June 22 - 28, 2009

Federal Budget for the financial year 2009-10 with a highest ever outlay of about Rs2.9 trillion was presented before the National Assembly by the Minister of State on Finance & Economic Affairs, Ms. Hina Rabbani Khar. In her budget speech, she claimed that the budgetary measures would boost the economy, create new jobs, alleviate poverty, bring down inflation, curtail unproductive expenditures, raise tax revenue, and provide relief to the poor and common man.

According to analysts, however, the speech was rhetorical. They believe that the budget is neither growth oriented nor people friendly. The inflation is not going to come down and as such, no relief to the poor is in sight. As a commitment to the IMF, drastic cuts have been made in the subsidies for power sector. This will result in increase of electricity tariffs, which would increase the cost of every thing.

Announcing its second budget, the PPP led government estimated total revenues of Rs2174.9 billion and budget deficit of R722.5 billion (about 4.9%). Hina Khar unveiled a budget with an outlay of Rs2.48trillion, with current expenditure of Rs1.69trillion including the defense budget of Rs342.9billion and development expenditures of Rs783.1billion. The tax revenue target has been estimated at Rs1.51 trillion, of which the FBR will collect Rsl.378 trillion in 2009-10. The size of the Public Sector Development Programme (PSDP) for 2009-10 will be Rs646 billion with provincial share of Rs200 billion. An amount of Rs25 billion has been allocated to the Earthquake Reconstruction and Rehabilitation Authority in the PSDP 2009-10.

On the war against terror and its costs, Ms. Khar said, "We now face the prospect of incurring huge costs on account of counterinsurgency expenditures and the government has a big challenge to deal with as millions are left homeless due to military operations against the Taliban. We have to meet the maintenance and rehabilitation costs of almost 2.5 million brothers, sisters, and children displaced as a result of the insurgency." "The international community has pledged its support for this human cause. However, your government is fully conscious of its responsibility and has allocated 50 billion rupees," she said. Pakistan has also increased the salaries of soldiers fighting against militants in three northwestern districts and along the rugged border with Afghanistan from July 1, and rest of the troops would get increased salaries from January 2010.

She said, "Today, the nation stands behind our valiant armed forces. No amount of compensation is adequate to cover the risk to one's life. I hope this small gesture on the part of the government helps in building the morale of our jawans (soldiers) and officers in the war against terror." Ms Khar said Pakistan had paid a price of about $35 billion for joining the US-led war against terrorism in 2001. We are facing huge expenditures to get rid of militancy. Our armed forces are in the forefront in the war against terrorism and militancy. Our western border is facing the most uncertain situation," she said, referring to the Taliban insurgency.

The government has taken new tax and non-tax measures. Experts said the government would tax the already taxed sectors and no additional areas had been included in the tax net, though the federal cabinet had decided that agriculture would be taxed in the budget. Rs264.9 billion external loans and Rs457.6 billion domestic borrowing will be arranged to bridge the huge fiscal deficit of Rs722.5 billion, depending upon the external inflows, which are not guaranteed in the budget. The huge amount of Rs779.5 billion has been earmarked for debt servicing, which is alarmingly higher up to 127 percent if compared with the defense allocation of Rs342.9 billion.

Influential agriculture lobbies, both inside and outside the government, have once again succeeded in forcing the government to exempt the income of agriculture from tax. The government also announced over Rs12billion subsidy for the sector that ultimately goes to the pocket of big landlords. Keeping agriculture sector untaxed indicates that about 22% of the GDP would still be out of tax net. As against this, the government had planned to impose Rs8per liter carbon tax surcharge on high-speed diesel, Rs10 per liter on motor spirit Rs6 per liter on Kerosene oil, Rs14 per liter on HOBC and Rs6 per liter on compassed natural gas (CNG). It is pertinent to mention that CNG has never been exposed to PDL earlier, but the carbon surcharge on CNG would have resulted in Rs6 per kg. The government is reported to have cancelled its decision of levying carbon tax on CNG.

In such a scenario dotted with economic slowdown, deteriorating law and order situation, and people burdened with un-abating inflation, the government was expected to present a bold budget with some out-of-box fiscal policy measures. What we see is a feeble attempt at balancing figures and a document devoid of the necessary innovation warranted by ominous circumstances. Instead of widening the tax dragnet, the government has yet again ended up by levying taxes on the already taxed and mainly is relying on such taxes, which will encumber the consumers. The budget should have articulated a stronger response to the challenges facing the economy and to the plight of people, unfortunately, it did not.

Incentives for the productive sectors of the economy should have been stronger. Some credible measures could have been proposed to contain inflation. The effort to balance the income and expenditure of the government appears more regressive than progressive for the economy, and not to provide relief to the masses. For those groaning under poverty or suffering at the hands of ballooning prices, especially those of essential items, the budget seems to offer little solace. Even lifesaving drugs have not been exempted from the duty.

The federal budget for 2009-10 is essentially based on double-edged strategy for resource mobilization. On the one hand, taxes have been imposed on number of items such as cigarettes, certain specified services, imports of commercial nature, property and high-incomes and on the other, subsidies have been heavily reduced, specially in power and petroleum sector. The impact of these measures will be wide-ranging and likely to be quite harsh for the common person.

The government's revenue income for the next financial year has been placed at Rs1513 billion. The CBR collection has been estimated at Rs1378 billion against Rs1180 billion in revised estimates for last year. However, the total tax revenue target is quite heavy, indeed, and while its impact will be felt all around, the risk of slipping on such high targets cannot be ruled out. This is specially so as economic growth for the next year has been projected at 3.5 percent. The risk of missing subsidies worth Rs120 billion have been reduced. These will come down from Rs252 billion in revised estimates of 2008-09 budget to Rsl32 billion. Since most of these reductions in subsidies relate to power sector (WAPDA and KESC), power rates will inevitably go up. Subsidy on petroleum sector will go down from Rs70 billion to Rs15 billion. In the original budget of last year, subsidy on this account was Rs140 billion. This will also mean an extra burden on people and various sectors of the economy.

The overall picture is that the government's net revenue receipts will be Rs1371.5 billion in 2009-10 (total tax and non-tax revenue minus provincial share) against the current expenditure of Rs1699 billion. Quite obviously, there is a clear need to bridge this gap. The revenue income (tax revenue and non-tax revenue) should be able to finance at least the entire current expenditure. Among current expenditures, the largest chunk of money will be consumed by debt servicing, both foreign and local, which is estimated at Rs.778 billion. In the next year's budget, external assistance has been placed at Rs510 billion and net capital receipts at Rs190 billion. This shows that heavy dependence on external and domestic borrowing has continued despite levy of new taxes and withdrawal of subsidies.

The Rs783 billion development programme will be, it appears, dependent on borrowings. It is, therefore, a hope that commitments of external assistance will be met in time. Or else, development effort may suffer as we already witnessed this happening this year. A sum of Rs157 billion has been allocated for other development expenditure (other than federal and provincial development programmes) but the details are not given. High allocation of Rs47 for power sector is understandable in view of power shortages.

Much will depend on the implementation of public sector development programme, which will hinge on timely availability of resources and overall security environment in the country. The government has committed itself to an ambitious target of bringing down the rate of inflation to single digit. It has been much too high this year. The recently released Economic Survey put the rate of inflation at around 21 percent (food inflation being still higher at 26 percent). That how this will be brought down to single digit has not been adequately explained and clearly, the government has deliberately eschewed an honest talk on the most critical of issues.

There are as usual relatively small allocations for social sectors like health and education but the provinces ought to focus on these areas. While poverty figures are under debate, the government's promise of making a more determined effort to reduce will be tested during the course of the year. The increase in Benazir Income Support Programme to Rs70 billion could provide relief to a larger number of people but again only if the right people, the poorest of the poor, are targeted.