, and restricting NAB to deal with bank related cases only when referred by the State Bank. However it is important to understand that this may have been a necessary step but is by no means sufficient to restore investors' confidence.

The conditions required for encouraging new investment particularly much needed foreign investment are rooted in fundamentally new initiatives in the exercise of State power. These may be specified as follows:

1. The support of the international community is essential for Pakistan's economic endeavour. This support is needed at three levels: (a) To achieve a second rescheduling of foreign loans in the year 2001. Without such a rescheduling the debt servicing burden will become so high that in spite of our best efforts on the domestic front, Pakistan will face financial default. (b) The support of G8 countries will be necessary so that the relevant executive directors of the IMF are given the necessary nod by their respective governments to be sympathetic to Pakistan's home grown economic revival strategy. (c) A supportive international community is necessary if private foreign investment is to start flowing at the level required for rapid export based GDP growth.

It may now have become necessary to seriously address the concerns of the international community with respect to the functioning of the State, if State security is to be strengthened through economic revival.

2. The confidence of private sector investors whether local or foreign cannot be restored unless the writ of the State and the rule of law is extended to all areas of the country, which constitute the economic space for production and sale of goods and services.

3. In order to have efficiently functioning capital markets through which local and foreign investment can be mobilized, it is necessary to ensure the credibility of audited balance sheets, which are the basis for determining stock market prices of publicly quoted companies. Institutionalized mechanisms of ensuring integrity of information and transparency of stock prices must be established.

4. If new investment is to be encouraged then it is essential to ensure the enforceability of contracts in Pakistan. Currently such enforceability is so poor that potential investors are shy of investing in new productive capacity, and existing investors often use extra legal means to enforce contracts.

5. One of the important features of contemporary market economies is the existence of a liberal culture, which allows the free flow of ideas, individual freedom and an environment in which difference of opinion is exercised through reasoned argument, rather than the threat of violence. The absence of a liberal culture characterized by diversity of ideas and social practices cannot be conducive to foreign investment and the functioning of a free market economy. If Pakistan is to emerge as a modern, dynamic country, which provides opportunities to its vastly talented people for actualizing their potential, then it must seek strength in freedom rather than repression.

In this article an attempt has been made to identify some of the key budgetary instruments for economic revival and to show how the achievement of budgetary targets as indeed of economic revival itself is rooted in the sphere of the State and its modes of functioning.