Published Date: May 10, 2016
Behold the power of leaks! In less than a month, Panama Leaks have already forced PM Nawaz to address the nation twice and hold a series of ‘jalsas’ and other public appearances. It is anybody’s guess as to whether the leaks will force him to visit the parliament when it meets next; though this time it appears less likely since unlike the PTI-PAT episode, even the PPP is out to get him. But what could be said with certainty is that the leaks will force his government to announce a ‘populist’ budget despite weak coffers.
At the time of writing this, the usually reliable sources in the Finance Ministry said it was too early to say anything. “Our meetings with the IMF are still underway in Dubai, which is why the exact nature of the leeway cannot be commented upon as yet,” he said over the weekend. However, channels checks with those closely involved in pre-budget negotiations with the government and our own understanding of affairs makes us punt on a few broad items, which are discussed below in itemized form.
First things first! Votes! Weak coffers and weak political capital aren’t the best combination to have. However, there is good old optics, and kicking the can down the line. The former includes some version of PM youth schemes (think laptop, youth entrepreneurship, etc), a hike in minimum wage, and also some hike in the salaries of government employees, which some insiders fear could be as high as 20 percent. The latter can include a raise in pension, which means promise now and pay later.
On the agricultural front, a kind of subsidy has already been given in the shape of lower feedstock prices; don’t be surprised if DAP is also subsidized in the coming budget. And one can only hope that sanity would prevail and the government will not raise wheat support prices.
While super tax and alternate corporate tax are likely to stay put for another year, corporate income tax rates will continue to go south as per the plan announced in FY13 budget. Some insiders also expect an announcement to push it southwards (till 28%) in the ensuing years to help avoid a hit on current revenues and offer a lollipop at the same time.
On a sector-specific note, it seems quite evident that some rationalization of taxes is on the cards for telecom and tobacco sectors, as both sectors have been upping their lobbying game in Islamabad like never before.
What is likely an extension in both the scope and the rates of WHT for non-filers, now that the strategy is finally showing some results? But in the interest of saving its political capital, the PML-N would likely refine that list to ensure its own supporters don’t resolve to shutter power.
Customs duties, however, will continue to be raised on items which can easily be classified as ‘luxury’. That move can help raise some revenues and also help PML-N portray itself as a government that taxes the rich to feed the poor. On that note, some rationalization of sales tax on inputs such as diesel and agricultural items should also be expected.
Meanwhile, an extension in Income Tax section 65 (particularly 65c) that deals with tax credits on investments is quite likely. If indeed that happens, the credit should go to the OICCI (well at least in part) that advocated for it, in the interest of attracting FDIs.
Sources in Q-block say the IMF has shredded the idea of single-stage sales tax; and quite frankly that was an outside chance in any case. However, in what would likely be received positively by both exporters and bankers, the government is expected to issue a 3-year tradable bond to raise monies for the ballooning tax refunds. In the case of direct taxes, the lowest income tax slab for individuals and association of persons is expected to be raised slightly to help get some political mileage without taking a major hit on revenues.
On the expenditure side, defence spending is likely to witness a more-than-average growth, which can be attributed to a confluence of factors, including PML-N’s weak political capital, growing security needs for CPEC, and expansion of anti-terror military operations, which recently also included the mandate of capturing the Chotu Gang in Punjab.
The PSDP is expected to be aligned to the CPEC, and sources with close ties with the P-block say, this budget will reveal the government’s priorities in terms of the CPEC projects. Donor flows, however, are put on hold due to the NGO crackdown, whereas multilaterals are figuring out how to align themselves to the CPEC. Ergo, no new programme funding is in the pipeline from the donors.
With the country soon graduating out of the IMF programme, there are clear and visible signs that the government is least bothered about reducing leakages in PSDP and improving its spending efficiency, plugging fiscal leakages from public sector entities and addressing the circular debt. But then, these have been a constant factor since many years.
The other thing that is likely to remain constant is: zero to little efforts towards direct tax collection in direct mode, which leaves annual tax revenue targets subject to multiple revisions, and gives the ECC a playing field to announce mini budgets of sorts all along the year, or clash PSDP by fiscal year-end or both. Then again that’s no news. As Dr Vaqar Ahmed of SDPI puts it, budgets in Pakistan have had no sanctity since the 70s. Why should this time be any different?