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Dar’s the die-hard optimist

Dar, a certified chartered accountant, very smartly used creative accounting to falsely take the credit for slashing the fiscal deficit by 2.5 percent of GDP in the upcoming first year of PML-N’s government. The budget deficit for the outgoing fiscal year was expected at 7.7 percent of GDP, however Dar announced it to be estimated at 8.8 percent in his budget speech yesterday.

The simple reason for this ballooning of 1.1 percent of GDP is to put the brunt of financing of circular debt through government borrowing in 2012-13. On the other hand, actual financing is supposed to be done under the rule of new government. That is how the deficit in 2013-14 is going to be curtailed to 6.3 percent. Had the elimination of the circular debt been accounted in 2013-14, the fiscal deficit in both the years would have been almost the same. Isn’t it smart accounting?

Even to take Dar’s tall claim at face value, the differential of 2.5 percent in a year is not the highest in the history of the country. In 2008-9, the first year of PPP government, the fiscal deficit was shrunk by 2.7 percent to 5 percent from the previous year.

This summarised the tone of Dar’s budget speech. At the time when the economy is growing at a slow pace and FBR tax is estimated to grow by 6 percent in the outgoing year, tax growth target of 23 percent is too optimistic. Plus, when the economy growth is not robust, higher rate of taxes can check the growth momentum and is inflationary in nature. Mind you, that is also a violation of the manifesto of the PML-N. The rationale for increasing GST to 17 percent is not aligned to medium term frame work of gaining growth rate of 7 percent by 2015-16.

There are hints of imposition of wealth tax through the levy of 0.5 percent on movable assets. It is regressive in nature and hinders wealth creation within the country. Then there are some cases of introduction of withholding taxes on various services which were totally out of the tax net. That is good and is a step in the right direction.

However, it has to be dealt very carefully, as the culture of having more reliance on withholding tax takes us to the presumptive tax regime as small to medium businesses do not file returns and withholding tax in essence becomes full and final tax. In the past this had proven to be a disincentive for the FBR to work on collecting income tax. The government and FBR should learn from past mistakes.

There is no concrete step taken to broaden the tax net. With this approach God knows how the government would be able to raise tax to GDP from 9 percent to 15 percent. Nonetheless, the business-friendly government has finally taken a step towards facilitating corporatization of businesses. The tax gap between companies and private partnership is proposed to be reduced in the staged manner. Had the income tax on companies in one go reduced to 30 percent, the confidence of new investment and incentive for small to become larger would have been substantial. Anyways, slashing it by one percent each year to 30 percent is better than the status quo.

The optimism is reflected in the 15 growth target in the non-tax revenues at a time when US is exiting from Afghanistan so the chances of handsome inflows from the Coalition Support Fund are thin. Expecting swift inflows from the long-pending 3G license auction and privatisation of PTCL is also tantamount to building castles in the sky. And to slash fiscal deficit to 4 percent in medium-term it is imperative to do away with subsidies and other losses. There is a need for clear and executable privatisation and corporatization plans for bleeding public sector entities. The upcoming fiscal year will unfold on the government’s progress on fulfilling its promises. Dar in his speech was vocal on the corporatization of Pakistan Railways and apparently the PMLN team has a plan in the works.

The foremost and immediate challenge is to straighten the DISCOs and electricity tariff rationalisation. In order to meet the targets of low subsidies, the electricity tariffs have to be increased immediately. The difference of what NEPRA has proposed and what is currently charged is close to Rs 6 per unit. But even bringing this gap to half in this heat and load shedding is a tough political decision. And if the government is able to swallow the bitter pill, inflation will follow

Nawaz and his team are mature enough to recognise the importance of social safety nets at a time of increasing poverty. They have not only continued but also expanded the income support programmes. Plus, the plans for youth in providing technical skills, raining to graduates and laptop scheme are going to help in empowering youth. In a nutshell, it’s a decent effort by Dar and his team considering that they had no time to prepare, deliberate and present the budget. Going forward, caution is the word PML-N has to insert in its dictionary to manage the dicey economy.

Ali Khizar Aslam, "Dar’s the die-hard optimist," Business recorder. 2013-06-13.
Keywords: Economics , Economic issue , Economic policy , Economic growth , Economic development , Budget 2013-14 , Pakistan , GDP