Friday May 20, 2022

Budget dynamics

June 19, 2021

The budget proposals for the next financial year have been presented in the National Assembly. The government has claimed it a growth-oriented budget, whereas the opposition has dubbed it a regressive and inflation-prone budget. The opposition had also vowed to give a tough time to the government by rejecting the federal budget and exposing their false figures. Without going into the details of the government’s claims and the opposition’s allegations, let’s analyse the budget dynamics in its essence.

The total budget outlay for the financial year 2021-22 is Rs8,487 billion entailing a deficit of Rs3,390 billion. The budget deficit will be met through external financing, domestic resources and privatisation proceeds. The external financing of about Rs1,246 billion will be mainly in the shape of loans, creating a huge portfolio of debts causing disturbance in the way of economic growth.

The domestic resources of Rs2,492 billion are also likely to warrant debate on how to meet this shortfall in the next financial year and what sort of resources would be available to meet our budget deficit. The same is true for estimated privatisation proceeds of about Rs252 billion, as the privatisation process of public-sector companies and entities is very slow.

The revenue collection target has been enhanced from Rs4,717 billion for the current financial year ending on June 30 to Rs5,829 billion for the next financial year; it will be a huge task for the FBR to collect this during the year. It all depends on economic growth and development which can determine whether the FBR can achieve such an insurmountable tax collection target. We are generally used to making a downward revision almost every year during the financial year.

If we look closely at the new revenue measures of additional taxes being proposed, amounting to Rs383 billion, they seem to be regressive in nature and would generate spiralling high inflationary pressures in the already inflation-ridden economy affecting the people – especially the poor – of this country.

The GDP growth aimed at 4.8 percent seems to be genuine – if we look back at our unexpected performance of provisionally achieving 3.94 percent for the current financial year, especially in the Corona days. Although the growth target should have been, ideally speaking, not less than 6 percent for a country like Pakistan, where population growth is almost 2.2 percent – something that disturbs all sorts of economic planning and eats up resources. There were expectations from the new dynamic finance minister to go all out for an economic growth target of about 5.2 percent, but there must have been solid reasons to get stuck ultimately fixing the target at 4.8 percent, which may not be considered as bad in the face of the economic realities and conditions prevailing in the country.

The defence budget of about Rs1,370 billion is a high cost but probably justified keeping in mind the ground realities of our defence needs, especially the Afghan situation and the Indian attitude. The most disturbing factor is debt servicing and interest payments which come to a huge amount of Rs3,060 billion, accounting for almost 36 percent of our budget. There seems to be no way to get rid of this problem in the near future. There needs to be a solid policy in place to slowly and continuously shed this huge burden by paying back bad debts/loans and generating our own resources to meet our expenditures.

A good step in the right direction is a proposed budget of Rs900 billion for the Public Sector Development Programme (PSDP), which may lead to a required growth model. Infrastructure development has been ignored in the last two years by this government owing to multiple reasons, but now has rightly been prioritised by Finance Minister Shaukat Tarin. The PSDP budget is absolutely necessary for economic growth contributing in revenue collection as well as providing a big boost to meeting the tax collection targets by the FBR. It will provide a base for economic growth. That is why the government is rightly branding it a growth budget with a big development plan.

The government is also going to offer Rs42 billion in tax incentives to industrialists to achieve required growth by lowering raw material cost. The government is also planning to provide cheap loans to people for businesses, which would again provide impetus to economic growth. The PSDP along with these incentives to the industrialists and people of Pakistan would definitely contribute to economic growth, if implemented in true letter and spirit.

State employees are being provided a meagre raise of 10 percent, which is a disgrace in the face of the current high inflation. The approach of controlling expenditure in this way seems to be faulty, as government employees are already suffering huge inflation for the last three years and their purchasing power has reduced to almost half during this time. If the employees are disturbed, the whole performance and efficiency of the government is choked. The government should immediately rethink and reconsider its proposal in the budget and change the raise to at least 20 percent of their salaries for good governance performance.

The overall package of the budget seems to be a good bag of boosting the economy, but it all depends on the performance of the government during the year. The government needs to focus on agriculture, industry and the services sector to uplift the economy. They have to take care of debt and the fiscal responsibility law to control the loans that are badly disturbing the economy. Then they must take into account the overall incentive package for the poor in the form of the Ehsaas programme as to how much it is contributing in addressing the plight of the poor. If need be, there must be a change in the incentive package to make people and society self-sustainable through an inclusive growth model by adding more business promotional incentives.

The writer is an economist.