One budget, different accounts
With focus on agriculture and exports, the federal budget sets ambitious targets
Agriculture: The main driver of growth.
The federal budget is being interpreted differently by different stakeholders. The ruling party claims it to be a pro-people, pro-growth budget. The opposition parties find it an “anti-poor” budget. Whereas, the masses feel that the things which hurt them the most (i.e., electricity tariff, petroleum prices, cost of living, cost of education, cost of food, and cost of transportation etc.) are not part of any budget. The cost of these items is determined by external factors ranging from market forces to hoarders.
Due to the peculiar nature of government revenue generation in Pakistan which predominately depends on indirect taxation, higher revenue targets means increased taxation irrespective of the income level. However, middle income groups and lower middle income groups feel the maximum brunt of indirect taxes. The poor, unfortunately, have nothing left to lose, whereas the rich are immune to price-hike shock.
Credit must be given to the PML-N government for meeting its tax revenue target of Rs3.1 trillion in the outgoing fiscal year. However, a detailed look at the budget document reveals that this increase was achieved through reliance on indirect taxes, mostly customs duties and sales tax. The taxes on income target were missed by Rs231.6 billion.
The FBR taxes target for the next fiscal year has been increased by another Rs500 billion. As there is not much increase in the number of tax payers so one worries that the target would yet again be achieved either through indirect taxation or by exposing existing tax payers to the new regressive taxes. Both measures would increase the miseries of common masses.
On the expenditure sides, the government is trying to invest in sectors which would boost growth in the country. After realising that poor performance of agriculture and exports were the two major factors hitting the GDP growth target last year, the federal government laid special emphasis on agriculture and exports in the budget.
Exporters complain about their sales tax refund with the FBR. While the finance minister has promised to clear all backlog of such refunds after following a certain procedure, accumulation of new refunds has been controlled through providing a zero rating regime for five major exports sectors (textile, carpets, cutlery, sports goods, and leather). It means neither the exporter would have to pay sales tax nor will they claim any refunds. This is a step in the right direction. However, it is not enough as our exports have suffered from a chronic policy neglect, most of which is beyond the control of Ministry of Commerce.
Exporters, for example, perceive Pakistani rupee to be overvalued against US dollar. They complain against high electricity tariff compared to the regional competitors. They also complain that Pakistan’s trade tariff regime is not very export friendly and needs to be reviewed. They hope things would get better after the import of LNG; however, till the last winter they were deprived of gas supply during winter month. Unless the above mentioned issues are addressed in a holistic way, one should not expect an overnight change in export performance. Unfortunately, many of these things did not get addressed in the federal budget.
The PML-N is historically known as an urban centred party that often ignores the rural development. Special emphasis on agriculture in the budget reflects that the PML-N wants to change this perception.
The PML-N is historically known as an urban centred party that often ignores the rural development. Special emphasis on agriculture in the budget speech reflects that the PML-N wants to change this perception and it should be appreciated that the government brought agriculture to its focus of attention. Subsidies on agricultural tubewells would reduce the cost of irrigation. Likewise, the subsidy on fertilizers would reduce the cost of input.
However, the federal government would require a strong cooperation from the provincial governments to make sure that tubewell subsidy is not misused and the benefits of fertilizer subsidy don’t just stop at fertilizer dealers. Like exports, the measures taken to revive agriculture are not sufficient.
Agriculture is getting affected from climate change. Climate change is about water, either there is too much water over a short period of time (leading to floods) or there is no water at all (drought). In both cases, we have to rethink our water management strategies and plans, which don’t seem to be there in the federal budget.
Credit must be given to the PML-N for meeting its tax revenue target of Rs3.1 trillion.
Likewise, we would have to conduct research on new varieties of crops which can tolerate heat and water stress. Last year, the cotton crop failure was not due to lack of availability of fertilizer, but due to lack of availability of certified seeds. It is good to note that the finance minister hinted at bringing Plants Breeders Rights (PBR) Act in Pakistan, which would encourage private seed corporations to invest in research and development. However, the PBR Act needs to be balanced by farmers’ rights acts who are the custodian of gene material for the last many centuries. Otherwise we would be in a situation where farmers would neither be able to save their own seed, nor exchange their seed with others.
Another important aspect for growth in agriculture is bringing agricultural universities, agricultural research centres, agricultural extension departments and district management at the same page. These four are working in their own silos without much coordination and integration. The federal government’s initiative would never work without a uniform support from the above mentioned four types of institutions.
The third important pillar for growth is Public Sector Development Programme (PSDP). An effective PSDP should result in increased opportunities for employment and livelihoods. The federal PSDP has been increased by Rs100 billion. However, this increase is for special development programme for temporary displaced persons and security enhancement, which in itself is a good thing to do but would not contribute in job creation. The rest of the PSDP is business as usual, which if implemented effectively, would sustain the current growth pattern but may not bring any revolutionary improvement in growth figures.
After examining the three major initiatives for growth, now let us see the broader budgetary framework. The current government would be the first one to successfully complete an IMF extended fund facility programme. Under this programme, the government had to curtail its fiscal deficit (difference between revenue and expenditure) to a pre-defined limit. This year the government has budgeted it to be at 3.8 per cent of the GDP.
After giving provincial share to the provinces, the federal government would be left with net revenue of Rs2779.7 billion. The two non-negotiable expenses that it has to meet are “mark-up payments and foreign loan payments” and “expenditures on defence affairs” — the former amounts to Rs1803.8 billion whereas the latter is Rs860.1 billion. In total, they make Rs2664 billion and are 95.5 per cent of the net federal revenue.
After making the two non-negotiable expenses, the government is left with 4.5 per cent of its net federal revenue — expenditures to run civil government, subsidies, pensions, and PSDP which would get financed through further borrowing up to the tune of 46 per cent of the net federal revenue (or 58 per cent if provinces does not come up with provincial surplus of Rs339 billion).
In these circumstances, one can pray for the government that it achieves its ambitious plans of growth through proposed federal budget, and for the people of Pakistan so that they can bear the brunt of additional taxes of Rs500 billion.
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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.