NationalVolume 14 Issue # 03

Budget deficit: Elephant in the room

More bad news on the economic front. According to the latest data, the country booked the highest-ever budget deficit of Rs2.26 trillion in the last fiscal year due to expansionary fiscal policies in an election year and poor performance of the tax machinery, throwing the country into a deeper debt trap. In its annual consolidated federal and provincial budgetary operations report, the Ministry of Finance has reported that the budget deficit was equal to 6.6 per cent of gross domestic product (GDP). In absolute terms, it was the highest-ever deficit, which broke the previous year’s record of Rs1.864 trillion. The Rs2.26-trillion deficit is Rs780 billion, or 2.5 per cent of GDP, higher than the target set by previous parliament in June 2017. The budget deficit is equivalent to 6.6 per cent of GDP against the approved limit of 4.1 per cent.

The main reasons behind the record deficit were reckless spending by the federation and provinces with eyes on the 2018 general elections and a steep decline in tax and non-tax revenues. The 6.6 per cent deficit was the highest in five years of the former PML-N government. This is exclusive of roughly Rs2 trillion in liabilities that the last government parked outside budget books. These liabilities relate to the outstanding debt of power, gas and commodity sectors. Total circular debt including the one parked in a public holding company has increased to Rs1.1 trillion. In order to bridge the yawning gap, Pakistan received a net Rs785 billion in foreign loans and Rs1.5 trillion in domestic loans in the last fiscal year. Gross foreign loans stood at Rs1.235 trillion. Against the budgeted repayment estimate of Rs326 billion, actual external debt repayments stood at Rs450.2 billion.

After coming into power, the PML-N government held out an assurance to the International Monetary Fund (IMF) to decrease fiscal deficit from 8pc in 2012-13 to 3.5pc within the next three years. In retrospect, the actual fiscal deficit ended up at 5.5pc in 2013-14, 5.3pc in 2014-15 and 4.6pc in 2015-16. A similar trend was witnessed in the FY 2016-17, when the country’s deficit went up to 5.8pc against the target of 3.8pc. During these years, expenditures and revenues were also significantly off target.

Despite fiscal consolidation and imposing new taxes, the deficit remained at an unmanageable level. Resultantly, the country’s gross public debt swelled to Rs28 trillion or 72.5 per cent of GDP – a very dangerous level for a developing country like Pakistan. Due to the growing debt burden, the country spent Rs1.5 trillion or one-third of its total budget on debt servicing in the last fiscal year. The implementation of the expansionary fiscal policy has exposed the country to the risk of twin deficits in its current account and budget. The current account deficit also widened to a record $18 billion in the last fiscal year.

Except for the Khyber-Pakhtunkhwa (K-P) government, the other three provincial governments opened their public purses ahead of the general elections. Instead of generating Rs347 billion in cash surplus, the four provincial governments cumulatively booked a budget deficit of Rs22.4 billion. Against revenues of Rs1.4 trillion, the Punjab government’s total expenditure surged to Rs1.42 trillion, a difference of Rs6.6 billion. The last Sindh government booked a budget deficit of Rs42.3 billion and Balochistan government also overspent by Rs7.8 billion. The K-P government showed a cash surplus of Rs34.4 billion. The federal government’s total net income after transferring provincial shares stood at Rs2.5 trillion. But it incurred expenditure to the tune of Rs4.7 trillion, booking a deficit of Rs2.2 trillion.

The federal government’s tax revenues fell by about Rs265 billion against the target of Rs4.3 trillion. The main reason was the FBR’s failure to achieve its Rs4.013-trillion annual tax collection target. Its collection stood at Rs3.842 trillion, including the Rs121 billion collected under the tax amnesty scheme. The collection under the head of other taxes also fell short of the target by Rs94 billion to Rs223.6 billion mainly due to less recovery of the Gas Infrastructure Development Cess.

Non-tax revenues stood at Rs630 billion only, short of the target by Rs350 billion.  The main reasons behind the low non-tax receipts were the United States’ decision to withhold Coalition Support Fund payments, lower-than-budgeted profit of the State Bank of Pakistan (SBP) and shortfall in dividends and mark-up receipts. Against a budgeted Rs142-billion defence receipts, actual receipts stood at Rs12.7 billion. The last government compensated the shortfall in revenues and excess in current expenditures by massively scaling back development spending. Against the budgeted Public Sector Development Programme (PSDP) of Rs1 trillion, the actual spending stood at only Rs660 billion, including development grants to the provinces.

Against the budgeted current expenditures of Rs3.4 trillion, the actual current spending in the last fiscal year rose to Rs3.8 trillion. This was because of higher-than-budgeted defence and debt servicing spending. Against a budget of Rs920 billion, the stated defence spending stood at Rs1.03 trillion, up 12 per cent. Similarly, the debt servicing cost also shot up to Rs1.5 trillion – almost one-tenth higher than the budgeted amount of Rs1.38 trillion. Debt and defence spending consumed 66 per cent of the total current expenses and 53 per cent of the total budget. It remains to be seen how the new PTI government tackles the problem of budget deficit.