Budget fails to address real issues of economy: IPR

  • Says since Pakistan’s last population census took place in 1998, all plans or budgets are based on a lack of information about number of people they affect
  • Says govt has relied again on withholding, indirect taxes to get close to fiscal deficit of 3.8 per cent

“Despite high claims, the federal budget 2016-17 does little to address the real issues of the economy or to revive growth,” the Institute for Policy Reforms (IPR) stated in its review of the budget.

The budget focuses on balancing receipts with expenditure, and does not set a strategic direction, the IPR said, adding that “the fiscal deficit of 3.8 per cent is too ambitious” and to get close to it, the government has relied again on withholding and indirect taxes.

According to the IPR, major issues encumber economic growth, as agriculture production has declined, while exports are in a precipitous long-term fall and power and energy remain short.

“The external sector is vulnerable, as the government borrows new loans to pay off old ones. The performance of industry is mixed. Textile production is stagnant and other key industries languish. Services, not the productive sectors, have fueled the economy’s growth of 4.7 per cent,” the IPR observed in its review, adding that “we have yet to see a strong policy response”.

The IPR pointed out that since Pakistan’s last population census took place in 1998, all plans or budgets are based on a lack of information about the number of people they affect. It said the government will be hard pressed to meet the ambitious fiscal deficit target of 3.8 per cent and it again may cut development spending to achieve it.

The IPR further said that total revenue is projected to grow to Rs 4,915 billion, a growth of 13.4 per cent, adding that following an increase of 19 per cent this year, Federal Board of Revenue’s tax revenue is targeted to grow by another 16.6 per cent, while total expenditure is set at Rs 4,418 billion.

It said that current expenditure will grow by 15.6 per cent over present year, while development will increase by 14 per cent. To meet its fiscal deficit target, it added, the federal budget counts on a provincial surplus of Rs 339 billion.

Inevitably, borrowing will also meet the gap, including Rs 819 billion in external funds, the IPR said, adding that the government’s plan to observe provisions of the fiscal responsibility law is encouraging.

The IPR said it welcomes the proposal for zero rating of five major export products which will ease a major issue faced by exporters. It questions, however, government’s policy to increase the burden of indirect taxes. “This year too much revenue increase comes through indirect taxes. These taxes are regressive, but more so, for an economy in moderate growth, they inhibit revival,” it added.

Referring to measures to revive the sectors of agriculture and industry, the IPR states that their contribution to growth is temporary, but the need was for long term efforts to build competitiveness and increase productivity, while reduction in input cost will help agriculture suffers from neglect of water resources and management.

The IPR said that the proposals also do not address the real issue of improving seeds and restricting virus, citing volatile prices as the reason for decline in production.

Observing that this year’s PSDP provides Rs 31.7 billion for the water sector which is Rs 15 billion less than the allocation of 2014-15, the IPR said that water must receive higher priority.

About the fiscal incentives for industry, the IPR review detailed that the industry needs technology support as well as access to capital and structural reforms to reduce costs. “The budget does not include proposals to improve governance to reduce of cost of doing business or to develop the capital market as a genuine source of funds,” it said, remarking, “Our exports will grow mainly through revival of industry and agriculture. This is critical for an economy effectively in a debt trap.

The IPR stated that the federal PSDP of Rs 800 billion is not enough to meet the large infrastructure and social deficits that constrain the economy, adding that “Even within this limited envelope, the PSDP’s priorities seem skewed.”

The IPR also expressed the hope that the Gas Development Fund of Rs 25 billion will not be another subsidy.

It said that in fact, the effective PSDP is Rs. 655 billion: this is two per cent of GDP and is 13 per cent of total budget. “The Rs 655 billion funds 813 projects, with an average completion period of seven years wherein roads get a disproportionate share of Rs 188 billion,” it added.

About growth in power sector allocation, the IPR observed that the budget primarily funds the two LNG power projects. As LNG is an expensive fuel source, the IPR said it would have preferred this amount to finance hydro projects, adding that the PSDP does not at all address the two major constraints of transmission and distribution.