The budget of financial year 2015-16 is based on fragile and unrealistic assumptions and there may be a need for a series of mini budgets to meet the quarterly quantitative performance criteria of the International Monetary Fund (IMF), says Institute of Policy Reforms fact sheet on the next financial year’s budget.
According to the IPR factsheet, the budget focus continues on fiscal consolidation under the aegis of the ongoing IMF programme. The reduction in the fiscal deficit has to be achieved by a combination of wishful thinking, involving over-optimistic projections, and through the adoption of some creative accounting techniques. There is an element of subterfuge, with some of the more oppressive taxation and other measures not being explicitly highlighted, said the report.
The report finds the government will have to increase the power tariff by 15-20 percent to slash the power subsidy by Rs 105 billion in 2015-16. But justification for tariff increase will be difficult in presence of low fuel costs. In 2014-15, these subsides aggregated to Rs 243 billion, almost Rs 40 billion above the budgeted amount.
The report said that the budget does not contain any relief for the public due to the pressure to raise revenues and cut back on expenditure to achieve the fiscal deficit target agreed with the IMF. The fiscal deficit target of 2015-16 is based on the generation of a large cash surplus by the provinces combined of Rs 297 billion (almost 1 per cent of the GDP). This is highly unlikely given that during the 9th NFC deliberations, the provincial governments will have a strong incentive to establish higher expenditure benchmarks.
Commenting on the key budgetary measures for FY 2015-16, it says the government has committed to a further reduction in the consolidated fiscal deficit by 0.6 per cent of the GDP to 4.3 per cent of the GDP. How will this be achieved in the presence of a jump in the size of PSDP of 42 percent and fall in non-tax revenues of 14 percent? it asks.
As usual, an ambitious target has been set for FBR revenues at Rs 3,104 billion. This implies a growth rate of at least 19 per cent over the level of Rs 2,605 billion for the current fiscal year. The growth rates achieved, despite heavy doses of taxation proposals, FBR revenues are 16 per cent and 13 per cent, respectively in 2013-14 and 2014-15. As per past practice, many taxation proposals yielding Rs 253 billion are proposed. However, the possibility exists of a significant shortfall in FBR revenues once again.
For the first time in Pakistan’s history, the 2015-16 budget actually targets for a decline in current expenditure of Rs 20 billion. In 2014-15, the growth rate is likely to be at least 10 percent. This unprecedented drop in current expenditure is to be achieved, first, by no increase in costs of debt servicing. This is presumably based on the big fall recently in interest rates. But there is a `lock in` effect of the large stock of outstanding permanent and unfunded debt at higher rates of interest. Almost 62 percent of domestic public debt is of medium or long term tenure. In addition the public debt will increase by almost 9 percent by the end of 2014-15. Therefore, there could be still some increase in costs of debt servicing in 2015-16.
The budget, envisages substantial additional taxation with a yield of Rs 253 billion, equivalent to 0.8 percent of the GDP. Almost 56 per cent of the yield is expected from direct taxes. The most positive aspect of the budget is the effort to increase the incidence of taxation on unearned capital income and capital gains. This includes the change in rate and taxable holding period for securities, higher rate of taxation of dividends and effectively a surcharge for rehabilitation of temporarily displaced persons (TDPs) on the income of large tax payers. In the presence of large profits, steps to increase the incidence of direct taxation on commercial banks are also a step in the right direction.
However, some of the more radical proposals by the Tax Reforms Commission (TRC) have not been adopted. These include the withdrawal of the special tax privileges of VIPs, measures to tax foreign income of residents and inclusion of mechanisms for checking transfer pricing. The holding period for the capital gains tax on properties should have also been extended, as done in the case of securities.
About the performance of the current financial year, the report says the finance minister indicated that the fiscal deficit target for 2014-15 of 4.9 per cent of the GDP will be met. This is despite a shortfall in FBR revenues of Rs 205 billion and a larger outlay on the PSDP than the originally budgeted magnitude of Rs 525 billion. Further, the provinces are likely to fall well short of generating the required cash surplus of Rs 289 billion.
The non-tax revenues are expected to be higher by as much as Rs 226 billion. SBP profits are way above the budgeted magnitude of Rs 270 billion, at Rs 399 billion. The large difference is primarily attributable to the receipts of almost Rs 100 billion from the sale of shares of UBL. In effect, privatisation receipts have been shown `above the line` as revenue. According to the Privatization Ordinance of 2002, these receipts are expected to be a financing item `below the line` and used 90 percent for the reduction of the public debt. In effect, an important convention has been violated to raise the level of revenues and reduce the resource gap. It is interesting that the Explanatory Memorandum of Federal Receipts shows SBP profits at Rs 296 billion, said the report.
The defence receipts are up by Rs 64 billion above the projected level of Rs 140 billion. These are primarily receipts from the Coalition Support Fund (CSF) of the USA. At Rs 204 billion these are at an all-time high record level. Will they continue at a high level following the US withdrawal from Afghanistan?
The falling interest rates have led to a saving of Rs 55 billion in the mark-up payments on domestic debt. The passage of the GIDC bill by the Parliament recently, all arrears have accrued to the Federal Consolidated Fund (FCF) and the target revenue of Rs 145 billion has apparently been achieved. However, there is the fundamental question as to whether GIDC revenues should go into the FCF, as they are earmarked for specific purposes like financing the infrastructure development of Iran-Pakistan Pipeline, TAPI Pipeline, LNG or other ancillary projects.
Also, there is a ruling by the Supreme Court that GIDC is not a tax. However, the Ministry of Finance has adopted the practice of showing GIDC in tax revenues, presumably to show a higher tax-to-GDP ratio. All in all, somewhat questionable accounting practices have been adopted to achieve the IMF-mandated fiscal deficit target of 4.9 per cent of the GDP.
The proposed budget is unrealistic & numbers are all confusing. The parliamentarians will never be able to understand the numbers as most of them are illiterate & ignorant. So, like the past this too will be passed by the Parliament without much fuss, just wait. What all the political parties are speaking & politicizing the issues will just sit numb, because they have no understanding of the technical terms etc; in the budget, nor are experienced enough to join the dots. What has the general public achieved in the last 2 budgets ? it has added poverty to 1.5 million people & has price of any basic eatable reduced, just list it & compare from the time of 2013 election to 2015.
Pakistani Government is a bad entrepeuner best thing is privitisation. Government should care for tax revenue and security and first class education. And do not depend on IMF keep the intrest rate in your country give it to pakistani people wealth will spread. Last but not least strict anti corruption laws like in Singapur.
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