Tax reliefs likely to take budget deficit beyond target: economists

KARACHI: Government has set an overambitious budget deficit target of 4.9 percent for the next year of 2018/19 as the populous tax reliefs it promised would hamstring revenue managers’ ability to introduce fiscal discipline, senior economists said on Friday.

“It will be difficult for the next government to contain the fiscal deficit and it’s hard to understand how the FBR (Federal Board of Revenue) will be able to increase revenue after tax cuts,” Salman Shah, ex-caretaker finance minister said, terming the budget “business-as-usual”.

Government, while unveiling budget for the next fiscal year of 2018/19, set fiscal deficit target at 4.9 percent of GDP as against the revised estimate of 5.5 percent for the current fiscal year 20118.

A renowned economist, requesting anonymity, asked how the new government will meet this ambitious budget deficit target when new taxation measures haven’t been announced.

The economist said the budget deficit has already surpassed 4.1 percent in the nine months of FY2018.

“How the new government will finance the growing budget deficit,” he added. “I believe it would reach 6 to 7 percent of GDP during the current fiscal year.”

The newly-appointed Finance Minister Miftah Ismail is confident that macroeconomic policy aims to address the imbalances of external account, while protecting economic growth.

“Over the medium-term we propose to continue reduction of fiscal deficit, maintain a cautious monetary stance, and embark upon next generation of reforms for strengthening investment climate, export promotion, and energy sector,” Ismail said in budget document.

The minister said government’s priority should be accorded to reducing losses in the public-sector enterprises and expanding tax base. Government fixed FBR revenue target of Rs4,435 billion, which is to be achieved through tax administration and compliance and not through any new tax measures.

“Tax base will be enhanced while tax rates are being lowered,” he added.

Analysts said tax incentives for individuals/salaried class would provide reliefs to the salaried individuals. The budget also proposed more incentives for agriculture sector by reducing sales tax on fertiliser to two percent.

Shah said the outgoing PML-N government sets to win support among voters ahead of elections due this year. “The government wants salaried people vote bank addressed.”

The government, however, has not addressed a risk of growing circular debt and increasing losses of state-owned enterprises, he argued. “There is no clarity how could the government improve tax administration… the new government will need to do more in terms of making reforms in FBR if it approaches to the IMF (International Monetary Fund).”

Government is expected to take a bailout package from IMF or other foreign source to ease external account pressure.

Current account deficit widened to $12.029 billion in the first nine months of the current fiscal year, equivalent to five percent of GDP.

Economist Ashfaque Hasan Khan said the numbers, which are presented in the budget, are “extremely fragile because there are no revised estimates of the outgoing budget available”. “This budget is meant only for political purpose,” Khan said.

Analysts said fiscal Deficit looks unmanageable in the elections year as it is expected at 5.4 percent during the current fiscal year, but it would normalise next year.

“This year budget deficit’s target can only be achieved by announcement of further tax revenue measures post budget and containment of expenses,” Topline Research said in economy update.