Defence spending not linked to decline in development budget: SBP

Staff Report

KARACHI: A State Bank of Pakistan (SBP) study suggests that increases in defence expenditure do not necessarily result in a decline in development expenditure.

The study – ‘Defence Expenditure and Macroeconomic Stabilisation: Causality Evidence from Pakistan’, conducted by SBP analyst Mahmoodul Hasan Khan – shows there is a long-term relationship among defence spending, development expenditure, inflation and Gross Domestic Product (GDP).

It suggests that defence expenditure cannot be used for stabilisation purposes or to counter inflationary pressures in the short-run. “This undermines the popular perception that increases in defence expenditure are generally accompanied with a decline in development expenditure,” the report said.

The study suggests that not only does the perception that defence expenditure hurts economic growth not seem to hold over the estimation period, but the “Military Keynesian hypothesis” also does not hold in Pakistan.

“Nevertheless, one should not forget that defence expenditure is primarily used for securing external defence, which has an undisputed intrinsic value for any nation,” it said. Since independence, Pakistan’s defence spending has remained one of the largest components of total government expenditure, although there has been sizeable variations in defence expenditure to GDP ratio over the past five decades. The ratio declined significantly toward the end of the 20th century, but the absolute size of defence expenditure is still considered very high.

“Defence expenditure was 17.7 percent of the government’s budgetary outlay for 2002-03,” the study said.

The shares of defence and development expenditures in overall budgetary outlay were 33.5 percent and 17.7 percent respectively during 1950-51, the study said.

“This exceptionally high share of defence expenditures in the early years of independence may be largely attributable to the government’s efforts to achieve a minimum level of deterrence, necessitated by the conflict on disputed territory of Kashmir and a war with India in 1948. After that, the share of defence expenditure in total expenditure saw a considerable decline with some fluctuations before spiking up again in 1965-66 on account of 1965 war with India,” the study said. Defence spending to total expenditure ratio saw a sharp reversal in 1966-67. However, this decline proved short lived, as a the ratio surged again in 1971-72 due to the 1971 war before dipping down to pre-1965 war levels.

The ratio gradually declined to 23.2 percent by 1979-80. However, the declining trend once against reversed in 1981 following the high tension in Afghanistan, as Pakistan was a front line state.

During first half of the 1990s, the share of defence expenditure averaged 26.8 percent of total expenditure, indicating an increase of 4.1 percentage points on average for the second half of 1970s. The withdrawal of Russian forces from Afghanistan, coupled with the prevalence of high fiscal deficits, propelled government to revisit its defence spending.

As a result, the 1990s recorded a considerable decline in the share of defence expenditure. The decline in the second half of the 1990s was more pronounced compared to the first half. Despite tensions on borders with Afghanistan (following September 11) and India (following the attack on the Indian parliament on December 13), the share of defence expenditure continued to decline and averaged 18.7 percent for 2001-03. This recent declining trend amidst a few episodes of tension is largely underpinned by the nuclear capabilities of Pakistan and India. The possession of nuclear weapons by both countries seems to be an important factor in minimising the chances of war, even with the enlargement of traditional weapons, the study said.

It said another important point was the movement of development to total expenditure ratio and its relation with defence to total expenditure ratio. It is generally perceived that the massive decline in development expenditure to GDP ratio over the past two decades is primarily on account of huge defence expenditure. “However, the data do not lend credence to this view, as both defence and development expenditures have been on the decline since the mid-1980s, not only in terms of their ratios to total expenditure but also in terms of GDP.”

The study attributed the decline in defence and development expenditures over the last one and half decades to the consolidation of the public sector. The rise in defence expenditure generally accompanied an increase in overall expenditures, instead of a decline in development expenditures. The study found that there are only seven out of 52 years in Pakistan in which increases in the defence expenditure to GDP ratio do not accompany increases in total expenditures to GDP ratio, but move along with declines in development expenditure of GDP ratio.

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