Analysis: What does this budget mean?

Budgets in Pakistan are like promissory notes that can be very easily ignored. At best, this provides a general gauge of the direction the government wants to take over the next year. Reading this as an ironclad commitment is wrong. What matters more is what the government does over the next 12 months.

Having said that, at its core, Dr Miftah Ismail had two key things to focus on: First, how to decrease the gap between government’s spending and revenue? This is a long-running issue for the federal government due to the ballooning debt payments (which alone is going to be over 40pc of federal government spending next year), fiscal transfers to provinces and recurring spending on defence, salaries and pensions. What remains is a very small envelope to spend from.

How do we change that? Well, either decrease spending or increase tax revenue. Dr Miftah thinks that more tax revenue – aimed to increase from 8.6pc to 9.2pc of the GDP – will come from improvement in tax administration and taxing banks, urban properties, cars, thesuper-rich and such. Enough to compensate in the increase in income tax threshold – again a promissory note. The most promising of which is the tax on urban properties that, if applied well, can fix massive capital misallocation in Pakistan. The least likely is the tax on petroleum, unless global oil prices crash.

Some of the increase in tax revenue value will happen anyways with the increase in inflation. But, there are some big ifs: how will this be possible if imports, which are a major chunk of the tax revenue, decline? How will the tax administration be improved? Will they go after people who pay no taxes? How will the compliance from major property owners be achieved? Only time will tell.

Decreasing spending is harder. The government has increased the overall budget outlay by about 10pc from last year. Some of the tax exemptions – equivalent to over 30pc of the tax revenue last year – have decreased but many remain. The easiest (and the worst) place where further cuts can be met is by slashing the public development budget – or PSDP. The government says it will spend Rs800 billion on this. It very likely won’t meet this, just like last year. What about pensions, the Achilles heel of public finance in Pakistan? A small fund will be created to move it away from being financed directly from the budget every year – a tiny, tiny step, but something.

Second, how to cushion the impact of increase in the cost-of-living for ordinary people? The government says they can decrease inflation to 11.5pc through a "mix of fiscal and monetary policy". They can’t do this given global prices of oil and wheat. The direction will likely be on the other way with inflation likely exceeding 20pc. The expanded targeted support through cash transfers is good but a drop in the ocean. Many people will be helped by increase in the income tax threshold to people earning at least one lakh rupees a month. Again, not enough to make up for increase in the cost-of-living. A fund for nationwide investments in public transport would have helped a lot, but the finance minister instead mentioned roads. Maybe provincial budgets over the coming weeks will compensate for this omission.

What does this all mean? The government has tried to achieve a sort of a balance between a “tough” stabilisation budget that the IMF wants and one to provide some targeted support that keeps decent economic growth at home ahead of the elections. The headline growth target of 5pc is unrealistic and best not to meet given our trade deficit. The government probably knows this. But, promissory notes can be ambitious.

The real test begins now. The government has two key tests it should be judged on: First, how it manages the payments for Pakistan’s import bill? If the IMF is happy with this budget and resumes the programme, covering the import bill should become more manageable. What won’t help is the global scenario. Energy and commodity prices are going up, especially of wheat, thanks to the pandemic and the war in Ukraine. On top of that, high-income countries are upping interest rate increasing borrowing costs for developing countries like Pakistan. A perfect storm is brewing.

The second much tougher test will be whether the government will undertake deep economic reforms on taxation, energy, transport and governance to improve the productive capacity of the economy. So, the next time our growth moves beyond 5pc, the economy doesn’t come crashing down. Ordinary people are about to witness a significant increase in cost-of-living – no budget can prevent that. It will be deeply unfair to them if the government doesn’t reform this economic system that benefits a small, extractive elite. If it doesn’t, this budget is akin of a house that is running on borrowed time.