Trying to stabilize the uncertain economic conditions of the country, the PTI government has set an ambitious tax revenue targets in the first full-year budget for Rs7,022 billion, for fiscal year 2019-20. Despite a massive Rs1.405 trillion tax plan, the federal budget sees no major change in the overall fiscal deficit during 2019-20, which is set to come in at a record Rs3.15 trillion or 7.2 percent of GDP.
A spiteful range of taxes has been proposed on almost all sectors of the economy, in line with the International Monetary Fund (IMF) for a bailout package, with maximum focus on recoveries from income tax and sales tax. Income tax payers will bear a substantial effect of the new revenue efforts set to unroll for the new fiscal year, starting from July 01, 2019.
The government has increased income tax rates to a maximum 35 percent from 25 percent and reduced by half the taxable income bracket to Rs50,000 per month for salaried and Rs33,333 per month for non-salaried. From the head of income tax alone, the government is aiming to raise Rs258 billion of additional revenue in the forthcoming year.
Another key decision under the budget is the removal of zero-rating facility to five export-oriented sectors, including textiles. Despite strong opposition from the industry, 17 percent General Sales Tax (GST) has been imposed. However, government has promised for speedy refund claims against actual exports. From sales taxes, the government is expecting to raise Rs250 billion incremental revenue, via GST rate adjustments in various areas and elimination of zero-rating.
Also, the budget removed restrictions on sale and purchase of movable and immovable assets of tax non-filers. The tax rates has been increased on sugar, cement, steel and many edible items and facilitation has been offered on import of machinery and equipment for industrialization, including in the tribal region, which has been being merged with Khyber Pakhtunkhwa.
The government is expecting that the difficulties arising out of budgetary measures, including inflation, would subside over six months to a year period as the State Bank of Pakistan acts independently through monetary policy tools that point towards further hikes in interest rates. It will bring long-term benefits to the country through effective documentation of economy and expansion in the tax base.
The budget promised 10% increase in net pensions, 10% ad hoc relief on running basic salaries for grade 1-16 employees of the civil government and equivalent army personnel and 5% for grade 17-20 officers. However, there would be no change for officers of grade 21 and above in civil and equivalent armed forces officers. The members of the federal cabinet had volunteered 10% pay cut. The current civilian expenditures would be cut down by 5% or Rs23 billion to Rs437 billion next year from revised estimates of Rs460 billion.
The next year’s overall deficit would be 7.1 percent of GDP or Rs3.137 trillion, compared to 7.2 percent of GDP during current year. The budget documents have put the deficit number at Rs3.151 trillion or 7.2 percent of GDP. This would be achieved through a cash surplus of Rs423 billion expected from the provinces as the federal deficit was pitched for next year at Rs3.574 trillion.
The government has committed to the IMF that it will undertake a fiscal adjustment equal to 0.6% of GDP in the primary deficit given a massive bill of Rs2.891trillion in interest payments. The primary deficit is the difference between revenues and expenditures after debt servicing has been removed. As such, the budget sets an ambitious revenue target of Rs5.555 trillion for the Federal Board of Revenue (FBR) that missed its Rs4.435trillion target during current year by a record margin. The budget revised FBR’s collection target to Rs4.15 trillion. Yet the tax-to-GDP ratio will increase to 12.6 percent next year, with all the aggressive campaign from current year’s 12 percent.
The government would continue import compression and try to increase exports to reduce external deficit to $6.5 billion next year from $13 billion during the outgoing fiscal year. This would be achieved by supporting exports through revised duty structure on raw material and intermediate goods, improved tax refunds, competitive electricity and gas rates and redoing free trade agreements.
The government has promised Rs190 billion allocation for social protection through the food ration card scheme for one million deserving people. Special nutritious food for infants and mothers, interest-free loans to the poor and stipends to six million women through mobile phones.
The budget has promised Rs100 billion loans to the youth under the Kamyab Jawan Program. The federal and provincial governments would together provide Rs280 billion agriculture support program for the next five years.
The revival of public sector entities through a combination of corporatization, privatization and restructuring is also there. An amount of $2 billion would be raised next year through sale of two LNG-based power plants and $1 billion through cellular phone licenses.
To meet the requirements of the Financial Action Task Force (FATF), the government is planning to introduce a new system, through the State Bank of Pakistan, to end trade-based money laundering. A new directorate of customs would be created for cross-border movement of currency. The government is making efforts to ensure that the budget measures had minimal impact on price increases and where unavoidable due to international market would ensure that consumers are protected to the extent possible through social safety programs. The government would no longer depend on the State Bank borrowing with effect from July 1. It is a “difficult transition” to achieve within a minimum amount of time. The revised tax rates would increase the CNG price by about Rs3 per kg and LNG price by a few rupees per kg. The overall tax policy would target reducing exemptions in a phased manner, gradual improvement in the value-added tax region and revision in special procedures to ensure effective tax compliance.
The budget essentially represents multiple macroeconomic compulsions and fiscal constraints faced by the government. However the annual federal budget is gradually losing its significance and relevance the country’s economic environment. Irrespective of the ‘facts and figures’ stated in the annual budget statement, there have been a number of macroeconomic factors which together shape the contours of federal budget as well as the economic outlook of the government. Obliged by such factors, the federal government usually makes certain necessary fiscal readjustments in the budget in the form of a number of subsequent ‘supplementary budgets’ and periodical SRO’s, diminishing the utility and significance of the formal budgetary scheme.
The government generally sets some ambitious revenue and growth targets in the budget after exaggerating its economic performance. It prepares a reasonable annual balance sheet of the government’s expected revenues and expenditures. The annual budget statement made by the government minister has just become a mishmash of the federal government’s fiscal, monetary, trade and export policies. It also contains the micro-level details of its taxation measures and development plans. The unnecessary and irrelevant facts stated in the budget speech just obscure the crux of the federal budget- the revenues and expenditure, and the gap between the two i.e. fiscal deficit.
The fiscal deficit is one the most significant aspects of any government budget. The art of preparing a balanced budget includes keeping the fiscal deficit below its optimum threshold; which varies from time to time. There is a tendency of describing the fiscal deficit in terms of the relative volume of country’s GDP instead of the relative size of the budget. Such practice hardly portrays the exact picture and perspective of this phenomenon. Analyzing the Pakistan’s fiscal deficit with its GDP volume alone would be erratic and rather misleading. It is the country’s tax-to-GDP ratio which is all important, and which ultimately determines its capacity to manage its fiscal deficit as well as the accumulated public debt.
The total outlay of the proposed federal budget for FY 2019-20 is Rs7.022 trillion. The ‘consolidated’ fiscal deficit has been projected at 7.1% of the GDP. The net federal revenues would be around Rs3462 billion after transferring the provincial share under the 7th NFC award. So, the fiscal deficit is expected around Rs3560. The government has projected such deficit at Rs3137 after hoping to get Rs423 billion as provincial surplus. In-fact the actual fiscal deficit is likely to be even more than Rs3560 billion if the government doesn’t get the estimated provincial surplus, and fails to meet the ambitiously high Rs5550 billion tax revenue target. It is a very alarming state that the fiscal deficit would simply be equivalent to about 50% of the total budget outlay. It is almost impossible for government to manage the economy with a 50 percent budget deficit. So the government has to opt for deficit-financing; through public borrowing.
The Economic Survey of Pakistan is presenting a very depressed picture of the economy. According to it, the provisional GDP growth rate is estimated at 3.3 percent while the inflation rate increased to 7.3 percent. Pakistani rupee has been in free fall for the last few months. In such situation, expecting a 35-40% tax revenue growth while the country is drifting towards stagflation would be unrealistic but also be disastrous for an ailing economy.
In such a gloomy picture of economy, the government has to carefully set its long and short term promising but pragmatic fiscal targets to step out of the current economic vicious cycle. Some effective fiscal and monetary tools of macroeconomics should diligently be employed to overcome the country’s pressing economic woes. Each sector of the economy has its sectorial role in boosting the economy. Hence the government should focus on the revival of each ailing sector of the economy separately. There should also be prudential regulatory measures to reduce enormous inflationary and recessionary pressures on the economy. Government should focus on improving the general state of the economy through prudential fiscal regulation and structural reforms, rather than managing it on an ad-hoc basis.
It is certainly an annoying situation; where no serious resolve on the part of the government to put the economy on the right track. The political confrontation between the government and opposition has reach to such an extent that nobody is ready to sit together to resolve such issues in properly discuss public affairs in the Parliament. It is the call of the day that the government makes serious efforts to lower the rising political temperature rather than adding more fuel to the fire through its venomous propaganda. The prevailing economic uncertainty and political turmoil would damage the country’s troubled economy beyond redemption.