Assessing the Federal Budget
The PML-N government has made history by presenting its 6th federal budget in five years tenure of the government. The good news is that federal budget 2018-19 tends to depart from decade old practices such as new formula for valuation of property and proposes to abolish FBR rates (in the federal territory) and Deputy Commissioner rates (in the provinces). In an unprecedented manner, FBR is provided with the powers to acquire any undervalued property. Similarly income tax slabs for individuals are simplified, income tax rate is reduced, and some tax incentives are announced for capital market and corporate sector too. All of this is a change from other finance minister’s policies who followed, ‘a bird in hand is better than two in bushes’ policy and overburdened the existing tax payers. As a salaried person, I am a direct beneficiary of tax slab/rate reduction so would welcome it at personal level. Tax amnesty scheme (now formally presented in the budget) is also a lucrative offer for those who have hidden assets. They can avail an amnesty after paying a negligible penalty.
Increased allocations for BISP, 10% ad-hoc increase in salaries and pensions, continuation of some of the incentives for industry, and reduction in sales tax on fertilizers etc., are also some of the positive steps in the budget.
However, the bad news is that despite proposing some unconventional and innovative measures to broaden the tax base and document the economy, the budget still follows a traditional, static, and nonflexible framework. Assuming that despite all the tax cuts, FBR would be able to meet 12.7 increased target in 2018-19, the net federal receipts would be Rs 5660 billion. Out of this, provinces would get Rs 2590 billion as their share. This leaves federal government with Rs 3070 billion and it has to spend Rs 5246 billion. This leaves a net deficit of Rs 2175.8 billion. The deficit is 41.4% of the budget or nearly half of the budget.
Federal government has to spend on four ‘Ds’ ie, Debt servicing, defence and security related expenses, day to day running of civil government, and development. The first three Ds are non-negotiable and non-discretionary. Rs 1620 billion for mark-up payment, Rs 110 billion for defence affairs and services, 601 billion foreign loan repayment, 463 billion for running of civil government, 342 billion for pensions. No matter whoever comes in power after the election would have to take care of above mentioned expenses. A total of Rs 4780 billion are required to meet the current expenditure and federal government has 3070 billion in its pocket. That means, government would have to borrow to take care of mandatory expenses. Then it has to take care of ‘development’ or discretionary expense. This year PSDP is budgeted at 800 billion rupees. Like always, PSDP would be delivered if the government managed to arrange domestic or foreign borrowing or assistance. Otherwise it would be cut to size.
On the whole, the budget comes with some visible relief measures and some invisible inflationary measures
Within this non-flexible framework, there would be very little room to experiment with innovative ideas as next government would face the challenge of containing fiscal deficit which is budgeted as 4.9 percent of GDP (1 percent of GDP is 385 billion rupees). It is assumed that the provinces would throw a provincial surplus of Rs. 285 billion. This is not going to happen, in the outgoing year provinces gave a deficit of 163 billion against a budget of 274 billion. One assumes that the same would be repeated next year and this 285 billion would not come through. Then the budget proposes 100 billion in its tax revenue as gas infrastructure development cess (GIDC). In the outgoing budget it 110 billion rupees were expected from this head, and government could get only 15 billion. The GIDC is challenged by province and it would be naïve to expect this 100 billion in the federal kitty. The provincial surplus and GIDC amounts to 385 billion which is one percent of GDP. Thus the fiscal deficit would be 5.9 percent of GDP if all other factors remain constant.
However, problem would be that other factors would not remain constant. As a result of tax relief measures, there would be a cut on direct taxes. This would be compensated with indirect taxes and ‘other taxes’. GIDC is one of the other taxes. Still another is petroleum levy. Which is proposed to be increased to rupees 30 per litre. This levy ranged between Rs 3 per litre in case of light diesel oil to Rs 14 per litre in case of high octane. Government has successfully collected 170 billion against a budgeted amount of 160 billion under this head. Now it plans to collect 300 billion from it. Oil prices are going northwards in international market (US$ 70 per barrel today). Although Finance minister assured that increase in levy would not affect petroleum prices in domestic market. However, one fails to understand where the additional levy would be parked if not charged to consumers. Government does not have the cushion to supply fuel at a subsidized price and including the revised levy in prices would give rise to energy inflation which would automatically increase the cost of all related items. Not revising the levy upward would mean another half percent of GDP increase in fiscal deficit, which would take the figure to 6.5 percent.
The budget is silent about it, but the next government would have to face the challenge of mounting energy circular debt (which has surpassed 1 trillion rupees, including the amount parked in power holding company). Likewise the whole issue of loss making public sector enterprises (PSEs) would haunt the next government. Opposition has been opposing privatization of PSEs so far. However, it would be interesting to see the behaviour of political leadership on this issue, if there is a change in role between current treasury and opposition benches.
Within these constraints, a major challenge for next government would be to reduce rural poverty. Economic survey of Pakistan released a day before budget presents a bleak picture of rural poverty. It says that poverty has decreased nationally, but urban poverty in 2015-16 stood at 12.5 percent whereas rural poverty was 30.7 percent. One can argue that all the relief measures presented in the budget take care of urban dwellers (who pay income tax) or own shares, or have corporations. Rural development may be a provincial subject, but without budgetary guidelines and concrete steps from federal government on tackling rural poverty, we may end up in a conflict between ‘haves’ and ‘have not’ where rural population may perceive that it is being marginalised by urban elites. This perception would play a major role in demand of new provinces including ‘Janoobi Punjab’ province.
On the whole, the budget comes with some visible relief measures and some invisible inflationary measures. The innovative ideas of tax reforms and documentation of economy should be welcomed, while a political consensus should be fostered on how to change the framework of budget making where such innovative ideas may flourish.
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.