The revised Federal Budget for 2018-19 has come as a great disappointment. Some experts have described it as a non-starter, showing a lack of vision and understanding of the dynamics underlying the current economic situation.
First of all, the revised document does not explain the government’s intentions on the structural reforms that it plans to initiate and to this end the policy direction and actions it expects to take to remodel the economic landscape to steer the economy onto a higher sustainable growth path. It has also not spelt out the tools it hopes to employ to significantly improve financial discipline and economic management. No measures have been to broaden the tax base and mobilize new resources.
More importantly, it has not shared its strategy to address the short- and long-term challenges facing the urgent and most vulnerable element of the economy_ the massive balance of payments deficit whose gross financing requirement could touch US$30 billion this year.
The PSDP at the Federal level has been slashed by over 28%, from Rs800 billion to Rs575 billion. The Constitution required that the revised PSDP for 2018-19 be presented to the National Economic Council, chaired by the prime minister, with representation of the provincial governments.Given the cut in the PSDP, the revised document, Public Sector Development Program, 2018-19, should have been made available, but this requirement has not been fulfilled.
The preamble to the Budget generally sets out the macroeconomic targets which government policies, including the fiscal policy, will aim to achieve in the financial year. The budget strategy has to be consistent with the achievement of these targets. The original Budget presented by the PML (N) government for 2018-19 had set the following targets: 6.2% for GDP growth, 6% for rate of inflation, 13.8% for the tax-to-GDP ratio, 4.9% of the GDP for the budget deficit, 63.2% of the GDP for the net Public Debt and foreign exchange reserves at $15 billion. The present government has already revised one target relating to the budget deficit from 4.9% to 5.1% of the GDP. No statement has been made by the finance Minister about the other Key macroeconomic targets for 2018-2019.
The FBR revenue target for 2018-19 has been set at Rs4,398 billion. It is lower than the original target by Rs37 billion, despite taxation proposals in the Revised Budget which are expected to yield Rs183 billion over the year. Now even after inclusion of revenues from taxation proposals of Rs183 billion the FBR tax-to-GDP ratio is expected to rise by only 0.2% of the GDP.The normal practice is for the FBR to prepare a statement of the revenues expected or foregone from each taxation proposal or relief, in comparison to the tax structure in 2017-18. This should be done for major proposals like the big reduction of income tax rates on annual incomes above Rs0.4 million, rise of the excise duty on cigarettes and large cars and enhancement of the advance tax on banking transactions.
On an annualized basis, the expected additional revenue from the FBR is Rs244 billion, with half from unspecified improvements in tax administration. There is the substantial risk that this target will not be achieved especially due the loss of revenues of over Rs80 billion in personal income tax from the level in 2017-18, reduction of import duty on intermediate inputs for exports, reduction in sales tax from 17% to 12% on LNG imported by the gas companies and exemption of a number of medical items from sales tax.
The hope that administrative efforts and and triangulation techniques will help increase tax revenues by roughly Rs90 billion is misplaced since it runs contrary to experience. Revenues from administrative improvements have always remained elusive. The weakness in this expectation is manifest in the growing reliance on revenues from “non-filers” (a legal category which in other jurisdictions would be classified as tax evaders). It is also intriguing that the FBR does not vigorously go after the non-filers although the tax deducted and deposited by the withholding agents enables identification and possible location.
Obviously, the government was under pressure from motor vehicle assemblers and real estate agents and developers to undo the decision of the previous government to prevent non-taxpayers from acquiring motor cars and property worth more Rs5 million. Even if we were to accept the argument that the earlier proposal was not in line with Article 23 of the Constitution, one could have got around this apparent breach and contravention by substantially raising the rate for non-filers, in keeping with the over-riding objective of documentation of the economy.
Overall, there was need for more progressive and innovative taxation proposals, especially to broaden the tax base. The budget is effectively a “tax free budget” as the net revenue from taxation proposals is near zero after allowance is made for revenue foregone due to the tax concessions. It is, indeed, unfortunate that at a time when there is need to contain the fiscal deficit, a budget with weak revenue generating proposals has been presented. It appears unlikely that even the modest FBR revenue target will be met, given the concessions. Federal non-tax revenues plummeted by 30% in 2017-18. The original Budget anticipated an increase in these revenues of Rs141 billion in 2018-19, equivalent to a growth rate of 22.3%. Now the Revised Budget proposes to increase this even further by another Rs121 billion, implying a growth rate of as high as 41.5%. Where will this phenomenal growth in non-tax revenues come from?
Public Sector Enterprises (PSEs) are having problems in meeting their mark-up payment obligations on loans from the federal government. We are left with only one possibility, that is, of large receipts from privatization and sale of government assets. The budget statement does not propose enhancing the petroleum levy. This is the right policy in the face of high international oil prices. Nevertheless, other taxes, besides the petroleum levy, are still expected to show an increase of Rs98 billion.