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June 13, 2019

Budget 2019-20

Editorial

June 13, 2019

Salaried persons across the country will be examining the taxation structure put forward in the PTI government’s first budget, announced on Tuesday, with trepidation. The finance bill presented in the National Assembly amidst some opposition protest pushes up taxes on both salaried and non-salaried persons, while also imposing new duties and taxes on cement, sugar, aerated water, juices, compressed natural gas and cigarettes. Salaried persons, including government officials from Grade 17 to 20, will in fact face an effective cut in salaries due to taxations. The government hopes that in the longer run, these measures will create stability and sustained growth. Critics, however, argue that the dictates are determined by the IMF and that the slowdown in economic growth to just over three percent, as reflected in the Economic Survey for the year, will keep it in a bind for some time to come.

The key features of the budget announced by Revenue Minister Hammad Azhar were austerity and revenue. The revenue minister started with a tale of the debt, and the current account and fiscal deficits that the PTI government inherited. These three issues – plus the issue of taxation – laid the basis of the budget speech. One of the biggest fears expressed before the budget was that the budget would contribute to high inflation, something the government has done little to address. Unlike its recent announcements in its Five Year Plan, the government has promised GDP growth of around 3.3 percent for the next fiscal year. This low GDP growth creates some of the biggest questions around the impact of the austerity and revenue measures announced in the budget. One must wonder, for example, how the overall budget outlay has been increased by 30 percent in a single year to Rs7,022 billion despite a reduction in government spending and a freeze in the military budget? This can partially be explained by the 32 percent increase in transfer to provinces via the NFC award, but these come to Rs3,255 billion – a high number, but one that does not explain the overall 30 percent increase. The big number here is the sheer amount of money that will go into debt repayments, coming in at around Rs4 trillion, or 56 percent of the budget. The increase in overall budget outlay means that the consolidated budget deficit itself is set to hit Rs3,137billion. This is much higher than the ‘threatening’ fiscal deficit that Hammad Azhar claimed the PTI inherited of Rs2,260 billion. The revenue figure is around 19 percent higher than last year.

How can the fiscal deficit be around Rs880 billion higher in an austerity budget? This is a question that one hopes the government will answer in the budget debate in parliament. It is clear that the government is set to tax consumption, rather than income, once again to reach its Rs5,550 billion revenue target. The tax on sugar will be doubled from 8.5 percent to 17 percent while a federal excise duty will be imposed on cigarettes and cars. Cotton is set to be taxed at 10 percent. The tax on CNG too is to be increased, while a range of taxes on the services industry are to be imposed. Essential consumer items such as ghee and oil will also be taxed at 17 percent while the construction industry will face increased taxation on marble and cement. Economic experts feel that the taxation measures proposed are punitive and could contribute to both inflation and a slowdown in economic growth. The exemption on duty on importing textile machinery does little to offset the damage high indirect taxation could do amidst economic slowdown.

While the National Development Programme has been kept at Rs1,800 billion, questions over where economic growth will come from next year remain unanswered for now. Already, this year the dollar value of Pakistan’s GDP has shrunk by around 20 percent. Duty reduction on non-traditional export sectors may not be enough to spur major growth in these sectors. The government’s job generation agenda boils down to two things: state-subsidized housing development and self-employment loans. The state-sector can create as many jobs as it wants provided it raises the required finance. But relying on self-employment loans reminds us of many previous self-employment schemes, which have failed. Loans end up being used for short-term consumption – and the likelihood of such happening in times of high inflation is even higher based on the government’s own predictions. The proposed budget does not reduce the fiscal deficit nor does it offer realistic ways of reducing the current account deficit. The talk of renegotiating free trade agreements is good, but the government will have to show more will to put it into action. Austerity and taxation may be the key words for this budget, but these will cause more anger if the measures do not work. For now, we wait for more details to emerge from what will likely be a most fiery budget debate in parliament.

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