Lahore (12 June 2019): “The ambitious goal of raising total revenue by 33% will be a challenge in the face of moderate economic growth ” . This was stated by the Institute for Policy Reforms in its review of the federal budget issued today. It said, that the framework of the budget is guided by government’s agreement terms with the IMF.
Any analysis of the budget must consider the political background in which the budget was announced. We also have to see the reaction of the industry to its many revenue measures. There will be much give and take in the weeks to come.
With Revised Estimates 2018-19 as base, the new budget proposes federal tax revenue to grow by over 33%. This magnitude of increase in revenue is unprecedented. The paradox is that it must necessarily depend on higher economic activity to generate the revenue, which a tight monetary policy and high taxes may dampen.
Despite growth in revenue, the fiscal deficit is estimated to be a high 7.1% of GDP. Primary balance will be below 0.6% of GDP. Any slippage would however make the fiscal deficit even greater, with deleterious effect on the economy. During the fiscal year, we may see frequent changes in budget estimates. In fairness to the government, in the buildup to the budget, it had cautioned about the difficulties faced by the economy and the hard choices to be made.
As much of revenue increase comes from indirect taxes, these will affect citizen welfare and dampen economic activity. However, increase in economic activity is necessary to generate more revenue. It is not clear how government will reconcile the two.
Looking at the expenditure side, IPR’s Fact Sheet states that the main purpose of the high increase in revenue is to meet debt servicing expense. Debt servicing is estimated to increase by 45% to Rs. 2.9 Trillion. This is about 40% of current expenditure. The Fact Sheet states that, in this case, government is right to say that it is trying to deal with problems created by others.
In addition to the ambitious revenue targets, there are many areas where the budget underestimates expenses. Also, provincial surplus could be well below the estimated Rs. 423 Billion. Any of these developments would further increase the deficit and would weaken the economy even more.
As making ends meet seems to be the primary goal of the budget, it does not place much emphasis on building competitiveness. There is no focus on re-building the economy’s productive base or improving its forever dismal savings and investment ratios.
The effect of these underlying factors is obvious in our exports. Exports have been stagnant for five years and there is no sign of its revival. Even this year’s major devaluation has not stimulated growth. Additional taxes and withdrawal of exemptions, though necessary, may weaken further the manufacturing sector.
The budget is accompanied by the Annual Plan which gives the macro economic framework. The economy’s targeted growth rate for FY 2020 is 4% and the current account deficit is -3% or USD 8.3 Billion. The current account deficit is well below FY 19’s deficit of USD 13 Billion. While the GDP growth rate seems realistic, the current account deficit target seems ambitious as a number of factors would affect it. FDI will be well below GoP’s estimate of USD 4.4 Billion.
With pressure on finances, it is understandable that the PSDP is below the scale seen in recent years. It is a low 1.7% of GDP down from over 3% in FY 17. Including provincial allocations, national PSDP is about 4% of GDP. It is unlikely that even this reduced envelope would be spent in full.
It is encouraging to see higher allocation for the water and hydropower sectors, though allocation for HEC and Railways seem inadequate. In the latter case it seems that CPEC’s ambitious ML1 project has been shelved.
Despite tight resources, alarge part of the PSDP is in discretionary special schemes. By one estimate, they total Rs. 220 Billion or 30% of the development budget. IPR feels that regardless of their importance, they do not fall under the developmental budget. The PSDP does not show specific projects against these provisions, suggesting that they may not have gone through the rigorous appraisal process. In essence, the federal PSDP is Rs. 480 billion rather than Rs. 701 Billion.