NationalVOLUME 15 ISSUE # 20

The outline of a ‘corona’ budget

This is the annual budget time and preparations are on in the Finance Ministry to put figures, numbers and documents together. What kind of a budget will it be, given the coronavirus crisis which has destroyed the world economy?

According to media reports, the federal and provincial budgets for 2020-21 are expected to be announced in June. As we know, the national economy has been badly hit by Covid-19, with the manufacturing and supply chain in a shambles. Revenues have fallen sharply, while expenditures have been rising to check the pandemic and treat the patients.

The economy was doing well in the first two quarters of the current fiscal year. In the first three quarters of 2019-20, there was a sizeable reduction in the consolidated budget deficit to 3.6 percent, from 5 percent of the GDP in the corresponding period of 2018-19. A primary surplus of 0.4 percent of the GDP was also noted.

The downturn began in the first quarter of 2020 and it continues. Figures show that government revenues declined by 10 percent in March and 17 percent in April. The burden on the budget has further increased due to the relief package of Rs 500 billion for poor sections of society. In view of it, economists estimate that the fiscal deficit in the last quarter could rise to 6 percent of the GDP. That works out to 9.8 percent of the GDP for the whole year, higher than the target of 7.3 percent of the GDP.

Needless to say, it is not going to be easy to frame the budget in such a serious crisis. The coronavirus is so far largely under control which gives some elbow room to the managers of the national economy. But as predicted, if the epidemic peaks in the next two to three weeks, we will have a corona budget with all the attendant problems.

The budget will have to provide for relief and incentive measures to keep the economy going and gradually reviving. Overall, it will have to be a growth-oriented budget. Here comes the role of the International Monetary Fund (IMF). The budget projections for 2020-21 given by the IMF as part of the report for giving access to its Rapid Financing Facility envisage a contractionary fiscal policy. Tax revenues are targeted to increase by 31 percent in an environment where their own expectation is that the economy will grow by not more than 2 percent. The increase in non-debt servicing current expenditure is actually expected to fall by 3 percent. Consequently, the budget deficit is expected to come down from 9.8 percent of the GDP this year to 6.6 percent next year.

It is relevant to point out in the context that the State Bank of Pakistan (SBP) has recently reduced the policy rate from 13.25 percent to 8 percent. If this can be carried down further to 7 percent by the beginning of the next fiscal year, it will reduce the projected debt servicing liability to about Rs 1,915 billion as compared to Rs 2,865 billion projected by the IMF for 2020-21. It will make for a saving of Rs 950 billion.

Another bonanza for the budget makers is the steep fall in international oil prices which has enabled the government not only to reduce domestic prices sharply but also to virtually double the rate of petroleum levy on motor spirit and HSD oil. If the price does not rise beyond $40 per barrel in 2020-21, additional revenues of almost Rs 150 billion could be expected. Combined together, the two developments could create fiscal space of Rs 1100 billion. It is equivalent to 2.5 percent of the projected GDP in 2020-21.

The normal revenue growth, without any additional taxation, will depend on the GDP growth rate, the rate of inflation and the trend in imports. Inflation will remain low, while imports too will further shrink. It is estimated that the GDP growth is likely to be near zero or even marginally negative in 2020-21. Also, due to low commodity prices and low level of aggregate demand, the rate of inflation is unlikely to exceed 7 percent. Based on these projections, the normal growth in Federal Board of Revenue (FBR) revenues could be in the range of 7 percent in the sales tax to 10 percent in the income tax.

As no new taxation measures are expected, FBR revenues are unlikely to increase by not more than Rs 350 billion. On the other hand, non-tax revenues may rise to over Rs 1300 billion in 2019-20, with SBP profits contributing almost half to the record level of revenues. At the same time, with a fall in interest rates, SBP profits in 2020-21 could come down by over Rs 250 billion.

Economists agree that the next budget would be a tax-free and people-friendly budget. The viewpoint is reinforced by the fact that the PTI government has shown special concern for the plight of poor people during the corona lockdown. Prime Minister Imran Khan too has been worried about it.