Budget proposals lack substance to support economy

Budgetary measures and proposals for the 2017/18 fiscal year hardly signal any move towards a structural change in economic fundamentals, depict no urge towards self-reliance, and induce little meaningful incentives for growth in critical sectors, such as agriculture and industry. By and large, the budget was a balance-the-books exercise, as usual, without any serious thought and effort to strengthen the economy’s foundation.

Many macroeconomic targets, set in the budget, are overly optimistic. Achieving six percent growth in the next fiscal year (5.28 percent in the current fiscal year) is quite possible, considering an increased development spending, allocation for China-Pakistan Economic Corridor-related projects and foreign direct investment coming from China. 

However, taking investment to 17 percent of GDP and increasing the tax to GDP ratio to 13.1 percent seem to be difficult, without any particular incentives for increasing the savings (prerequisites to investments) and with no out-of-the-box approach to broaden the tax base. Keeping the budget deficit at 4.1 percent and inflation under six percent in the wake of increased expenditures on all counts would also be hardly possible.

The budget 2017/18 was presented on May 26, a week or so earlier than the usual practices of bringing it out in the first week of June. However, the overall time of debate on the budget in the parliament has been reduced (attributed to Ramazan and the debate is to be completed by June 16. The boycott by the opposition of the budget debate in the parliament makes this entire exercise even more meaningless. 

Although the opposition benches should also be advised to consider playing a more constructive role in this connection, in a parliamentary system it is the responsibility of the treasury benches to keep the opposition onboard and to make it a truly a national budget, not just the budget of the government. 

A budget strategy paper is usually prepared and approved by the cabinet in the initial months of the calendar year – outlining the coming budget’s priorities. However, the budget strategy paper this time was hurriedly unfolded and approved by the cabinet, days before the presentation of the budget in May. Evidently, neither the objective of pre-budget consultations was served in a proper manner, nor is there enough time for any meaningful space/period for post-budget debate.

Budget’s outlay for 2017/18 is Rs5,103.8 billion, 4.3 percent higher than the size of the budget for 2016/17. Net revenue receipts are estimated at Rs2,926 billion, up 5.3 percent over the budget estimates for 2016/17. Provincial share in federal taxes is estimated at 2,348.2 billion, an increase of 11.6 percent over the outgoing year.

In the budget outlay, Rs3,763.7 billion (73.7 percent of total) is current expenditure, while development expenditure is Rs1,340.1 billion (26.3 percent). Federal public sector development program (PSDP) is for the first time crossing the limit of one trillion rupees at Rs1,001 billion as against expenditure of Rs715 billion (revised estimates as against an allocation of Rs800 billion) in the outgoing fiscal year. Bank barrowing is estimated at Rs390 billion, while external resources are targeted at Rs837.8 billion.

Much of the growth registered in the past couple of years, including in the outgoing year is in the services sector. It is nothing unusual for a developing economy, but at the same time, an economy like Pakistan’s being primarily agrarian, the budget brings forth little meaningful measures/proposals for all important agriculture sector except for continuing with Prime Minister’s agricultural package – the exact impact of which is yet to be known – and focus on increasing agri-credit. 

In industrial sector, the focus remains primarily on few select industries, such as textiles, which is by no means enough and responsive to the changing circumstances where small and medium enterprises require an enhanced attention.

Reliance on indirect taxes: 

For 2017/18, the target for direct taxes has been increased Rs214 billion to Rs1,595 billion, while the target for indirect taxes has been revised up Rs276 billion to Rs2,418 billion, which is all set to increase the burden of the common man.

For the fiscal year of 2016/17, the target for direct taxes was Rs1,558 billion, while actual collection was down eight percent to Rs1,389 billion. The target for indirect taxes was Rs2,063 billion, while the collection increased 3.3 percent to 2,142 billion. 

Lopsided development budget: 

Bulk of the PSDP (more than Rs400 billion) is concentrated in the communication sector.

Revised estimates for 2016/17 indicate that the overall spending was considerably less than the initial allocation – Rs715 billion as against Rs800 billion. This is less than the revised estimates for the bank borrowing in the same year,making it clear that the whole developmental spending came from borrowed money. No expense has been mentioned against allocation for internally displaced persons (IDPs) – that was Rs100 billion, in the budget documents. Instead, an expenditure of Rs14 billion is shown against a new heading – security enhancement. For 2017/18, another Rs45 billion will be provided for this new head and IDPs each.

Expenditure on sustainable development goals increased to Rs42.5 billion from an allocation of Rs20 billion. No amount was spent in the outgoing fiscal year, out of the allocated Rs28 billion, for special federal development program, yet Rs40 billion will be disbursed for the same for 2017/18. 

Two new initiatives – ‘Energy for All’ and ‘Clean Drinking Water for All’ – get Rs12.5 billion each without any details. Prime Minister’s Youth Program could consume only a quarter – Rs5 billion out of Rs20 billion, which has again been allocated. 

As far a gas infrastructure development cess is concerned, only Rs158 million were spent on uplift schemes out of Rs25 billion allocated in the current fiscal year and again the same amount was set aside. Much of the allocations for ministries of ports and shipping and planning, development and reform remained unspent during 2016/17.

Defence budget rose to Rs920 billion for 2017/18 from Rs860 billion for 2016-17, up modest seven percent considering the overall security situation in the region – tensions on the eastern and western borders.  

Allocation for Benazir Income Support Program was revised up to Rs121 billion and number of beneficiaries increased to 5.5 million. Certainly, direct cash grants, no matter how small, do help to an extent. Despite its short-term benefits, the program is becoming a source of increasing dependencies instead of building or facilitating sustainable livelihoods as its main deliverance. Continuing with this approach serves only one purpose – winning sympathies and votes of the downtrodden in the elections year. 

Awarding the personnel and officers of armed forces with the double increase in salaries -- 10 percent as per the increase announced for all the federal employees and 10 percent special allowance for  military operation Zarb-e-Azb – though warranted due to the peculiar role and sacrifices of the military, smacks of discrimination. 

Increase of the minimum wage to Rs15,000 a month is, on one hand, too meagre considering the inflation of daily-use items, and there is no visible mechanism ensuring its implementation on the other.

International institutions estimate that housing shortage in Pakistan is around 10 to 12 million units. In spite of this, an allocation of mere six billion rupees and that too in the form of a part of credit guarantees is insufficient. What is needed is a large scale program for provision of housing to millions.

Mobile phones are an import source of personal and commercial connectivity in today’s world. In view of this, it is good that withholding tax on mobile calls and excise duty on import of mobile phones has been reduced. It is also important to note that the use of mobile phones is linked with promotion of certain lifestyles – specially the nighttime packages. Packages that discourage unhealthy lifestyles should be discouraged through taxes and duties. Taxes on actual airtime can handle this issue.  Taxation measures introduced in the budget of 2017/18 are actually decreasing cigarette prices in contrast to the prevailing global practices of discouraging tobacco consumption.  

Debt burden is continuously increasing. Ironically, the finance minister, in his budget speech, was seen as building the opinion in favour of loans, saying that loans if taken for development are not bad. 

Over one-third (Rs1,363 billion) of the total expenditures were earmarked for payment of the interest/markup on national loans during the next fiscal year. During the past four years of this government, net public debt increased Rs5.5 trillion. Gross public debt, including the government’s assets with the banks, rose seven and half trillion rupees. 

A burden of more than Rs1,194 billion was added in the first nine months of the outgoing fiscal alone. Revised estimates for bank borrowing rose to Rs741 billion as against budget estimates of Rs453 billion. 

Treatment of financial products of Islamic banks at par with conventional banks is welcome, as previously the Islamic banks were rather disadvantaged with double taxation in some cases. However, if the objective is to encourage Islamic banking in the country, it will be served better with providing the Islamic finance products incentives, which are higher than the already established commercial financial industry.  

The writer is Lead Coordinator at Islamabad-based Institute of Policy Studies