Neither a pandemic nor a growth-budget

Against the backdrop of Covid-19 and the locust attack, the budget 2020-21 fails to address concerns over economic recovery

In Pakistan, June is known for hot summers and budgets. Given the pandemic, the budget for financial year 2020-21 is critical. Budgets in such times aim to protect people from socioeconomic fallout of the pandemic and support economic recovery. The government needs to prioritise people over economy and aim for social spending.

Budget 2021 does not seem very promising in terms of mitigating the socioeconomic impact of the pandemic and driving economic recovery. It is a good budget in that it does not impose new taxes. But it is also a status-quo budget as it provides no relief. It is not on a pandemic budget either as there is no downward adjustment in taxes proposed last year for a non-crisis situation.

Maintaining the tax lines and rates designed to meet the IMF targets aiming at a stabilisation of economy does not qualify the fiscal policy to be called “expansionary” as claimed in the budget speech. Tough even for more normal times, as last year’s performance in revenue collection showed, these rates cannot stimulate economic activity because they are not designed for it.

The budget has amplified the already rampant uncertainty on a roadmap for economic recovery. Take for example the revenue target of Rs 6,573 billion. This is around Rs 1,000 billion higher than last year’s target which we missed. A budget speech promising no new taxes thus aims to collect Rs 1 trillion more in a crisis year than collected in a normal year. It is guided mainly by an unrealistic GDP growth target of 2.1 percent which is based on some weak assumptions including the projection that the economy will sprint to recovery once the lockdown is eased. Remember, this is to be achieved under a tax structure which resulted in a 1.9 percent growth rate in a normal year.

The budget is reduced to an accounting exercise when one looks at the revenue target of Rs 4,963 billion for the FBR and the economic landscape of the country. The FBR was barely able to collect around Rs 3,063 billion during July-March (2019-2020) before the arrival of the pandemic against the revised target of Rs 3,521 billion, a shortfall of Rs 458 billion. If one generously agrees to similar collection during July-March, the board shall be required to collect and additional Rs 1,900 billion in the last quarter in an economy which is yet to see the toll of the pandemic.

The economic landscape does not support these numbers. Following last year’s 15.7 percent growth in sales tax recovery, the government proposes to collect Rs 2.9 trillion through indirect taxes. Sales tax contributed 38.1 percent to the tax revenues in FY2019-20. This, however, was mainly because of inflation. People have to pay more tax in rupees for the same quantity of purchase when prices are higher. The revenues from this head in FY2021 will drop as inflation slows. It has already declined from more than 14 percent to 8.22 percent in May2020.

The GDP growth rate target of 2.3 percent seems ambitious. Agricultural growth rate is likely to drop in FY2021 due to locust attack. Similarly, industry and services will struggle due to disrupted value chains and global economic meltdown.

Non-tax revenues in the outgoing fiscal year came mainly from State Bank profits. These will face a significant decline after a 525 base-point cut in the policy rate over the last 3 months, with further cuts likely in the months ahead. Add to this the announced cut in federal excise duties (FED) and locust impact on agriculture. It is in this context that the budget fails to be a roadmap for economic recovery. At best, it is a signal to the Fund that we are complying with the terms of the Extended Fund Facility (EFF).

The government has gone all-out to restrict the overall deficit to around 7 percent and the primary deficit to 0.4 percent of GDP as desired by the IMF programme. While this would have been good in normal times, it is not workable in a crisis. To cut the deficis, the government is holding the spending hand.

Despite the scale of pandemic and its socioeconomic fallout, the budgeted expenditures for 2020-21 of Rs 7.13 trillion is only slightly higher than Rs 6.83 trillion, the revised expenditures for 2019-20.

There can be no doubt that the government faced the challenge of keeping its commitments to the IMF. However, the Fund has ignored deficits arising from social spending including social protection, health and other incentives to support small and medium enterprises (SMEs) and micro businesses.

Only Rs 20 billion has been allocated for the sector which is not only severely hit by the pandemic but also will be shaping the socioeconomic fallout of the pandemic. A failure to protect the public health is likely to significantly affect the economy through productivity loss, absenteeism, reluctant consumers and other costs associated with Covid-19.

The same holds true for social protection. Budgetary allocations for Ehsaas are Rs 208 billion, compared to Rs 187 billion last year. Given the size, magnitude and vulnerability of people to the pandemic, this is less than required. The resources saved from freezing the pensions and salaries should have been shifted to social protection.

The Rs 650 billion federal PSDP, which needed to be increased, has faced a further 18 percent cut. One explanation for this may be that the sector will be covered in provincial spending. This, however, may not be true as provinces will also be facing a cut in resources. A higher provincial PSDP is only possible if the federal government borrows on behalf of the provinces.

The GDP growth rate target of 2.3 percent seems ambitious. Agricultural growth rate is likely to drop in FY2021 due to locust attack. Similarly, industry and services will struggle due to disrupted value chains and global economic meltdown.

Debt repayments remain major consumer of resources with Rs 3.235 trillion ($19.90 billion) earmarked for the purpose. The government has to make some arrangements to adjust debt repayments to create space for necessary expenditures. External debt servicing can be rescheduled. Similarly, tax collection needs to improve seriously if Pakistan has to maintain a minimum threshold of spending required to mitigate the effects of pandemic and ensure economic recovery.

The budget, claiming to be expansionary in stimulus, is limited mainly to controlling the deficits. It offers nothing to mitigate socioeconomic fallout of the pandemic.

The writer is a Research Fellow and heads Policy Solutions Lab at Sustainable  Development Policy Institute (SDPI). The views are author’s own and do not necessarily reflect the SDPI position

Neither a pandemic nor a growth-budget