January 11, 2011: This column was originally published in Dawn on the 21st of January, 2011.

THE country’s financial squeeze continues unabated after recent attempts by the PPP-led administration to alleviate pressure on public coffers came to naught. The ruling party was left isolated by opposition parties as well as its own coalition partners as one after another proposed tax reform and increases in power tariffs and oil prices were withdrawn in the face of intense political opposition. In effect, political realities defeated economic realities.

The withdrawal of proposed increases in power and oil prices can be attributed directly to their widespread unpopularity with the electorate. On the other hand, the failure to implement the Reformed General Sales Tax can be attributed to its unpopularity among the political bases of its most vociferous opponents, the PML-N and the MQM. This particular tax reform is vehemently opposed by the traders who form substantive portions of those two parties’ support bases.

Moving forward, two questions need to be addressed. Why have we failed in implementing apparently necessary fiscal reforms? And what are we to do next? Recent commentary on our fiscal conundrum seems to be split into two opposing groups.

The first is the apparently dispassionate, realist school. They point to the inescapable economic crunch the state is in. Members of this group can be imagined in their living rooms, at editorial desks, in donor-agency offices and at the Pakistan desks of western foreign offices, chastising the inept political class for their inability to make difficult decisions. They see no policy alternatives to tax reforms and to slashing state subsidies for electricity and oil consumers. In this assessment of recent developments, much-needed economic reform was sacrificed at the altar of short-term political expediency.

The second group is the more visceral, populist group. These folks, sitting on television talk shows and in tea shops around the country, are offended by the nerve that corrupt politicians display when they wish to raise power or fuel prices. They are the retailers and traders sitting in markets in Karachi and Lahore who have noticed rising power tariffs and no relief from loadshedding. They bristle at the idea of tax reforms that will increase their liabilities to a state that provides them with nothing in return. According to this reading of the situation, economic reforms are less important than tackling corruption.

There is a strong assumption at work here: that corruption within the government is a drain on public finances which, were it to be tackled seriously, would deliver the state out of the current crisis without the need for price hikes and tax reforms. Another set of assumptions is that political corruption may even have created this fiscal crisis and that this administration is substantively more corrupt than previous ones.

The realists do not deny the existence of rampant corruption, but they appear to believe that it is a relatively constant drain on the economy from administration to administration, a long-term structural problem with long-term structural solutions. They also appear to think that the current pressure on public finances is due to exogenous events. That is to say, it has been caused by forces that are not under the economic control of the state, such as the floods of last summer, militancy and at-source spikes in oil and food prices.

The answer to the first question — why attempts at fiscal reform failed politically — lies in the gap between these two perceptions of reality. Unfortunately there is no quantitative method to determine the relative level of corruption from government to government. I do not claim to know whether this administration is the most corrupt ever, but there are those who claim so. These people always have an anecdote or ten handy when they are asked for evidence, and they are steering the public discourse at the moment. And as long as this perception exists, it will be difficult for an unstable coalition to implement drastic fiscal reforms.

So far the government has been covering itself by borrowing excessively from the financial markets and printing more money. This has pushed inflation up to 16 per cent, public debt to well above 60 per cent of gross domestic product and the expected fiscal deficit for the current fiscal year to over 6 per cent of GDP. While the public debt burden is lower than in many other countries, the kick in the teeth comes from how expensive the rate of borrowing is and how much it adds to future debt servicing. At the same time, the International Monetary Fund has decided to call out the government on its failure to push through tax reforms.

So what is to be done? Fiscal reforms are essential, but so is the survival of this administration until the next general election. The real question, then, is how the administration can make these reforms more politically palatable in an already frayed economic and political environment. Perhaps it can expand the scope of fiscal reforms to incorporate some of the suggestions from political opponents. There are already some signs that tax evaders may be pursued more aggressively, and the administration can perhaps try to expand tax collection from the agriculture sector. It can reduce the size of the government by cutting non-essential expenditures. Above all, it needs to make a coherent case for reform to the electorate. An honest appraisal of the situation, including the likely negative economic consequences of inaction, needs to be presented before the public.

None of this will be easy, but it can only be achieved by aligning perceptions of reality within the political forum with economic reality. The government must negotiate with those political parties that opposed the RGST and bring them back to the table. What it has to offer them remains to be seen. The template for this process exists within the negotiations for the seventh National Finance Commission award made in 2009 and the 18th amendment to the constitution made last year. This is how democracies are supposed to work.

The writer is a doctoral candidate studying public policy at The George Washington University in Washington, D.C. asifsaeedmemon@gmail.com