WILL BUDGET 2011-12 HIT THE POOR?

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)
June 13 - 19, 20
11

With an outlay of Rs2,767 billion, Pakistan's Finance Minister, Dr Abdul Hafeez Shaikh on June 3 unveiled the federal budget for the next fiscal year 2011-12, envisaging a deficit of four percent of GDP.

The budget allocates over 50 percent of the total budget spending to defense and debt servicing, leaving little funds for education, health, and social development. The provinces are supposed to present a cash surplus of Rs125 billion during next year to contain the overall consolidated deficit at four per cent of GDP, or Rs850. The provinces are estimated to get Rs1.224 trillion as share out of the federal divisible pool, up 23 per cent from the current year's revised estimate of Rs993 billion.

Critics call it a budget prepared under the diktats of the International Monetary Fund (IMF), which had reportedly conveyed to Islamabad that the success or failure of next round of talks in July for release of the next tranche of $ 11.3 billion loan depends upon the measures proposed by the government in the new budget.

Analysts believe that the budget will hit the poor, as it contains fresh taxation measures of about Rs105 billion and less relief measures for the people already reeling from high inflation.

Speaking at a post-budget press conference, the finance minister Dr Shaikh announced on June 4 a five-year tax holiday on loan-free equity investments, called for checks and oversight of defence expenditures and identified the rising debt servicing as a major challenge for the country.

"We have not been much successful in creating jobs and achieving higher growth," said Dr Abdul Hafeez Shaikh "Therefore, it has been decided that there will be no tax at all for five years for those who invest their own money without raising loans."

Big slices of budget will go to debt servicing and defence spending. An amount of Rs495 billion has been earmarked for defence, up 12 per cent than current year's allocation of Rs442 billion. The government had earmarked Rs786 billion for debt servicing, 8.3 per cent more than current year's revised estimate of Rs726 billion.

Current expenditures of Rs 2.315 trillion of the federal government would include Rs791 billion for repayment of interest on domestic and foreign loans and Rs243 billion on repayment of foreign loans.

Development expenditures of the federal government will be Rs452 billion which include Rs300 billion for federal public sector development programmes and Rs55 billion for development loans while grants to the provinces and other development expenditures have been estimated at Rs97 billion. Gross revenues of the federal government have been estimated at Rs2.732 trillion, which include Rs2.074 trillion from tax revenues and Rs658 billion from non-tax revenues.

Some relief measures taken in the budget include the increase in salaries of government employees' salaries by 15 percent and pension by 15 to 20 percent. The government has increased the income tax exemption limit from Rs300,000 to 350,000 to facilitate low-salaried class. The business community has welcomed the reduction in GST and Special Excise Duty and termed it a good sign for the revival of the economy. The government has reduced the sales tax rate from 17 percent to 16 percent.

The government' decision to slash subsidies from Rs395.8 billion to Rs166.448 billion would have an inflationary impact forcing a hike in prices of electricity and essential items. Critics say that no major steps were unveiled in the budget to ameliorate plight of downtrodden masses already reeling under rampant inflation and instead eyewash measures including lowering excise duty of soft drink was unveiled which amounts to dashing aspirations of masses.

Additional tax revenue to the tune of Rs365 billion to be generated in the next fiscal year would also result in inflation. Local experts however believe that the reduction in sales tax rate will accord no respite to the public as the government would realize an additional Rs182 billion in next fiscal year through unannounced reformed general sales tax (RGST).

The government has introduced Rs106 billion additional taxes by removing two dozen sales tax exemptions in a bid to achieve the Rs1,952 revenue target in the next fiscal year. It has withdrawn 21 sales tax exemptions in addition to exemptions withdrawn on March 15, from which it would earn Rs31.2 billion and Rs75 billion respectively. The government will generate Rs81 billion through five percent sales tax on the local supplies of five zero-rated sectors, whereas Rs26 billion will be generated through withdrawal of exemptions on various items.

Islamabad is seeking a second IMF loan to pay off the first one, whose repayments begin in 2012. Critics say the IMF would not extend a new loan programme without implementation on tax reforms, particularly with regard to implementing a commitment on levying the value added tax.

Some experts believe that the government has initiated 'Plan B' for implementing the RGST or the value-added tax in the next year's budget. The government has actually implemented the components of RGST through eliminating exemption given to five zero-rated sectors by levying five percent sales tax on local supplies and bringing several other sectors that were enjoying exemptions into the tax net. The government will generate Rs81 billion through five percent sales tax on the local supplies of five zero-rated sectors, whereas Rs26 billion will be generated through withdrawal of exemptions on various items.

IMF last year halted a $11.3 billion loan package agreed in 2008 over a lack of progress on reforms, principally on tax. Analysts believe that meaningful tax reform should lift exemptions on powerful interests, such as the country's enormous agriculture sector. The government has long defied western pressure to end giant tax-dodging in a country where barely one per cent of the population pays at all, as a corrupt bureaucracy starves energy, health and education of desperately needed funds. Experts believe Pakistan's tax revenue amounts to less than 10 per cent of GDP, one of the lowest rates in the world and worse than in much of Africa.