What should one look for in the budget announcement today? The single most important number that describes the budget is the revenue target. There can be some debate on this, but in Pakistan the size of the revenue target best describes the challenge the government is setting for itself in the forthcoming year since revenues are very difficult to extract in this economy where large parts of the economy are undocumented. This year the government is set to announce a near historic 35 per cent increase in the revenue target for next year, which will mean a very aggressive tax plan and documentation drive will have to be launched to meet it. Given that the country plans to be on an IMF programme during this year, the space for slippage will also be limited. If the government fails to meet its quarterly revenue targets, it will have to seek corresponding reductions in expenditure as well, which present problems of its own especially when the pace of economic activity is already under pressure due to interest rate hikes and currency devaluations. Look for the tax plan in the budget, especially how realistic it is.

What do we make of this announcement that the defence budget is about to be slashed? Is this really an unprecedented step? Cutting defence spending is particularly difficult for a country like Pakistan that faces multiple security challenges as well as ongoing military operations within the country against terrorist groups. For the moment what we know about the cuts is that they will be applied mainly on salary expenditures for the officer corps and have been voluntarily agreed to by the military authorities themselves. This is unusual but is not as unprecedented as one might think. Take for example the difference between the amount that is budgeted under defence expenditures every year, and the amount that is actually disbursed during that year. The graph shows this difference for each year from FY2009 onwards. In that year the amount actually disbursed was 11.42 per cent higher than what was budgeted for defence. That gap comes down steeply in the years that follow, and actually becomes negative from FY2013 till FY2016, meaning the government was disbursing less than what was even budgeted. In the two years that follow it climbs again, meaning the government once again began disbursing more than what was budgeted until the figure once again crosses 11pc by end of FY2018, right before the elections.What is the role of the IMF in this budget? Pakistan`s programme with the IMF has not yet begun. What we have is a staff-level agreement, meaning the government and the Fund staff have agreed to the details of an adjustment programme. The next step is approval by the IMF board. Once that happens the programme begins and the first tranche of the money is released within days. But for the IMF board to agree, the government has to demonstrate its seriousness which it will do by taking the first year targets of the programme and factoring them into the budget.

Once the budget has been passed by the National Assembly, it will go to the board along with the staff-level agreement that has similar targets for the next three years. So even though the programme has not begun yet, the budget can be said to be the first step towards implementation of the IMF advice for stabilisation of the economy.