The ‘Schwarze Null, or Black Zero Budgeting’ which refers to a balanced budget without any new government borrowing during the year. Wolfgang Schäuble, who was Germany’s Finance Minister introduced the balanced budget rule in the aftermath of the European debt crisis in 2009. Despite pursuing the black zero budgeting rule for many years, Germany is still facing the deep pressures of looming recessions.
According to the State Bank of Pakistan, the central government’s total debt stood at a whopping Rs35,822 billion as of November 2020. Paying off-debt becomes critical for developing economies, primarily when tax revenues weaken, and public debt stocks become too high.
Generally, repayment can be made through; debt SWAP, self-generating projects, currency printing, and excess tax revenues over expenditures. In this article, I am merely discussing the 4th option ie no further borrowing and catering debt sewing of existing debt stocks. It was the desire of successive political governments in Pakistan that they would not increase debt.
In a country like Pakistan, the parallel economy is too large, and significant portion of our citizens especially agriculturists and traders, are not contributing significantly towards taxes.
Is it possible or not? I have examined existing tax collection mechanism vis-a-vis constitutional obligations of the federal government under Article 160 of Constitution read with 7th NFC Award, and have found that such black zero budgeting is merely a dream. According to the Constitution, the country’s provinces get their due share from divisible pool under the 7th National Finance Commission (NFC) Award.
This 7th NFC award allocates the financial resources between federal government and the provincial governments. Out of every Rs100 from the divisible pool, the federal government actually gets Rs40 or 40 percent, whereas the provinces receive Rs60 or 60 percent, including 1.5 percent or Rs1.50 to Gilgit-Baltistan and Azad Jammu and Kashmir governments. Based on the Federal Budget 2020-21, the country’s projected black zero budget deficit in 2021-22, and 2022-23 has been worked-out as per following calculations.
This equation elucidates black zero budgeting, leading to a valid, reliable and conclusive assessment. According to the equation, total tax revenues of the federal government are equivalent to total expenditure minus projected (ntr) non-tax revenues, and other taxes (OT). The quantum of total expenditures includes; a) current expenditures, b) development expenditures. If NTR and OT are deducted from total expenditures, 40 percent of federal divisible pool could be achieved for financing expenditures of the country. Therefore, remaining 60 percent of the share goes to provinces, including GB and AJK.
Consequently, total expenditure becomes equal to the total revenue, which ends up with zero fiscal deficit in 2021-22 and 2022-23. By applying the black zero budgeting rule, no incremental domestic and external borrowing incorporated during 2021-22 and 2022-23. Additional resources to be diverted to defence, development expenditure and improve social safety nets to boost economic growth of country. The defence expenditure is proposed to increase by 20 percent in 2021-22, and 2022-23 due to vulnerable security reasons. The development expenditure is proposed to increase by 20 percent each in 2021-22, and 2022-23.
In addition to this, education budget is proposed to increase by 20 percent each in 2021-22 and 2022-23. Health budget is proposed to increase by 20 percent in 2021-22, and 50 percent in 2022-23, and social protection budget is proposed to increase by 20 percent each in 2021-22 and 2022-23. By deducting NTR and OT, according to above table, net federal revenues stand at Rs6,326 billion in 2021-22 and Rs7,239 billion in 2022-23. This federal share is 40 percent out of the divisible pool.
Therefore, total gross revenue receipts would stand at Rs15,815 billion in 2021-22 and Rs18,090 billion in 2022-23. Out of total gross revenues receipts, 60 percent of its share amounting ie Rs9,489 billion and Rs10,854 billion, goes to provinces in 2021-22, and 2022-23 respectively. Consequently, total expenditure becomes equivalent to total revenue. This ends up with a zero federal fiscal deficit in 2021-22, and 2022-23.
Now instead of 60 percent share of provinces, if provincial share increases by 20 percent each year over last year, federal tax revenues share would further accelerate to Rs11,656 billion in 2021-22 and 13,577 billion in 2022-23.
If this happens, it would be a new paradigm shift in the 7th NFC award, which could raise serious political issues. Pakistan’s tax to GDP stood at 9.58 percent in 2019-20, which is one of the lowest in the world. According to the Finance Ministry and Pakistan Bureau of Statistics, the tax to GDP trajectory for last five years is hereafter.
During current fiscal year, the Federal Board of Revenue (FBR) tax collection would remain around Rs4,400 billion to Rs4,600 billion. Whereas, FBR’s tax revenue target stands at Rs4,963 billion in 2020-21.
However, we estimate that the FBR’s tax revenues would be around Rs4,500 billion. The SBP projected Pakistan’s GDP growth would remain 1.5 to 2.5 percent in 2020-21. Last year, Pakistan’s GDP was Rs41,727 billion. The projected GDP would be Rs42,352 billion in 2020-21.
Therefore, our tax to GDP would remain stagnant at around 10.6 percent in 2020-21. According to the SBP’s first quarterly report 2020-21, “Based on current economic trends, Pakistan’s Real GDP growth is projected to be in the range of 1.5 to 2.5 percent in 2020-21”.
Germany pursued black zero budgeting for a long time, which negatively affected GDP growth of Europe’s largest economy. The International Monetary Fund (IMF), and European Central Bank, had warned Germany that it should end black zero budgeting rule, and spend and borrow more to accelerate economic growth.
Where does this money amounting to Rs15,815 billion in 2021-22 and Rs18,090 billion in 2022-23 come from, when the country’s economic growth is feeble? Pakistan’s tax revenues have never crossed Rs4,000 billion.
This tax to GDP of 39 percent is one of the highest than tax to GDP of 24.5 percent of United States, 32 percent Japan, 33 percent United Kingdom, 33.5 percent Canada, 33.8 percent Germany, and 23.1 percent Turkey, whereas the average tax to GDP ratio of OECD countries stood at 33.8 percent in 2019.
Pakistan has tremendous potential to enhance its tax revenue collection and finance its deficits.
FBR must pursue tax reforms and expand tax net, explore true potential of key sectors not in tax net, and focus more on the enforcement mechanism.
The key sectors which could add tremendous value in national GDP, include agriculture sector, wholesale and retail trade, real estate, Afghan Transit Trade/curbs on smuggling, and elimination of fixed tax regimes.
The writer is a tax expert