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An ambitious budget

Turning to current expenditure, debt servicing is expected to increase by Rs125 billion, defence by Rs57 billion, grants by Rs3 billion and civil administration by Rs23 billion. On the other hand, it is anticipated that subsidies will be reduced by Rs127 billion. Despite no increase announced in salaries, expenditure on civil administration is projected to grow by 9 percent. Therefore, the 30 percent cut in non-salary expenditure directed by the prime minister does not appear to have been implemented.

Another major development is a large increase of Rs110 billion anticipated in non-tax revenues. These revenues include Rs112 billion from the Coalition Support Fund (CSF) and Rs120 billion from the 3-G licences by the PTA. Both are subject to a degree of uncertainty. The required financing of Rs1651 billion is based 90 percent on domestic sources. Sources of external financing include Eurobonds of Rs49 billion and Rs99 billion from a ‘China Safe Deposit’. It is surprising to find that, despite lots of speculation, no support from Saudi Arabia is reflected in the budget documents. Proceeds from privatisation are projected to fetch Rs79 billion.

Development programme The budget for 2013-14 has an ambitious target for the size of the federal PSDP, with an increase of 50 percent – to Rs540 billion. The corresponding figure for the four provinces combined is Rs615 billion, implying an increase of 20 percent. The focus in development appears to be shifting back to the federal level.

The expectation was that with a throwforward (remaining cost of on-going projects) of Rs472 billion of the portfolio of projects in the power sector that it would receive the major share of allocations from the PSDP. Instead, it has been given only about 19 percent directly.
The National Highway Authority, a key agency for PM Nawaz Sharif – with his proclivity for motorways – gets a share of 12 percent. It is significant that the PML-N government is also focusing now on the rehabilitation of the railways, which was somewhat ignored in its previous tenures.

An unusual practice that has been adopted, perhaps for the first time, is the inclusion of a large bloc allocation of Rs115 billion, or 21 percent, for so-called ‘New Development Initiatives’. This clearly increases the discretionary powers of the government. The National Assembly needs to be informed of the specific initiatives proposed. Also, at this time of scarcity of resources, new projects ought to have been deferred, with the exception of key projects in the water and power sectors.

Taxation proposals There is a multitude of taxation proposals in the budget and virtually all sectors have been tapped. The FBR revenue target is Rs2475 billion, with a growth rate of over 23 percent in 2013-14, compared with a low growth rate of less than 7 percent in 2012-13. It can only be achieved with taxation proposals yielding as much as Rs230 billion.
There are some serious concerns about the impact of some of the proposals on the lower income sections of the population. The increase in the sales tax rate from 16 percent to 17 percent is one such example. Other proposals of a potentially regressive nature are the further 2 percent tax on sales to non-registered persons; additional 5 percent on top of the standard 16 percent on non-registered commercial and industrial consumers of electricity and gas; increase in federal excise duty on beverages and cigarettes; expansion in items which are chargeable to sales tax on retail price, etc.
In the area of direct taxes, the PML-N government has reverted back to the successful tax reforms it had implemented in its first tenure. This involved the extension of the withholding/presumptive tax regime to a large number of transactions. The result was a large increase in the direct tax-to-GDP ratio in the early 1990s.

In the latest budget, withholding taxes have been introduced for hotels, clubs, marriage halls, restaurants, cable operators, margin and trade financing, motor vehicles (in lump sum), foreign-produced films and TV serials. In other cases, presumptive taxes have been converted into adjustable withholding taxes.

There are also some innovations. The introduction of an earmarked income support levy on moveable assets is a progressive measure. But earmarking of taxes has been a failed experiment in Pakistan, starting with the Iqra Surcharge in the 1980s and the export development surcharge/cess more recently.

Clearly, one of the most important targets for 2013-14 will be FBR revenues. It is important that the morale of the FBR is raised after the chaos in recent months and a proper, more secure leadership put in place. Also, the time has come to implement major improvements for the modernisation of the tax administration as highlighted by the finance minister.

A major omission in the budget is measures to limit the trade deficit so as to reduce the pressure on the already low foreign exchange reserves. The PML-N manifesto includes the introduction of regulatory duties on non-essential imports. This measure should have been implemented at this time.

Finally, the budget proposes a big reduction in subsidies – by Rs127 billion or 35 percent, especially to the power distribution companies. Part of this may have to be achieved through an enhancement in power tariffs, possibly by 25-30 percent.

Therefore, a major concern for the coming year is that inflation may be back once again to a double-digit rate due to the large monetary overhang, increases in indirect taxes and the anticipated hike in power tariffs.

All in all, the 2013-14 budget is an ambitious first attempt by the PML-N government to restore the fiscal balance, while reviving the economy and protecting the poor through the enhancement of the minimum pension and the monthly subventions under the Income Support Programme.

But it is a fragile and risky budget with financing based on rapid growth of tax revenues, inflow of proceeds from privatisation, access to the international capital market, funding from friendly countries, reimbursement from the coalition support fund, etc. If one or more of these projections do not materialise then history could repeat itself with big slippages of the type we have seen in the last few years.
The writer is a former adviser to the PM for finance and economic affairs.

Dr Hafiz A Pasha, "An ambitious budget," The News. 2013-06-16.
Keywords: Economics , Economical issues , Sales tax , Economic growth , Budget , Saudi Arabia , China , PMLN , GDP , CSF , PTA , PSDP , FBR