NationalVolume 13 Issue # 19

Federal Budget: A mix of politics and economics

The Federal budget for fiscal 2018-19 is the swan song of a government on its way out. Overloaded with promises and empty projections, it tries to please everyone ahead of the coming elections.

The Rs5,932.5bn budget represents a 10 percent increase in spending from last year. The emphasis has shifted from development to expenditure, specially current spending as provisions for expenditures, salaries, pensions have been increased generously where they matter most for the government. Given that this is PML-N’s election year budget, with constituents and power players to appease, nearly all heads under current expenditures register marked increases from last year’s budgeted amounts.

After an increase last year, the federal Public Sector Development Programme (PSDP) has been slashed by 20pc compared to last year’s amount, falling to Rs800bn this year. Although the government mentions the total federal PSDP will be equal to Rs1,030bn, the additional Rs230bn will not come out of the federal government’s pockets, but will be provided by “self financing by corporations and authorities”. The provinces’ share of PSDP has also been slashed by around 24pc to Rs850bn, bringing both the federal and provincial PSDP closer to revised spending in the current year of Rs750bn and Rs800bn, respectively.

On the plus side the federal health budget has been jacked up by 8.2pc to Rs13.89bn, of which hospital services will eat up Rs11.66bn. The federal education budget has been enhanced by Rs6.9bn (7.1pc) to Rs97.4bn, with the increases mainly intended for provision of services from pre-primary through tertiary education. The tertiary education budget on its own has been increased by only 5.23pc. Pension payments register a whopping 37.9pc increase to Rs342bn, of which military pensions will account for Rs259.8bn (up 44.2pc from Rs180bn budgeted last year) while civil pensions will total Rs82.2bn (up 21.2pc from Rs67.8bn last year).

Law courts have been given a 8.8pc increase in their budget, which now stands at Rs5.63bn. Meanwhile, the allocation for police has been bumped up by 21.5pc to Rs122.9bn from Rs101.1bn a year ago. Among other divisions gaining generous incentives next year is the Pakistan Atomic Energy Commission, the budget of which has been hiked by a whopping 88pc to Rs28.3bn. Meanwhile, the allocation for the housing and works division has been cut by almost half to Rs5.4bn. The budget for the national health services has also been reduced by 49pc from Rs48.7bn to Rs25bn. Pakistan will also spend less on ensuring Sustainable Development Goals (SGDs) are met, as the allocation under this head has been slashed massively from Rs30bn to only Rs5bn.

On the revenue side, the government has opted to reduce the tax burden on the common man — reducing income taxes significantly — while adopting a carrot and stick approach towards non-filers and tax evaders. However, some tax heads have been revised upwards and people should expect to pay significantly more on imported items and petroleum next year. The Federal Board of Revenue’s tax target has been increased by 10.5pc (Rs422 billion) to a total of Rs4,435 trillion. Of this Rs140bn will come from direct taxes, while indirect taxes will account for the remaining Rs282bn.

In addition to increasing petroleum levy rates, the government has also taken some inflationary tax measures. The most regressive measure is the FBR’s decision to increase 1% additional custom duty on almost all imported items except those that come on concessionary rates under the bilateral free trade agreements. The 1% additional duty will be applicable on 7,200 imported tariff lines. The other regressive taxation measure is the increase in further sales tax rate from 2% to 3%, which will generate Rs12 billion in additional revenues. The enhanced tax is to be charged from those who are not registered sales tax persons. At present there are fewer than 150,000 registered sales tax persons. The decision will increase the standard 17% General Sales Tax Rate to 20%, which is inflationary and regressive.

Under the direct taxes head, the government expects its lowered income tax rates to result in a substantial broadening of the tax base and add another Rs132bn to income tax collection. In percentage terms, this reflects a 8.36pc increase from the income tax target for last year. Under the indirect taxes head, customs duties will be Rs154bn higher than the previous year, reflecting a 26.5pc increase. This will likely reflect in higher prices on imported items. The remaining increase in indirect taxes will come from a Rs95bn (5.9pc) increase in sales taxes and a Rs35bn (15.1) increase in federal excise duties over last year’s budgeted figures.

Much of the development budget will be financed through borrowing.  The government expects to raise nearly Rs406bn through public debt, which represents a Rs91bn increase over the previous year under this head. Floating debt will account for the greater part of public debt, with the government expecting to raise a total Rs292.5bn under this head. Rs200bn of this will come from treasury bill auctions — which represents a 344pc increase over last year — and the remaining from prize bonds. Permanent debt will be cut to Rs113.55bn from Rs184.93bn last year, with the most significant cut provisioned for ijara sukuk bonds, through which the government expects to raise only Rs10.62bn compared to Rs60bn last year.

Much of the empty optimism from the last five budgets announced by Ishaq Dar was tempered by the much more moderate estimates and projections in the new budget. A more balanced assessment of the fiscal situation is reflected by the modest contents of the budget. Overall Budget 2018-2019 is a devious mix of politics and economics, with many tricky issues left for the next government to be tackled. These will naturally be discussed in detail by the National Assembly. Three provinces have already declared their hostility to the budget. The opposition parties in the National Assembly have also voiced their concern over many aspects of the budget. Experts are of the opinion that the next government will be forced to modify many measures contained in the budget in significant ways.