Persistence of Primary Deficit has become a consistent feature of successive governments which has resulted in accumulation of public debt, had consequential effects on economic growth and the sustainability of the economy. This growing trend of Primary Deficit indicates that the policy makers have spent taxpayer’s money more on debt servicing than on wealth creation, which hinders fiscal sustainability and has caused detrimental effects on the GDP growth of Pakistan.
Primary Deficit is the difference between a country’s fiscal deficit and its interest payments. (Primary Deficit = Fiscal Deficit minus Interest Payments). This actually gauges the fiscal health of an economy. According to IMF, Primary Balance is the most accurate reflection of government fiscal policy decisions. According to the Finance Ministry, primary deficit have ballooned primarily due to higher quantum of fiscal deficits during 2018-19 and 2019-20, which has raised key concerns for the fiscal sustainability of our country. The trend of Primary Deficit since 2013-14 is as follows;
The Primary Deficit had recorded at Rs757 billion or 1.81 percent of GDP in 2019-20. This Primary Deficit had dropped significantly to Rs757 billion in 2019-12 compared to Rs1,354 billion last year mainly due to relative improvement on fiscal deficit front. (Last year Fiscal deficit was recorded at 8.9 percent of GDP). Fiscal Deficit surpassed its original target which was set at 7.1 percent of GDP, and ended up at 8.1 percent of the GDP in 2019-20. In absolute amount, the fiscal deficit was recorded at Rs 3,376 billion in 2019-20, which was Rs239 billion higher than the actual target of Rs 3,137 billion for 2019-20. This fiscal deficit has eaten up around 84% of the FBR’s tax revenue. If Rs234 billion of the Federal PSDP and Rs 540 billion Covid-19 package fully utilized (out of Prime Minister Covid-19 relief package of Rs1.240 trillion), the fiscal deficit would have been 9.95 percent of the GDP or Rs4,150 billion. Consequently, this alarming level of fiscal deficit has left little fiscal space for critical development expenditures and added further fiscal pressures for the country.
The Primary Deficit had recorded at Rs 1354 billion or 3.57 percent of the GDP in 2018-19, which was highest in a single year since last 5 years. Higher Primary Deficit indicates that the quantum of additional borrowings in the respective fiscal years has increased. As per SBP’s Annual Report 2018-19, “an unusual decline in revenue collection and steep rise in current expenditures caused a deterioration in all major fiscal indicators during FY19”. Consequently, fiscal deficit shot up to 8.9 percent of GDP in 2018-19. This fiscal deficit further revised to 9.1 percent of the GDP due to a revision in GDP figures. Moreover, it may be noted that this fiscal deficit was the highest in decades. On the other hand, Pakistan had paid Rs2,091 billion as interest payments which was 54 percent of the tax revenues in 2018-19 vs. Rs 1,500 billion in 2017-18. This interest payments as percentage of the GDP recorded at 5.5% of GDP in 2018-19, which was the highest in the previous 14 years.
The Primary Deficit was recorded at Rs760 billion or 2.2 percent of GDP in 2017-18. Due to the election year, the fiscal deficit grew to 6.5 percent of the GDP or Rs2,260 billion in 2017-18. Overall, the Primary Deficit primarily remained below 1 percent of GDP, from 0.95 percent of GDP in 2013-14, to 1.61 percent of GDP in 2015-16. The key reason behind these Primary Deficit manageable limits was a relatively lower fiscal deficit.
There is no threshold levels for fiscal deficit. However, in a country like Pakistan, where we were experiencing relative openness/expansionary policies, the average threshold level should be around 3.0 to 3.5 percent of the GDP. However, it should not be beyond the levels which obstructs economic growth. Fiscal deficit hit a whopping 8.19 percent of GDP in 2012-13, which was reduced to 4.60 percent in 2015-16 mainly through better expenditure management and growth in revenues. Overall, FBR’s Tax revenues grew by 98 percent from Rs1,936 billion in 2012-13 to Rs3,842 billion in 2017-18. This reflected in overall GDP growth, which grew from 3.68 percent in 2012-13 to 5.53 percent in 2017-18.
The Finance Ministry is seeking to improve the taxation system and broaden the tax base to keep the primary deficit at a sustainable level. However, this persistence of a large stock of the fiscal deficit needs to be curtailed urgently. In Pakistan, where we are facing a large outstanding stock of public debt to GDP which stood at 85 percent of GDP as of Oct 2020 vs. 70 percent of GDP as of Jun 2018, this has become a ‘risky business’. Therefore, reaching a primary surplus is viewed as a key prerequisite for the reduction in public debt to GDP ratio. Hence, in order to address this recurring Primary Deficit “disorder”, the country requires fiscal federalism/fiscal consolidation for the broader financial discipline in the Pakistani economy, which can be achieved if the tax-to-GDP ratio is enhanced by expanding the tax net and increasing non tax revenues, boosting privatization program on a fast-track basis, and rationalizing expenditures.
The writer is a tax expert