Sunday July 14, 2024

A survivor’s budget

By Dr Izza Aftab
June 13, 2022

The budget for FY2022-23 is here. Given the current national and international situation, the budget-making was bound to be challenging. In this piece, I attempt to explain some of the key tax-related decisions and what they mean for common folk like the reader and myself alike.

There is the usual this-is-the-best-option from the treasury and an outright rejection from the opposition, albeit from the platform of social media and not the august house of parliament. That should be a point to ponder for all of us. But let us get down to business.

In a nutshell, this is a survivor’s budget. Of the Rs9.5 trillion layout, 57 per cent of the budget is devoted to keeping the country on the world map – almost Rs4 trillion is marked for interest payments on debt that Pakistan owes and Rs1.5 trillion will go to defence. While the remaining 43 per cent of the budget is being nitpicked, the 57 per cent is what tells us where we are at. Helps bust myths about our global importance and tells us the trouble we are in.

Pakistan’s total debt stands at Rs47 trillion; public debt (sum of domestic, external and debt owed to the IMF) is Rs40 trillion. So the fact that debt servicing takes the largest chunk of the budget is no surprise. Pakistan is a highly leveraged economy.

Pakistan is housed in an increasingly volatile and hostile part of the world. Amidst the chaos being perpetrated by political parties, little attention is being paid to the growing insurgency in the north and west of the country. While the public’s bandwidth for tension is fraying at the seams, now is as good a time as any to focus on real issues which are quite existential in nature.

Apart from this, what does the budget mean for us? Things are going to get difficult. The government is proposing to add another Rs740 billion worth of taxes, of which perhaps the most significant is the Rs300 billion which will come from a fuel levy. The current levy of Rs30 per liter will go up to Rs50 per liter. This will, very simply, make everything very expensive. Why? Because unfortunately all two hundred and twenty seven million of us do not live in farms, factories and ports at the same time. Goods have to be moved to the market so that households can access them. Fuel is also an important input in the production of most consumer goods. So, brace yourself.

The proposed inflation target of 11.5 per cent can be chucked out the window. It is unreal and unbelievable. This fiscal year will be one of very high inflation. Inflation will be higher and even so as the cost of higher global fuel prices are passed on to consumers.

To counter inflation’s impact, the budget proposes respite for salaried individuals by reducing tax rates, reducing tax slabs and a higher exemption threshold. All this adds to a Rs47 billion relief. The counter-request by the IMF was to increase the tax burden on the salaried class and collect a little over a Rs120 billion additionally from it. This puts pressure on the coalition government to find Rs170 billion from somewhere else. The treasury bench has come up with interesting ways to find the funds. The increase in tax on banks and capital gains tax is the major development. This is done with the intent of targeting the safe haven Pakistani elite have found in real estate.

The new tax will operate as follows. Suppose you live in a house valued at Rs25 million and own another asset that is assumed to be valued at Rs25 million. Even if this other asset is not generating any income, the government will assume it does: to the tune of Rs1.25 million, or Rs12.6 lakh, per year. You will pay a tax of Rs12,500. Keep adding to this equation in line with your asset ownership.

And then there is the usual increase in punitive measures for living luxurious lives in Pakistan – increasing taxes on vehicles above 1600 cc and imposing taxes on foreign immovable property. If you happen to be a senior citizen, you should go forward and invest in Behbud certificates, as the tax on those has been halved to five per cent.

The budget brings us a little closer to reviving the IMF programme but the revival and ensuing talks will still be fraught with tough(er) decisions. The government’s assumption of a provincial surplus of Rs800 billion seems downright impossible to realize. If this does not materialize, the government cannot meet the key target of a primary budget surplus of a little over Rs150 billion.

The primary surplus is fairly non-negotiable for the IMF. This surplus essentially is the excess of government revenue over expenses excluding interest payments. You can expect a mini-budget by December of this calendar year. Why is the assumption of a provincial surplus unrealistic? This is an election year. It is reasonable to expect all provincial governments to put forward lavish budgets with a lot of spending that convinces the electorate that the right folks are in the driving seat.

Is there a silver lining? Yes. The budget has been tabled and will sail through. Is that good? Not necessarily, as it is not subjected to democratic scrutiny that only the opposition can meaningfully offer. In parliament, not on social media. How do we survive this budget? By cutting back and continuing to hold our elected representatives accountable through elections.

The writer is a faculty member at Beaconhouse National University, Lahore. She tweets @izzaaftab