Budget claims increasing tax net, cutting expenses but IMF, privitisation remain controversial
What began as a somber budget speech with new Finance Minister Ishaq Dar beginning on an emotional note and declaring that the government was “disappointed with the deteriorating economy” suffering from “subsidies, foreign debts, energy crisis and bad governance”, became an outline of not just the next financial year, but the basic policy paradigms that shall mark the Pakistan Muslim League-Nawaz (PML-N) rule at the centre. Dar revealed that the State Bank has a depleted reserve of $6 billion while the government’s net debts totalled around Rs15,000 billion. Compare the debt to the Rs3.4 trillion total budget outlay and outstanding debt is approximately five times the total budget. With the PML-N claiming to have been dealt a hard hand by the last government, Dar’s emphasis remained that economic revival shall take “at least three years”. Experts had suggested that the budget had to prioritise economic recovery, reducing non-development expenditure, overcome the energy crisis, increase productivity and reduce the fiscal deficit by improving revenue collection. Some of the answers of the PML-N economic programme were there in Dar’s speech while some remained unanswered. With tax revenues expected to total around Rs2.75 billion, the budget deficit is set to be around 6.3 percent of the GDP, a worrying figure.
The first word on everyone’s minds was what was the energy plan? Rs225 billion was the amount that Dar stated had been allocated for the purpose. However, to what purpose those funds would be used remained unclear, especially given that the circular debt now stands at Rs500 billion. Subsidies are set to come down while tariffs shall be gradually increased. In terms of increasing tax collection, Dar promised “no additional tax on those who are already paying their share in tax”. He spoke of how the tax-to-GDP ratio had fallen from 13.8 percent to 8.9 percent. He said that the government had planned to bring it up to 15 percent, but gave no timeline or concrete plan, except point to “widen the tax network”. He made an important point in saying that “an effective tax system focuses on direct taxes, while ours focuses on indirect taxes”, but then proposed increasing GST from 16 percent to 17 percent. A new levy is due on movable assets while a withholding tax will be imposed on foreign films and dramas. Eco-friendly hybrid cars will be excused of any duties. Dar said the 3G telecom licenses will be auctioned, a matter finding no bidders in the last three years, and the foreign exchange reserve would be upped to $20 billion in three years. Rs59 billion is the allocation for new dams while the road and motorway network is set to be expanded. The Pakistan Railways is set to be turned into a “corporation” while more privitisation is expected, with Dar pointing to a need to “shrink the public sector”. The government is also set to introduce an eight percent markup micro finance scheme for budding entrepreneurs.
As usual, the promise of saving Rs40 billion by reducing government expenditures by 30 percent and House expenditures by 44 percent will be believed when seen. Dar also announced an end to secret funds, except for intelligence agencies. The real question however is how to expand the tax net. An agricultural tax has not been imposed while setting the tax rate at 25 percent for traders will dissuade more than it will bring into the tax net. The more dangerous promise is the “public corporations which ought to be sold, will be sold” promise. The fact that Dar himself mentioned the recovery of $800 million still owed by Etisalat over the PTCL privitisation deal means that it is hoped that the government is aware of the dangers of privitisation. There was of course the silence about the military budget, with not much said about whether the PML-N was tilting towards demands from civil society to “reduce the budget” or the military’s demands of “increasing it further”. With the first promise, the end of circular debts made with a 60-day timetable, it does appear that speed and determination may define this PML-N term. But with Dar indicating that the government may go to the IMF to cover the budget deficit, the question of how the begging bowl shall be broken still remains. Perhaps more should have been added to the tax net. One only hopes that the PML-N plan will work.
