Preparing the federal budget for the new financial year appeared to be an easy task compared to the fiscal exertions of recent years. The new macro-economic stability and the industrial growth with its higher tax payments made the relaxed atmosphere possible.
After mobilising revenues of Rs351.7 billion in the first nine months of the current financial year, the Central Board of Revenue (CBR) was confident of hitting the revenue target of Rs510 billion in the current year and even exceeding that. The IMF projection also said the current year's revenue collection would be above the target unlike the performance of recent years minus last year.
In the light of such fiscal optimism the revenue target for next year was fixed at Rs571.2 billion which meant an increase of Rs61.2 billion over the current year's target.
CBR Chairman Abdullah Yusuf and the officials of the IMF were reported to have chalked out that revenue target instead of trying to overshoot and fail, as in recent years.
It was also tentatively fixed the public sector development outlay would be Rs200 billion against Rs160 billion in the current year, almost an increase of 100 per cent over a two-year period.
Then came the new approach by the World Bank and the IMF possibly in view of the higher 7.2 per cent economic growth around Pakistan which said the revenues should be far more to achieve the growth rate of 6 per cent next year. Larger resources were also held essential for quicker poverty reduction and for larger social sector development programmes.
The international financial agencies wanted Pakistan to explore the possibilities of levying new taxes and collecting far more revenues from the existing taxes through better tax collection and less corruption in the CBR. Above all the government should do away with many of the 170 tax exemption, mostly in the income tax sector.
The government's position is that no new taxes are to be levied in the new budget. And after doing away with 72 tax exemptions in two years it would examine the need or legitimacy for each of the left-over 170 tax exemptions.
And Mr. Vakil Ahmad Khan, Member Direct Taxes, says the government would this year reduce tax on banks and companies by three to five per cent in order to eventually bring the level of taxation for banks to 35 per cent - the same as for companies now.
There are now new contradictions in respect of the tax GDP ratio. While Abdullah Yusuf says that is 11.5 per cent of the GDP the official Economic Survey shows that as 13.8 per cent of the GDP last year with 3.8 per cent as non-tax: GDP ratio, making a total revenue in relation to GDP at 17.6 per cent. Somebody ought to reconcile the vast disparity in the figures which are both official.
The revenue target for next year is in a state of flux now. The development outlay for next year may be fixed by the Planning Commission Co-ordination Committee by May 20 to accommodate the World Bank's and the IMF's demand for larger development outlay, touching Rs250 billion from Rs160 billion in the current year.
Prime Minister Mir Zafarullah Jamali and other ministers have been saying the new budget would be investor-friendly and business-friendly. What does that mean in specifics? It is supposed to mean very low or no import duty on industrial machinery and lower duties on raw materials.
That could mean loss of revenues; But the import of large quantities of raw materials and machinery could mean far more tax revenues than now. In fact, the current year's revenue picture improved distinctly because of lager import of raw materials and machinery which resulted in higher industrial growth by 15 per cent in the first eight months of the year.
On the industrial side the new revenue picture would be minus-plus. What is lost in terms of lower import duties the government may gain in the form of corporate taxes from existing industries.
Along with them we are to have a new textile city in Karachi and a garment city in Lahore which are to be totally exempt or become tax holiday zones. Gwadar will also be a tax free zone. The textile men may concentrate more in such tax holiday zones than in their existing fully taxed trade centres.
The governor of the State Bank of Pakistan, Dr. Ishrat Husain, has been pleading for 25 per cent corporate tax in place of the 35 per cent tax. Does he want that in stages or at one go? He has not specified that. And does his plea have the approval of Finance Minister Shaukat Aziz and dovetail with his fiscal map?
On the expenditure side, the largest single item is debt servicing, which this year costs Rs256 billion. Of that the interest on domestic debt alone is Rs170 billion while the interest on foreign debt is Rs39.5 billion.
But the foreign debt has come down greatly and so also the cost of servicing the loans. The more costly foreign debt is being paid off on a priority basis and rates of interest on some of the other loans are being re-negotiated. The US wrote off one billion dollars and is to write off $480 million in this financial year.
The new US aid package of $3 billion, spread over five years is to begin from November 1 with $701 million, with $300 million for defence and $300 million for economic development, $52 million for health, $40 million for anti-narcotic campaign and $7 million for border security. And after the write-off of the loan of $480 million this year the debt to the US would come down to $1.6 billion.
While the domestic debt is not being reduced its interest cost is being slashed. And that includes the interest rates on various instruments of the National Savings Organization, including the popular national defence savings (NDS) certificates. The NSO's savings instruments are to undergo another cut in interest rates after the budget.
The World Bank and the IMF insist the interest rates of the NSO should be the same as the interest rates for the Pakistan Investment Bonds. The second largest item of expenditure in the budget is defence which last year and this year consumed Rs160 billion.
The army is to be reduced by 50,000 soldiers; but that would not mean a reduction in the expenditure, as while the numbers are to be reduced the defence capability is to be boosted. The army is to be made a lean but more lethal.
A new demand for increasing the expenditure next year would come in the form of increase in salaries and pensions of government employees. The salary is to be raised by 10 per cent and inclusive of the pay rise of last year by 25 per cent.
The earlier generation pensioners who have been given a very raw deal should be given a fair deal now. When more than four million persons are employed by the central government as well as provincial and local governments, the salary burden is bound to be heavy and pension load excessive in these years when retirees live for long.
In an effort to assist the CBR collect larger revenues from existing taxes the World Bank has been coming up with large assistance. Out of its total aid package of $225 million for this purpose, $96 million are to be in the greatly concessional IDA credit.
How well will the CBR use these large funds and collect the 40 to 50 per cent tax which is not reaching the government coffers but passing into the pockets of taxation officials.?
The CBR has come up with varied innovations like the Large Tax Payers Unit, Medium Tax payers Unit and Model Units but the overall increases in revenues is not as large as expected and the extent of pilferage does not seem to have been plugged.
The budget has raised great many hopes among the traders and industrialists. And how well the assurances of various ministers to them become a reality remains to be seen.
While the official policy is to promote employment by helping the industrialists and investors both the employed in the unorganised private sector and the unemployed are deeply affected by the rising real inflation which is far above the modest official estimate of 4 to 5 per cent.
Food prices have shot up, beginning from Ata prices to the prices of mutton, beef and chicken. Understandably along with that vegetables prices have risen high, hitting the poor multiply hard.
The Sensitive Price Index (SPI) reflecting prices of 53 essential items rose by 0.82 per cent in the last week of April as a part of an excessive rise. Most of the flower mills in the country are closed for one reason or another pushing up Ata prices too high and making the commodity scarce. Administrative measures have failed.
The division of the centrally collected taxes between the centre and the provinces remains unsettled despite several meetings of the National Finance Commission. The provinces demand 50 per cent share while the centre is ready to yield up to 47 per cent. Now the divisible pool of revenues has been set at Rs540 billion. The provincial reaction to that remains to be ascertained.
Privatization of the nationalized units is making headway after collecting Rs. 43 billion in 18 months since the process was resumed. Major projects like the PSO, the KESC and the Pakistan Petroleum are to be put on the auction block and more shares of the PIA, the Sui Southern and the Sui Northern companies etc are to be sold to the public with the minimum purchasable shares reduced to 500 from 1,000.
All that should help the national debt to come down and along with that the debts servicing cost. And that should ease the squeeze on the budget next year. While 90 per cent of the sales proceeds of privatization are to he devoted to debt reduction 10 per cent is to be allocated for poverty reduction.
And that should be helpful to the government at a time when the international financial agencies are pressing the government to spend far more on poverty reduction.
With weeks to go for the budget to be presented, the major contours of the budget are yet to take final shape. In the NFC what is the loss of the centre may be the gain of the provinces and the people. With too many people making too many claims on the budget, budget-making gets to be too tough now.
