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A status-quo budget


June 8, 2016

The budget speech made by Finance Minister Ishaq Dar in parliament and the finance bill are two separate things and should be analysed separately. While the former reflects the political priorities and wish list of a government, the latter gives an estimate of revenue to be collected and expenditure to be made in any given fiscal year.

Unlike the speech, where tall promises may be made, the finance bill is a manifestation of priorities on how to balance spending with income. In a deficit budget (like ours where spending is more than income), attempts to curtail the fiscal deficit are always tricky and they become even trickier when a country is in an IMF programme with a predefined maximum limit for its fiscal deficit. Budget-making in such circumstances entails reverse engineering – using the IMF’s permissible fiscal deficit as a starting point and then adjusting the income to meet the cost of expenses.

Very often the income is inflated and the foreseen expenses are deflated (that is why the revised estimates of the expenses are mostly higher than the budgeted one). This formula has worked for the last many years (whenever we are in an IMF programme) and there was no reason for the finance ministry to depart from it when making this fourth consecutive budget for the current PML-N government. Thus, one should not expect Budget 2016-17 to bring about any revolution that the earlier three budgets could not.

The good news is that after a long time the FBR was able to meet its tax collection target of Rs3.103 trillion in the outgoing fiscal year. The bad news is that this target was met by increasing the indirect taxes (mainly customs duties), the direct text target was missed by Rs238 billion. The problem with indirect taxes is that they have a direct burden on the lives of common masses. This is partially the reason that despite the government’s claims of macroeconomic stability and record low inflation, life for the country’s people is getting tough.

Going forward, total tax revenue target is increased by 15 percent for FY2016-17. Due to the stagnant number of taxpayers, it is quite likely that most of the target would be met through indirect taxes, adding further miseries to the lives of common citizens. Another structural problem with our revenue collection framework is that the three building blocks of our economy – services, agriculture and manufacturing – don’t contribute (direct) taxes as per their share in GDP.

Services contribute around 60 percent of GDP, but only 30 percent of total taxes. Agriculture contributes almost 21 percent of GDP with negligible share in taxes, whereas manufacturing – with 20 percent GDP – is contributing maximum taxes. Without bringing ‘all incomes’ above a certain threshold into the tax net, it will neither be possible to improve tax-to-GDP ratio nor to reduce reliance on indirect taxes. Resultantly, there would be little room for new spending that may ‘boost’ the kind of growth the finance minister promised in his speech.

On the expenditures side, once again (like previous budgets) the federal government has very limited cushion to be innovative. After paying the provincial shares from the federal divisible pool, the federal government will be left with net revenue of Rs2,779.7 billion. Now let us look at its expenditures.

Federal expenditures comprise current expenditures and development expenditures. Around Rs1,803 billion (47 percent of total current expenditures – TCE) would be consumed in mark-up payment and foreign loans repayment, whereas Rs860.1 billion (21 percent of TCE) are being allocated for defence. Combine the two expenses and 95.8 percent of net federal revenue is gone. The federal government is then left with 4.2 percent revenue and a huge deficit (to the tune of 58 percent of its net revenue) to take care of civil government, subsidies, and federal PSDP. This deficit would be taken care of by further borrowing – both from external and domestic resources, public debt, and estimated provincial surplus etc.

Thus subsidies, federal PSDP, and 75 percent expenses of running the civil service are dependent on further debts/external assistance. There can be no compromise on debt servicing, defence expenses and the running of the civil government. That means the PSDP and subsidies would have to be curtailed in case of any slippage in external or domestic financing.

Now let us analyse the budget speech where the government set quite ambitious targets for itself, such as achieving high growth through the federal budget, adding 10,000MW electricity into the system, and bringing relief to the ordinary citizen’s life. One must appreciate that Finance Minister Dar rightly recognised policy neglect of agriculture and exports. In the case of agriculture, a subsidy on electricity tariff on agricultural tube-wells and on fertilizers has been announced.

According to the finance bill, subsidies and grants have been reduced by 20 percent in Budget 2016-17 compared to the outgoing budget. Due to limited revenue cushion, government would have to reduce some existing subsidies if it wants to implement the newly announced agricultural subsidies. However, reduction in electricity/fertilizer price will not address the single largest problem for the cotton crop – ie lack of availability of pest-resistant seed. Both the federal and the provincial governments would have to team up and bring agricultural universities, research organisations and extension departments on the same page to bring agriculture back on track in this country.

In the case of exports, zero rating of five vital sectors is another welcome move, but will only address one part of the problem. To bring exports back on the radar, the policy bias against exports would also have to be reduced by allowing the Ministry of Commerce to have a say in other economic policies (such as exchange rate, tariff, energy prices etc) that negatively affect exports.

On the promise of 10,000MW electricity generation by 2018, one hopes many of these projects are installed by then. However, getting this electricity into the grid may be overambitious. I personally think Budget 2016-2017 is a status-quo budget and cannot be termed as growth oriented. However, Pakistan will complete its EFF programme in August 2016. The finance minister may review his fiscal prudence policy at the end of the IMF programme and can come up with some out-of-the-box thinking which can boost growth. Till then, one will have to live with the status quo.

The writer heads the Sustainable Development Policy Institute, Islamabad.

Email: [email protected]

Twitter @abidsuleri


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