An attempt to temper populism with realism

Finance Minister Hafeez Shaikh. — Photo by AFP

ISLAMABAD: The PPP government unveiled its fifth budget, which tried to balance the economic mess the government faces with the demands of the upcoming election.

As a result in one stroke it reduced subsidies and increased taxes — measures that are worth about Rs330 billion in total. But at the same time, it added Rs45 billion to its salary and pensions bill.

Announced on Friday by Finance Minister Abdul Hafeez Shaikh, the PPP-led coalition’s fifth budget estimated an expenditure of Rs2.960 trillion and a deficit of Rs1.105 trillion which is around 4.7 per cent of GDP.

However, the confusion over the government’s figures started soon after the speech ended.  The budget document put the federal expenditure at Rs3.23 trillion, instead of Rs2.960 trillion announced by Mr Sheikh.

One possible explanation for this discrepancy could be that in his speech the finance minister left out the Rs591 billion the government plans to spend on development.

This includes Rs360 billion under public sector development programme (PSDP), Rs77 billion in development loans and grants to provinces and Rs154 billion on other development expenditure such as the Benazir Income Support Programme, Export Development Fund, Crop Insurance etc.

The federal budget set an ambitious tax revenue target of Rs2.381 trillion and the finance minister claimed that his government would take the FBR tax to GDP ratio up to 10.1 per cent.

However, not everyone was willing to agree with his ambitious mathematics. Officials said the additional taxation measures would generate about Rs62 billion extra revenue but the net impact of this would be partially offset by the Rs31 billion fiscal stimulus. Hence the net gain would be only Rs31 billion.

Subsidy (mis)calculations

However, the government hopes that its cuts in subsidies will also be a major gain. Subsidies have been reduced to Rs208.6 billion, which is 59 per cent less than what the government spent in 2011-12.

Hence the government promises to provide only Rs135 billion to Wapda instead of the Rs419 billion it provided in 2011-12 while it aims to dole out Rs50.3 billion to KESC, which got Rs45 billion in 2011-12.

However, very few people are willing to buy these figures. An economist working for the government admitted on the condition of anonymity that the reduction in subsidies seemed unrealistic. He pointed out that in 2011-12 the government had put aside Rs166.5 billion for the power sector but ended up providing subsidies worth Rs512.3 billion. There are no indications this year that the next fiscal year would prove to be any different.

Perhaps the finance minister was aware of this as he said in his speech that the government had injected Rs1.25 trillion in the power sector in five years. “This is a huge burden on country’s fiscal system. After the NFC award, federal resources cannot carry this burden for too long”. But it remains to be seen if the provinces will heed his words or that the federal government will stop doling out cash for this hungry monster.

Federal government earnings

According to the budget, the federal government estimates it will have Rs3.23 trillion to spend in 2012-13, compared to Rs2.732 trillion it had in the previous fiscal year. This means it hopes for an 18.3 per cent hike in its revenues.

Out of this amount, it estimates to earn Rs2.504 trillion from taxes and Rs730 billion worth of non-tax revenue. It hopes to collect Rs932 billion from direct taxes and Rs1.572 trillion from indirect ones.

Telecom sales and CSF earnings

Interestingly, the government plans to collect Rs730 billion non-tax revenue, which is 42 per cent higher than what it got in 2011-12 -- Rs512 billion. The low figure for 2011-12 can be blamed on the failure to hold telecom sales and because Washington didn’t deliver the coalition support fund.

Hence, the ambitious target the government has set itself in the budget is primarily based on the notion that it will earn Rs197 billon in CSF and third generation telecom earnings.

Deficit gaps and hopes

The overall federal fiscal deficit for the next year has been estimated at Rs1.185 trillion but the budget documents put it at Rs1.105 trillion because the government expects that the provinces will provide a cash surplus of Rs80 billion.

But even if the provinces deliver, the federal government will meet the Rs1.105 trillion deficit from Rs971 billion of domestic loans and the rest from external loans. But as the finance minister pointed out in his speech, the deficit target for 2011-12 was missed by a huge margin especially if subsidies and debt consolidation were added to it -- all this took the deficit to 7.4 per cent of GDP in 2011-12.

Back breaking expenses including salary hikes

The total current expenses have been estimated at Rs2.612 trillion. The largest share of expenditure would be consumed by interest payments of Rs926 billion, about 9.7 per cent higher than 2011-12’s revised estimate of Rs844 billion. The total expenditure on pensions has been estimated at Rs129 billion which includes Rs98 billion for military personnel and Rs31 billion for civilians.

In addition the government has announced another Rs45 billion for the proposed increases in salaries and pensions. The finance minister announced an across the board 20 per cent increase in salaries and pensions for government employees. That this was a political move forced on him as confirmed by officials in the finance ministry who said Mr Shaikh had wanted to stick to a 10 per cent increment but federal ministers such as Khursheed Shah, Qamar Zaman Kaira and Firdous Ashiq Awan wanted a 30 per cent raise. Eventually, the two sides compromised on 20 per cent.

Defence has been allocated Rs545.4 billion for the next year, about 10 per cent higher than what it was supposed to get in 2011-12 and 6.8 per cent higher than what it actually ended up with.

The civil government will get a mere Rs240 billion, slightly higher than current year’s Rs216 billion while subsides will swallow up Rs208 billion.

The subsidy to the poor through Utility Stores would be increased from Rs2 billion this year to Rs6 billion to provide relief during Ramazan. In addition, the allocation for BISP has been increased from Rs50 billion to Rs70 billion.

Jobs in an election year

The finance minister also said that fresh employment opportunities would be generated for 100,000 educated youth.

Tax cuts for the salaried class

The budget promises to reduce tax rates. Mr Shaikh announced income tax exemption from existing Rs350,000 a year to Rs400,000 for the salaried class and businesses. The income tax slabs were reduced to five from 17 and only the portion of income exceeding a specific tax bracket would be charged at higher tax rate. He said this would benefit all existing income tax payers.

He also said that major tax relief had been extended to capital markets and investments. As such profits and gains of venture capitals would be exempt from taxes until the year 2024. Likewise, investments, retirement funds, dividends received by banks would be exempt from withholding tax provisions on capital gain tax.

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