BUDGET SETS OPTIMISTIC GOALS

Comments: Inflated revenue assumptions

June 04, 2011

NADEEM MALIK

The Budget FY12 has been based on inflated revenue assumptions and understated expenditure estimates to show a fiscal deficit of Rs 850 billion or 4 percent of GDP. Achieving a tax revenue target of Rs 1952.3 billion next year over the revised estimates of Rs 1587.7 billion during outgoing fiscal year, requires 24 percent growth, which we have not witnessed in the past.

The projection of current expenditures at Rs 2314.9 billion for FY12 over the revised estimates of Rs 2295.9 billion for current fiscal year, show a less than one percent increase. This stringent fiscal discipline and belt-tightening have never been a practice in our fiscal management.

Finance Minister Hafeez Shaikh has announced these numbers in his second budget speech before the parliament, which is the fourth budget of Yousuf Raza Gilani's government. Pakistan faced unprecedented security challenges and devastating floods during the four years of PPP government. Not a single fiscal or growth target set for the year could be achieved.

Many independent experts believe that poor governance and a serious lack of fiscal discipline has created a fiscal hole, which Pakistan is finding hard to plug. A generous 7th National Finance Commission Award has devolved substantial resources to the provinces meeting their long standing demand, but in response there is hardly any effort on the part of provincial governments in terms of mobilisation of additional resources. In the absence of a sizeable surplus from the provincial budgets, federal budget would keep running large fiscal deficits. Hafeez projected a provincial budget surplus of Rs 125 billion for FY12, which is unlikely to materialise as no provincial government has ever tried to tap urban property tax, which can yield somewhere between 0.5 and 0.75 percent of GDP based on various models.

Agriculture Income Tax is another popular talking point for the urban elite, but we have never seen a real political will at federal or provincial level for the enforcement of this tax. Jahangir Tarin, a minister in the previous government, believes taxing agriculture income is important to discourage income tax evasion by powerful ruling elite in the country. Tarin, who owns a large land holding and is an industrialist as well, believes agriculture income tax should be imposed at 15 percent of the leased value of a particular agricultural land, which at present is Rs 25 thousand to 30 thousand rupee per acre per annum in Punjab.

MQM leader Farooq Sattar is also a strong proponent of agriculture income tax. He criticised the government for its inability in taking this measure. However, Hina Rabbani Khar, a state minister in the PPP government, said Sattar was the first person to raise his hand in approval of the budget proposals in the cabinet meeting!

KERRY-LUGAR BILL The budget documents also revealed that Pakistan received a paltry sum of Rs 11 billion under Kerry-Lugar Bill from the United States and a peanut of Rs 3.5 billion from the Friends of Democratic Pakistan (FoDP) as part of the Tokyo Pledges.

Hina Rabbani Khar, who now holds the portfolio of Minister of State for foreign affairs, with additional charge of the Economic Affairs Division, confirmed that Pakistan hardly received $250-300 million under the Kerry-Lugar Bill. She explained that rest of the amount was being spent by the Americans directly under USAID or through other schemes, but there was no mechanism to confirm the said amounts. She said the American official documents show an amount of $875 million had been spent during the year under the Kerry-Lugar-Berman Law. This amount or its accounts are not available with the government of Pakistan

Same is true for the Tokyo Pledges. Instead of $6 billion for the Internally Displaced Persons (IDPs) of Pakistan as a result of counter-terrorism operations in South Waziristan, Swat, Dir, Buner and other areas, no such compensation amount has been given to Pakistan. Khar believes that the government initially thought that the Tokyo Pledges were additional commitments, which proved to be untrue.

KEY REFORMS MISSING Dr Ashfaque Hasan Khan, former Economic Advisor to the Ministry of Finance, criticised the government for presenting a weak budget. He emphasised that there was a need to have a reform-oriented budget to overcome the same vicious cycle of large deficits and debt trap. But there was hardly any reform in the budget. The most anticipated push for broad-based sales tax in VAT-mode to encourage documentation and generate additional resources was not even touched in the speech, except that the measures initiated in March 2011 have been regularised except for one-time additional surcharge on incomes. Hafeez Shaikh also announced reduction in GST rate from 17 to 16 percent.

Similarly, there was popular pressure to reform the income tax law to enable taxation of all income from within the country or outside Pakistan to rope in people who do not pay taxes. But the budget made no progress in this direction.

PUBLIC SECTOR ENTERPRISES Last year, Dr Hafeez Shaikh was vocal in his budget speech while underscoring the need to reform loss-making Public Sector Enterprises, which have put a huge drain on the budget. It impressed people like Tarin, who thought it was a step in the right direction. However, Jahangir Tarin and Ashfaque were disappointed to see complete inaction to reform these entities. The Minister said the cost of power sector subsidies alone was Rs 500 billion.

Khawaja Muhammad Asif, a lawmaker of PML (N), was even harsher on this issue. He said Punjab was being penalised to make up for the losses of Hyderabad, Karachi and Tribal areas electricity companies. He claimed that cumulative losses of these companies were Rs 150 billion. He raised objections to the proposed plan of selling Islamabad and Faisalabad area electricity companies, which are profitable, to make up for the losses of other areas.

INFLATION & UNEMPLOYMENT There is good news for the government sector employees and pensioners who will pocket 15-20 percent raise, hardly enough to match the current inflation levels. However, weak fiscal and budgetary situation, large deficits, huge energy shortages and inflation have added more pains to the poverty stricken masses. With further adjustments in the tariffs and pass through of the rising oil prices during the year, coupled with large deficit financing, is most unlikely to bring down the rate of inflation to a single digit. Blackouts and gas shortages have also rendered industrial workers jobless in big numbers.

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