Cash Accounting and Budget Deficit

Budget is not just a book-keeping exercise for recording government receipts and expenditure. It is a significant instrument of economic management and has important basic functions of stabilisation, allocation, distribution and resolution of conflict.
The way funds are raised and spent has far-reaching implications for the economy and the society at large. From that angle, budget should be very transparent so that all stakeholders may be able to understand and respond rationally to the proposed measures.
It has been customary for the finance minister, to sum up, while presenting the annual budget, the financial impact of the proposed measures. This vital information is conspicuously missing in the Federal Budget for 2010-11 with the result that the size of the budget deficit-- a crucial element for fiscal and economic management-, cannot be determined by an outsider.
The fiscal deficit-GDP ratio has assumed added importance because of the conditionalities of the current standby arrangement with the IMF. Compliance with this condition has been a sticky issue. In the past, all sorts of devices to show compliance on the due date were used such as advancing receipts, and postponement of payments. If this did not do, there was no hesitation in resorting to figure fudging even at the risk of being detected and fined.
In this connection, it must be remembered that the US is a major shareholder of international financial institutions including the IMF. In case a borrowing country is on the right side of the US, the Fund, like its other sister institutions, will be very soft and more than willing to grant waiver after waiver. For this, the attitude of the US authorities needs to be watched very carefully. This has been the experience of Pakistan, which is being repeated in case of the current standby facility.
The concept of GDP embraces goods and services produced in a year. There is no problem with budget deficit-GDP ratio, if the goods and services acquired by the public sector are paid off during the same year. If not, the relationship will be distorted to the extent these are not paid or those acquired in the previous year are paid.
In Pakistan, budget accounting is on “cash basis” and only payments during the year are taken into account regardless of the date of transaction. As a result, there are huge arrears because of slack financial discipline, to say the least, and also deliberate efforts to show a better fiscal position for reasons mentioned above. Recently huge arrears of electricity charges due from the federal government