The landmark 5th budget of the PPP-led government has all the hallmark of an election year budget, providing tax relief to individuals, companies, increase government employee salaries, pension and enhancing the development expenditure.
Given the expansionary theme of the budget, the country’s financial managers have set an ambitious fiscal deficit target of Rs1.1tn (4.7% of GDP), a difficult task in any year, said the analysts at Topline Research.
“The government is likely to overshoot its deficit target with threats imminent on revenue as well as expenditure sides,” said Nauman Khan.
The analyst said the fiscal deficit was expected to stand in a tune of 5.5%-6% of GDP in FY13, assuming no arrear subsidies.
Further, the challenge of financing the deficit would still persist in FY13. Given weak global economic outlook, uncertain Pak-US relationship and higher debt payments, reduced support from external account is expected. The onus once again laying on domestic sources that could keep inflation outlook at elevated levels and interest rate downward sticky.
The government has set an ambitious tax revenue growth target of 24% over revised estimates (FBR revenue growth target of 22%) as against nominal GDP growth of 14% (9.5% inflation target and 4.3% real GDP growth). With broader tax relief to individuals/companies, the impetus to tax collection primarily resides with tax authorities drive to document the economy. Discouragement of Presumptive tax regime (PTR) is a critical step, in this regard, but political consideration would remain a key roadblock in this regard. Our initial estimate suggests that tax revenue fall short by approx. Rs75-100bn or 0.4% of GDP.
In addition, gov’t expects non tax revenue to grow by 43% from revised estimates.
Though, the estimates of major contributor i.e. SBP profits seems reasonable but areas of concerns emerge in PTA profit (includes auction of 3G license) and defense services (includes receipts from CSF). Heightened political noise in the election year would be hindrance in the former, latter fate lies within Pak-US relationship. On the positive front, the gov’t has increased GIDS (Gas infrastructure Dev. Cess) from Rs8bn to Rs30bn that indicates towards gov’t willingness to tap new revenue generation avenues.
The gov’t envisioned expenditure growth of a mere 3%. Within subsidy the gov’t has earmarked Rs170bn for tariff differential as against revised estimated of Rs457bn in FY12. Given 20-25% gap still persist between tariff and cost, and stalled energy sector reforms, we estimate tariff differential to overshoot the desired target to over Rs250bn. The remedy could come from decline in the international oil prices that could reduce cost of electricity generation.
Further, unlike previous years, curtailing the development expenditure to accommodate cost overruns in other expenditure seems less likely this year. This given development expenditure as a potent tool for political traction.
Though, mounting deficit would be a problem but major challenge in FY13 comes from financing it. The reliance would once again be on domestic sources similar to FY12.
The budget reveals that Rs1.1tn deficit estimated in FY12 (excluding electricity arrears) would be 92% financed through domestic sources that has constraint the liquidity position of banking channel.
Furthermore, similar scenario in FY13 and heightened chance of gov’t dependency on the central bank borrowing could keep long term inflation outlook at elevated levels and thus, interest rates downward sticky.
The budget was overambitious; oh and they realise it already
