FeaturedNationalVOLUME 16 ISSUE # 21

Budget: Reforms reversed?

The new budget has something for everybody. It appears the government has attempted to please everybody with its spending spree by ditching reforms which were hurting it politically. The budget also aims to woo voters, with a Rs900 billion Federal Public Sector Development Programme (PSDP) for the next fiscal year, which is 38pc higher than the last year’s Rs650 billion.

The budget shows the government has shifted gears to growth after getting some fiscal space following “harsh” reforms for almost three years, which started hurting it badly. It was because of the reforms, which were good for the national economy but bad for the people, the government lost almost all by-polls after the general elections. In the situation, the government had no option but to revise its policies to please all sectors ahead of polls in 2023, but it could damage the country in the long run, as fiscal indicators could worsen again.

It is obvious that the government aims to win the next election at all costs. It will spend a hefty amount now and may tighten its belts again after winning the election. The government has ditched its contractionary fiscal policy it pursued for the last three years; increased funds for development projects; offered significant tax incentives and relief to businesses and announced schemes to support the common people. It announced a Rs900 billion Federal Public Sector Development Programme (PSDP) for the next fiscal year, which is 38pc higher than the last year’s programme of Rs650 billion. The volume of the National Development Programme, which includes the PSDP and the provinces’ development share, will be Rs2,135b, which is 33pc higher than the last year’s allocation of Rs1,324b. According to the budget document, of the Rs900b PSDP, Rs265b are for transport and communications, Rs103b for energy, Rs99b for water resources, Rs40.93b for housing and physical planning, Rs28b for health, Rs5.12b for education and training, Rs37b for the Higher Education Commission, Rs15.26b for environment, Rs5.13b for manpower and employment, Rs74b for Sustainable Development Goals, Rs54b for merged districts of Khyber Pakhtunkhwa, Rs45b for special areas (Azad Jammu and Kashmir, Gilgit-Baltistan), Rs34b for less developed areas (North and South Balochistan Packages, Sindh Development Plan and GB Development Plan), Rs5.7b for governance, Rs29.3b for science and information technology, Rs15.5b for the production sector (industries, food and agriculture) and Rs37.4b for other requirements.

Besides increasing subsidies and incentives for big business, manufacturing, corporate market and agriculture sectors, the government proposed a 24pc hike in revenues, including Rs506b in additional measures. “The stabilisation phase is now over, and the budget 2021-22 will focus on inclusive and sustainable growth, fostering growth with investment,” Finance Minister Shaukat Tarin said in his speech. The additional revenues of Rs506b are based on Rs264b worth of policy measures and Rs242b of administrative measures. The budget more than doubles (226pc) subsidy allocations and significantly hikes surcharges and levies on oil and gas, including a 36pc increase in petroleum levy. It also allows a 10pc increase in salaries (ad hoc allowance) and pensions at an additional cost of Rs160b and promises universal health coverage through the Sehat Card.

The government’s revenue plan is based on massive reliance on indirect taxation, mostly outside the divisible pool sources that keep the federation financially floating. Over Rs115b alone will be additional revenue on account of gas infrastructure development cess that would increase by a massive 767pc to Rs130b next year against just Rs15b this year. Over Rs160bn is targeted to flow from petroleum levy on oil projects which means petroleum prices would go up in the next fiscal year. The target for petroleum levy is Rs610b for next year, up 35pc from the current year’s Rs450b that would touch Rs500b by June 30, 2021. Another 260pc increase is expected in natural gas development surcharge to Rs36b next year, compared to just Rs10b this year.

The budget projects the next year’s fiscal deficit at 6.3pc of GDP (Rs3.42tr). The revenue target for the next year is set at Rs5.829tr, compared to Rs4.691tr this year, showing an overall increase of Rs1.138tr (24pc). About Rs635b would accrue automatically on account of 8.2pc inflation and a 4.8pc GDP growth rate.

The budget entails major concessions to the manufacturing sector, including automobile, textiles, pharmaceutical industry, mobile phone and information technology, and even small and medium enterprises (SMEs) through reduction in import duties on raw material and lower general sales. A major favour has also been given to the stock market through reduction in capital gain tax from 15pc to 12.5pc, while a series of withholding taxes have been removed, including those on banking transactions, stock exchange transactions, margin financing, air-travel services, debit and credit card-based international transactions and mineral exploration.

The amount of subsidies for the next year has been targeted at Rs682b, almost 226pc higher than the current year’s Rs209b, which was later revised to Rs430b. The federal expenditures are budgeted at Rs8.487tr against revised estimates of Rs7.34tr for the current year, showing an increase of 15pc. Non-tax revenues are projected to be higher by 22pc to Rs2.079tr, compared to Rs1.7tr this year. Of the total FBR revenue of Rs5.829tr, the share of indirect taxes is estimated at Rs3.647tr next year against Rs2.9tr this year, up by 26pc, while growth in direct taxes is less than 22pc at Rs2.18tr against Rs1.789tr this year. The provincial share in federal taxes would increase form Rs2.7tr this year to Rs3.4tr next year, up by about Rs707b or 25pc, but about Rs570b would be retained by the federal government as provincial cash surplus to contain the federal deficit that would otherwise go beyond 7.1pc of GDP.

The current expenditure of the federal government would be around Rs7.5tr next year, up 14pc over the current year’s Rs6.56tr. The interest payments are projected at Rs3.06tr, compared to Rs2.85tr this year, with an increase of 7pc. The pension bill, excluding the latest 10pc increase, is estimated at Rs480b. The running of the entire civil government would cost Rs479bn, down from Rs487b this year.

Undoubtedly, some internal and external factors have allowed the government to reverse its contractionary policies. However, it will have to renegotiate terms with the International Monetary Fund (IMF). The success or failure of the budget will also depend on the government’s ability to raise estimated tax revenues. The ambitious target would become even more difficult to achieve if the pandemic recurred.