More of the same?

As one may recall, while the budget for the Financial Year 2011-12 was being presented in the National Assembly, the opposition members from the PML-N had presented the finance minister with a piece of bread and hurled bangles at him in protest against the PPP government for allegedly aggravating the plight of the masses. The PML-N, together with other parties, had also opposed, and successfully so, the introduction of the Reformed General Sales Tax (RGST), which led to Pakistan’s premature exit from the IMF programme. Although no theatrics were seen during the presentation of the FY14 budget, the ruling PML-N has run the gauntlet of criticism from the PPP and other parties on the opposition benches for coming out with ‘anti-poor’ budgetary proposals including one percent hike in the General Sales Tax (GST). It seems all ruling parties think alike and those in the opposition seldom differ.

The FY14 budget is more of the same as, like the previous such documents, it brings out the constraints of a narrow fiscal space invariably faced by every government, civilian or military, strong or weak, in Pakistan: one, there’s massive public debt, reaching Rs13.63 trillion now, that has to be repaid or serviced; two, a huge military apparatus and a large civil administration have to be maintained with their perks, salaries and pensions and day-to-day expenditure; three, heaps and heaps of money have to be put into loss-making public-sector enterprises just to keep them alive despite pledges to turn them around; four, subsidies have to be provided to the people in one form or another.

All these expenses have to be met in the presence of rampant tax evasion together with the lack of political will to widen or plug up the tax net. Lacklustre economic growth and the menace of terrorism only compound the budget makers’ problems. The result is high fiscal deficit, disproportionate share of current and development spending in the total expenditure, and reliance on indirect taxation and borrowing to keep the wheels of the economy moving.

With projected federal government net revenue of Rs1.91 trillion and estimated expenditure of Rs3.59 trillion, FY14 will post fiscal deficit of Rs1.67 trillion, which constitutes 6.3 percent of the projected GDP for the financial year. For the outgoing financial year (FY13), the fiscal deficit is projected to be 8.8 percent of GDP. With due regard to the present government’s avowed commitment to austerity, the FY14 fiscal deficit, as in the past, may overshoot the budgetary target because of both increase in expenditure and revenue shortfall.

The total estimated federal government expenditure breaks down into Rs2.82 trillion current spending (79 percent of the total expenditure) and Rs762 billion development expenditure (21 percent of total expenditure).

The share of the current and development spending in total federal government expenditure in FY13 budget was 81 percent and 19 percent respectively. With 41 percent share, the single largest item on the FY14 current expenditure, as always, is debt servicing of Rs1.15 trillion. This is followed by defence spending of Rs627.22 billion (22 percent share), Rs367 billion for external loan repayment (13 percent share), Rs337 billion administrative expenditure (12 percent share), and Rs240.43 billion subsidy including 185 billion to the power sector.

The Rs762 billion development expenditure, which represents 38 percent increase in the revised estimates for the preceding year, includes Rs540 billion public sector development programme (PSDP) and Rs75 billion Benazir Income Support Programme.

The latter envisaging direct income transfer is primarily not a developmental project, for such programmes, despite their enormous social and political merits, don’t directly contribute to the productive capacity of the economy. Therefore, its allocation should have been placed under the head of the current expenditure. An amount of Rs225 billion has been allocated for the beleaguered energy sector and 115 billion for ‘new development initiatives,’ which presumably will include some mega infrastructure projects.

Expenditure is one side of the budget equation, whose other side is revenue. The federal government’s gross revenue receipts are projected to be Rs3.42 trillion, out of which Rs1.50 trillion will be transferred to the provinces, leaving Islamabad with net revenue of Rs1.91 trillion. The tax revenue target for FY14 is Rs2.60 trillion representing 22.3 percent increase over the FY13 revised estimates.

Pakistan has one of the lowest tax-to-GDP ratios in the world – 8.8 percent – and the government wants to raise the same to 9.5 in FY14 and further to 11 percent by the end of FY16. This will entail reform of the tax collecting machinery and broadening of the tax net, which successive governments have been shy of doing

The share of direct and indirect taxes will be Rs975 billion (38 percent) and Rs1.62 trillion (62 percent) respectively. Hence, indirect taxes will continue to have the lion’s share in feeding the economy. These taxes, though easier to collect, are inherently inflationary as they drive up final prices of goods. Besides, indirect taxes hit the low income group harder, as the final consumer will have to bear equal tax burden irrespective of his income.

This makes such taxes regressive. Hence, not surprisingly, the proposed hike in GST from 16 to 17 percent has come in for adverse criticism at the hands of both the opposition and the public, especially when read with the proposal to bring down corporate tax by 5 percent (one percent annually).

The treasury argues that the proposed GST increase was necessary for shoring up public revenue and that the essential food items by and large are exempted from the tax. The question is: could the government not resort to some alternative means to drive up the revenue?

The fiscal deficit will be met through Rs1.48 trillion domestic and Rs576.61 billion external finance. The latter includes Rs467.43 billion loans and 108.98 billion grants. What has happened, one may ask, to the PML-N promise, renewed from time to time during last five years, of breaking the begging bowl? Such promises aside, the new government seems to have made up its mind to go back to the International Monetary Fund (IMF) mainly to work off the existing debt the nation owes to the multilateral donor.

The domestic resources include Rs975 billion bank borrowing and Rs507 billion non-bank debt. The government has decided to reduce net borrowing from the central bank to zero. This is a good initiative as such borrowing, which takes the form of printing of money, fuels inflation. However, the previous government had also decided to eliminate net borrowing from the central bank but ended up by raising the same to record levels, partly because of revenue shortfalls and partly because of lack of foreign capital inflows. So good luck to the PML-N government!

During the budget speech, the finance minister announced to eliminate the Rs500 billion circular debt, a bane for the power sector, in two months. Though the target may seem ambitious, if met, it will help put the economy on the right track besides giving a big boost to the popularity of the ruling party. One hopes this announcement doesn’t share the fate of the preceding government’s repeated promises to put an end to power shutdowns.

Caving in to public pressure, the finance minister announced a 10 percent increase in salaries of government employees. This is only a glimpse of how difficult it is to contain current expenditure and how challenging it will be for the government to restructure mega PSEs, such as the Railways, the PIA and the Pakistan Steel Mills, which, inter alia, will entail laying off the surplus staff.

The author is a freelance contributor. Email: hussainhzaidi@gmail.com