OP-ED

Assessing the Federal Budget

The Public Sector Development Program will be delivered if the government manages to
arrange domestic or foreign borrowing or assistance. Otherwise it will be cut to size

Dr Abid Qaiyum Suleri

MAY 3, 2018
The PML-N government has made history by presenting its 6th federal budget in five-year tenure
of the government. The good news is that federal budget 2018-19 tends to depart from decade-
old practices, such as new formula for valuation of property and proposes to abolish FBR rates
(in the federal territory) and Deputy Commissioner rates (in the provinces). In an unprecedented
manner, FBR is provided with the powers to acquire any undervalued property. Similarly,
income tax slabs for individuals are simplified, income tax rate is reduced, and some tax
incentives are announced for capital market and corporate sector too. All of this is a change from
other finance minister, who followed ‘a bird in hand is better than two in bush’ policy and
overburdened the existing tax payers. As a salaried person, I am a direct beneficiary of tax
slab/rate reduction so would welcome it at personal level. Tax amnesty scheme (now formally
presented in the budget) is also a lucrative offer for those who have hidden assets. They can avail
an amnesty after paying a negligible penalty.

Increased allocations for BISP, 10% ad-hoc increase in salaries and pensions, continuation of
some of the incentives for industry, and reduction in sales tax on fertilizers etc., are also some of
the positive steps in the budget.

However, the bad news is that despite proposing some unconventional and innovative measures
to broaden the tax base and document the economy, the budget still follows a traditional, static,
and non-flexible framework. Assuming that despite all the tax cuts, FBR would be able to meet
12.7pc increased target in 2018-19, the net federal receipts would be Rs 5660 billion. Out of this,
provinces would get Rs 2590 billion as their share. This leaves federal government with Rs 3070
billion and it has to spend Rs 5246 billion. This leaves a net deficit of Rs 2175.8 billion. The
deficit is nearly half of the budget.

Federal government has to spend on four ‘Ds’ ie, debt servicing, defence and security related
expenses, day-to-day running of civil government, and development. The first three Ds are non-
negotiable and non-discretionary. Rs 1620 billion for mark-up payment, Rs 1100 billion for
defence affairs and services, 601 billion foreign loan repayment, 463 billion for running of civil
government, 342 billion for pensions. No matter who comes in power after the election would
have to take care of the above mentioned expenses. A total of Rs 4780 billion are required to
meet the current expenditure and federal government has Rs 3070 billion in its pocket. That
means, government would have to borrow to take care of the mandatory expenses. Then it has to
take care of ‘development’ or discretionary expenses. This year PSDP is budgeted at 800 billion
rupees. Like always, PSDP would be delivered if the government manages to arrange domestic
or foreign borrowing or assistance. Otherwise it would have to face cuts.
On the whole, the budget comes with some visible relief measures and some invisible
inflationary measures

Within this non-flexible framework, there would be very little room to experiment with
innovative ideas as next government would face the challenge of containing fiscal deficit which
is budgeted at 4.9 percent of GDP (1 percent of GDP is 385 billion rupees). It is assumed that the
provinces would throw a provincial surplus of Rs 285 billion. This is not going to happen; in the
outgoing year provinces suffered a deficit of Rs 163 billion against a budget of Rs 274 billion.
One assumes that the same would be repeated next year and this 285 billion would not come
through. Then the budget proposes Rs 100 billion in its tax revenue as gas infrastructure
development cess (GIDC). In the outgoing budget, 110 billion rupees were expected from this
head, and government could get only Rs 15 billion. The GIDC is challenged by the provinces
and it would be naïve to expect this 100 billion in the federal kitty. The provincial surplus and
GIDC amounts to Rs 385 billion, which is one percent of the GDP. Thus the fiscal deficit would
be 5.9 percent of GDP if all other factors remain constant.

However, other factors might not remain constant. As a result of tax relief measures, there would
be a cut on direct taxes. This would be compensated with indirect and ‘other taxes’. GIDC is one
of the other taxes. Still another is petroleum levy, which is proposed to be increased to Rs 30 per
litre. This levy ranged between Rs 3 per litre in case of light diesel oil to Rs 14 per litre in case of
high octane. Government has successfully collected Rs 170 billion against a budgeted amount of
160 billion under this head. Now it plans to collect Rs 300 billion from it. Oil prices are going
northwards in international market (USD 70 per barrel today). Although Finance minister
assured that the increase in levy would not affect petroleum prices in domestic market, one fails
to understand where the additional levy would be parked if not charged from consumers.
Government does not have the cushion to supply fuel at a subsidised price and including the
revised levy in prices would give rise to energy inflation which would automatically increase the
cost of all related items. Not revising the levy upward would mean another half percent of GDP
increase in fiscal deficit, taking the figure to 6.5 percent.

The budget is silent about it, but the next government would have to face the challenge of
mounting energy circular debt (which has surpassed 1 trillion rupees, including the amount
parked in power holding companies). Likewise the whole issue of loss making public sector
enterprises (PSEs) would haunt the next government. Opposition has been opposing privatization
of PSEs so far. However, it would be interesting to see the behaviour of political leadership on
this issue, if there is a change in role between current treasury and opposition benches.

Within these constraints, a major challenge for the next government would be to reduce rural
poverty. Economic survey of Pakistan released a day before budget presents a bleak picture on
this front. It says that poverty has decreased nationally, but urban poverty in 2015-16 stood at
12.5 percent whereas rural poverty was 30.7 percent. One can argue that all the relief measures
presented in the budget take care of urban dwellers, who pay income tax, own shares, or have
corporations. Rural development may be a provincial subject, but without budgetary guidelines
and concrete steps from federal government on tackling rural poverty, we may end up in a
conflict between ‘haves’ and ‘have-nots’ where rural population may feel marginalised by urban
elites. This perception would play a major role in demand of new provinces including ‘Janoobi
Punjab’ province.

On the whole, the budget comes with some visible relief measures and some invisible
inflationary measures. The innovative ideas of tax reforms and documentation of economy
should be welcomed, while a political consensus should be fostered on how to change the
framework of budget making where such innovative ideas may flourish.

The writer is heads Sustainable Development Policy Institute and tweets at @abidsuleri

Published in Daily Times, May 3rd 2018.