The national and provincial budgeting cycle has come to an end, though Pakistani governments often present mini-budgets through tax and rate hikes later on. They also rarely stick closely to budgeted revenue and expenditure estimates. Thus, analysing Pakistani budgets means analyzing to some extent wishful intentions. Nevertheless, a comparison of the national and five provincial budgets produces several interesting trends on both revenue and expenditure side.
Overall, only 65% of the funds that the federal government plans to generate for its own expenses and the provinces will come from tax and non-tax receipts while a hefty 25% will come from internal and external debt-related inflows. The rest will come from aid grants and miscellaneous inflows. Thus, the federal government plans to incur new net debt of over Rs 1.5 trillion while the provinces will incur an additional Rs 100 billion. This is unfortunate since the federal government could easily collect more taxes, thus eliminating much of this debt accumulation. A World Bank review of Pakistan’s tax efforts in 2009 had conservatively estimated Pakistan’s federal tax gap, ie, the amount of tax that remains uncollected due to non-compliance based just on existing tax laws, to be roughly 70% of taxes collected or around 8% of GDP. Even collecting half of it would yield fiscal savings of around 4% of GDP or around Rs 1 trillion annually, eliminating the need for much of the new debt incurred. Imposing new direct taxes (eg, capital gains taxes) could completely eliminate the need for incurring new debt, provide additional funds for retiring existing debt gradually and increasing spending on social sectors. Within tax receipts, direct taxes (almost entirely consisting of income taxes) only account for 38% of projected tax revenues, with the rest coming largely from indirect taxes. Thus, federal sales taxes are the single biggest source of federal tax revenues, providing 37% of total tax revenues, ie, the same as direct taxes and higher than income taxes. Global reviews generally deem direct taxes as being better for economic equality and more suitable during economic slowdowns.
The situation at the provincial level is worse. The percentage of their total annual budget that provinces aim to generate from their own tax and non-tax receipts versus transfers from the federal government is roughly 18% and 70% for KP; 17% and 60% for Punjab; 18% and 70% for Sindh; and 9% and 73% for Balochistan. The rest will come from aid grants and miscellaneous inflows. Thus, none of the provinces is in a position to even generate one-fifth of its annual outlays from its own resources. This is primarily due to the fact that the most productive taxes, eg, income tax and GST on goods, lie with the federal government. However, even so, there are several avenues for provinces to expand their own resources, eg, agricultural tax, GST on services and property tax, thus freeing up federal government revenues for debt retirement. By allocating nearly 60% of federal tax receipts to provinces, the 7th National Finance Commission award has reduced the incentive for provinces to significantly expand their own tax collections. That said, provinces have increased their tax collections in recent years, but there is still scope for more provincial collections.
There are wide differences in the sources of the revenues that provinces generate themselves. Sales tax is the single biggest tax source for all provinces while direct taxes percentage ranges from 18% for Punjab to 8.5% for Balochistan. Tax receipts account for 72% and 85% of total indigenous provincial receipts for Punjab and Sindh respectively while non-tax receipts, ie, fees, rents and other charges, account for 74% and 82% of indigenous provincial receipts for KP and Balochistan respectively. Much of this may be due to the fact that the latter two provinces lack major agriculture and industry, unlike Punjab and Sindh. However, there is a need for more in-depth analysis of the total revenue potential of all provinces and the federal government, which could then become the basis for increasing revenue collections, reducing debt and increasing social expenditures.
On the expenditure side, nearly 38% of the federal government’s own planned expenditure is on debt servicing. This represents an increase from 35% during the last year. Thus, debt servicing is eating up increasing chunks of federal receipts. Development expenditure is projected at nearly 20% of the budget. However, this includes nearly Rs 100 billion of expenditures on the Benazir Income Programme, which largely funds current consumption by beneficiaries. Thus, it is debatable whether this outlay should be included under the development budget or the social protection chapter of current expenditures. Finally, defence expenditures account for 16% of the projected expenditures. The federal budget allocates very little for health (0.9%), and education (2%) current and development expenditures. Given that these sectors have been devolved to provinces, this may not be bad so long as provinces allocate large sums to the social sectors. Provinces do plan to actually spend substantial proportions of their total current and development budgets on health and education, with KP leading at 36%; followed by Sindh at 30%; Balochistan at 27% and Punjab lagging far behind at 12%. However, even in the three earlier provinces, ground level analysis of the status of basic health and primary and secondary education centers reveal extremely poor quality of services. Thus, even this large proportion of expenditure has not helped improve service delivery. Looking at the consolidated federal and provincial budgets, only 3% of these combined budgets will be spent on health and only 7% on education. Planned expenditure on other critical sectors like environmental protection, social protection and community amenities is next to nothing.
A peculiar feature of Pakistani budgets, both on the expenditure and revenue side, is their lack of strategic intent. Annual budgets represent the main tool available to the government for implementing its various policies. Thus, different Pakistani ministries have ambitious policies such as the debt management policy, trade policy, industrial policy and economic growth policy. The annual budgets must be formulated in such a way as to give a clear idea of how these various policies are likely to be implemented in the coming year. However, the budget contains no descriptive sections to highlight how the coming budget will implement these various policies. Nor does going through the budget figures give one a clear idea in this regard. It is thus not surprising that these policies stay largely unimplemented. Thus, Pakistani governments must craft their budgets in a more strategic manner so as to clearly reflect the main aims of different government policies.
Pakistan also needs to make a major fiscal adjustment to reduce its yawning annual fiscal deficit, arrest its rapidly increasing debt and increase expenditures on social and economic sectors. Since debt servicing presently devours 4.5% of GDP, the fiscal deficit must be brought to around 3% of GDP from 6-8% presently for Pakistan to reduce its debt burden. Pakistan must spend another 5% of GDP on health, education, infrastructure development and disaster preparedness. Thus, Pakistan must make annual fiscal adjustments of around 8-10% of GDP through revenue increases and expenditure reductions. Such revenue increases and expenditure reductions must respect the critical goals of growth, poverty and inequality reduction and administrative and political feasibility. Keeping in mid these goals, the optimal strategy would be to start by eliminating government waste and corruption on both civilian and defence expenses; followed by the elimination of the losses of public sector enterprises. Attention could then revert to revenue side measures, which should focus primarily on direct taxes by reducing leakages in undertaxed sectors like agriculture, transport, domestic trade and retail, capital gains in property and stocks and the informal economy.Niaz Murtaza, "Comparing budgets," Business recorder. 2014-08-23.
Keywords: Economics , Economic issues , Financial matters , Property tax , Property issues , Budget , Agriculture , Provincial collections , Pakistan