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The five ‘Ds’


June 16, 2019

For those who are saying that the federal budget is tough, let me begin by saying that I was expecting a tougher budget than this. Let me explain why. After paying the provincial share from the federal divisible pool, the net revenue left with the federal government will be Rs3,462 billion. The total federal expenditures are Rs7,036. This leaves a deficit of Rs3,574.

Like previous governments, this government too hopes that provinces would leave some unspent deposits with the State Bank of Pakistan (provincial surplus), and taking into account that surplus has come up with a deficit number of Rs3,151 billion or an overall fiscal deficit of 7.2 percent of GDP (one percent of GDP is equal to Rs437.6 billion). However, past trend tells us that provinces seldom leave any surplus so the actual deficit would be higher than 7.2 percent of GDP. The government will be relying on external financing (project loans, programme loans, Islamic Development Bank loans, Saudi oil facility, Euro Bond and Sukuk bonds, and budgetary support from friendly countries and China) and domestic financing (commercial banks and non-bank financing) to meet this deficit.

The punch line of the above paragraph is that overall deficit will be almost equal to the net federal revenue, and the deficit would be managed through loans. The expenditures are more than double the income. One way to improve this situation was to increase revenue (read: taxes) or reduce expenditures. In both cases the budget would have been tougher than what is presented now.

Let us look at it from another angle; the net federal income is Rs3,462 billion. Major expenditures can be classified in ‘Four-Ds’. The first ‘D’ is debt service and foreign loan repayment, which comes to Rs3,986 billion. The second ‘D’ is defence affairs and services, which is Rs1,150 billion. The third ‘D’ is day-to-day running of the civil government, pay and pensions, which amounts to Rs931 billion. And the fourth ‘D’ is development, grants, transfers, and subsidies, which amounts to Rs1,936 billion. The net federal revenue is not sufficient to meet the first ‘D’ – which means the rest of all expenses would be made through external and domestic financing. Which in turn would mean more borrowing and more debt servicing.

Questions are asked whether FBR tax revenue be increased to Rs5,555 billion from this year’s collection of around Rs4,100 billion. The target is ambitious, an additional Rs450 billion are to be collected as income tax, and the rest through indirect taxes which include an additional Rs600 billion in sales tax (GST), Rs265 billion in customs duty, and Rs100 billion in Federal Excise Duty (FED) respectively.

An attempt to increase direct tax (additional income tax of Rs370 billion, if we exclude the impact of reversal of tax slabs and tax rates for individuals) is a step towards a positive direction. Increased collection of sales tax, without a flat increase in rate of GST as was done by the PPP and PML-N governments, is again a positive move. Although GST on certain items such as sugar is increased, the increased target for GST would be mainly achieved through withdrawing exemptions (and also restricting the powers to grant such exemptions) enjoyed by certain sectors. Increase in customs duty without negatively affecting imported raw material was also required to improve our trade deficit as well as to contain our balance of payments.

Increased taxes will pinch most of us, but one would bear it if the noose around taxable tax evaders were tightened, and that seems to be the direction of the budget – at least on paper.

Coming back to the expenditures side, the second and third Ds – defence affairs and services and running of the civil government – are almost kept at the level of the outgoing fiscal year. One finds an increase in the estimated allocation for the fourth ‘D’, development, transfer and grants.

Incidentally first three ‘Ds’ are non-discretionary expenditures. The government cannot compromise on debt repayment/servicing, defence requirements, and cost of running the government. The only discretionary expenditure is the fourth ‘D’, development. Thus, the development budget get axed when governments have to reduce their fiscal deficit.

In the outgoing fiscal year too, the original budget allocated for the PSDP for federal ministries/divisions got slashed by almost 50 percent. The most disappointing for me in the outgoing fiscal year is the slash in the Human Rights Division PSDP budget, which was revised from Rs300 million to Rs1 million (Rs143 million is allocated for this division in the forthcoming PSDP, hope this time they get released, and the HR division actually spends it).

On the whole, I am thrilled to see 40 percent higher allocation for the federal PSDP (Rs701 billion) compared to the revised estimate of Rs500 billion for the outgoing budget. The major winners are the climate change division (an allocation of Rs7.5 billion compared to Rs71 million revised estimates (RE) in the outgoing budget), food security (an allocation of Rs12 billion compared to Rs578 million RE in the outgoing budget) and information technology/telecom division. HEC, narcotics control and health services divisions saw a decrease in their allocations compared to their budgeted PSDP allocations for 2018-19. However, in all three cases, these allocations are higher than the REs for outgoing budget.

An exception to the above rule is the ‘Pakistan Sustainable Development Goals and Community Development Program’, (recommended by parliamentarians for their constituencies) where allocation was upward revised from Rs 5billion to Rs24 billion in the outgoing budget. Rs24 billion has been allocated for it in the forthcoming budget as well.

Beefing up the BISP programme is a prior action for the IMF programme. The allocation for BISP has been increased from Rs118 million to Rs180 million. One appreciates the increase in the minimum wage (which private-sector employees and daily wage labourers seldom receive), BISP stipend, and allocation for the Poverty Alleviation Fund. However, it would be wrong to say that the people will not be affected by the increase in the prices of sugar, edible oil, cement, LNG and CNG etc, due to increased taxes on these items in the forthcoming budget. On top of the measures taken in the federal budget, what bothers them most are the prices of electricity and fuel which are determined by Nepra and Ogra periodically. The fluctuation in prices forces them to revise their household budgets every month.

The first half of the budget speech comprised the government’s intended social safety protection initiatives to insulate marginalized and vulnerable segments of society from the contractionary policies that are required to achieve macroeconomic stability. The sooner those initiatives can be materialized the better it would be to avoid the spreading of a fifth ‘D’ – disappointment – among the people.

The writer heads the Sustainable Development Policy Institute. Twitter: @abidsuleri