Government cuts development spending, increases taxes on country's elite

Published September 18, 2018
Finance Minister Asad Umar presents amendments to the budget for the ongoing fiscal year. —PID
Finance Minister Asad Umar presents amendments to the budget for the ongoing fiscal year. —PID
Prime Minister Imran Khan speaking in National Assembly. —APP
Prime Minister Imran Khan speaking in National Assembly. —APP

Finance Minister Asad Umar on Tuesday presented the incumbent government's amendments to the budget for fiscal 2018-2019, stressing that the Pakistan Tehreek-i-Insaf led government had only two priorities as it grapples with "difficult times": protect the poor and support exporters.

Prime Minister Imran Khan, ministers and lawmakers from both opposition and coalition parties were in attendance.


  • Federal development programme cut by almost Rs250 billion to Rs725 billion, with federal PSDP being target of most of the cuts
  • Budget deficit to be brought down to 5.1 per cent
  • Tax relief granted by PML-N revoked from salaried persons earning more than Rs200,000 per month; tax rates still lower than last year
  • Tax rate in highest income tax slab raised from 15pc to 30pc
  • Increased federal excise duty on imports of luxury vehicles and duties on 'expensive' cell phones
  • Customs duty increased on more than 5,000 'luxury' items. Regulatory duty increased on import of more than 900 items
  • Rate of withholding tax on banking transactions for non-tax filers increased to 0.6pc
  • Expansion of Insaf Sehat Card facility to Fata and Islamabad Capital Territory

Dire straits

Starting his speech with an invitation to opposition lawmakers, the finance minister acknowledged their past experience and said he was open to suggestions for amendments to the proposals he was about to present.

"Whatever suggestions you give, we will listen and accommodate if possible. We want to take parliament with us. We do not possess divine wisdom and do not believe only we can be right. Suggestions are welcome," he said.

Moving on to an assessment of the country's economic situation, Umar noted that the budget deficit had expanded to 6.6 per cent at the end of the last fiscal year from the 4.1pc that had been budgeted by the government for FY2017-18.

"When the PML-N government took over, the budget deficit had been 8.2pc of which the PML-N had said 1.2pc would go towards financing the circular debt. Five years later, we are at that same position," Umar said. "We all remember the difficult decisions that the PML-N had to make to grapple with that situation. It is part of history now."

The monetary value of the budget deficit — Rs2,293 billion — also does not reflect "what is happening off the books", the finance minister said.

"The power sector alone faced a shortfall of Rs450bn over the last year, even after all the subsidies they received in the budget. This number is not included in the deficit. Similarly, there was a Rs100bn shortfall in the gas sector," he explained.

"The most dangerous situation is that if we continue as we have, the budget deficit will expand to 7.2 per cent — Rs2,900bn — by the end of the ongoing year. This is the assessment of the finance ministry as well as economic experts, including past finance ministers and governors of the State Bank," Umar said.

"The external situation is worse."

"The current account deficit had been $2.5bn in 2012-13, when Raja Pervaiz Ashraf [of the PPP] was prime minister. In the fiscal year that just ended, the deficit had reached $18.1bn: more than 7.5 times higher."

"As a result our external debt, which was $60bn, reached $95bn by the end of the previous government's tenure," the finance minister warned.

Warning that the country's foreign exchange reserves had depleted to only two months of import cover, and drawing attention to the fall in the rupee's value against the dollar, the finance minister said that difficult decisions had to be made or inflationary pressures would build up to the point that they would become unbearable for the average consumer.

"The warnings came long ago: we are now at the precipice of a crisis," he said.

"If our reserves fall any further, we can imagine what the impact on the common man will be," he warned.

"We need to decide — not the government alone, but this house — if we want to continue like this," he said.

"In the last budget, the government overestimated the federation's revenues by Rs350 billion and understated expenditures by Rs250bn. Furthermore, the projected provincial surplus of Rs286bn is unlikely to be realised if we realise that the provinces actually ran a deficit of Rs18bn," he continued.

"In total, there's a Rs890bn difference in the expected and the budgeted figures for the deficit which we have to contain. If we do not take measures, the budget deficit is expected to increase to Rs2,700bn," he warned.

"These are difficult times, and they call for difficult measures. It does not take an economist to figure that out," Umar said.

"But we also need to make sure the burden [of our economic measures fall] on those who can bear it. The poor are already resource stressed, and we cannot burden them further. Sure, we can seek bailouts from the IMF and employ stabilisation measures, but that is not the solution: Pakistan's economy can only grow when our economy grows, our exports grow, our industries grow and our agricultural economy grows."

Relief measures

"For farmers, we are ensuring the provision of urea by boosting local production and by importing 100,000 tons from abroad. A Rs6-7 billion subsidy has already been approved on urea for the Rabi season."

"We will also provide Rs540,000 per family in Fata and Islamabad in the form of the Sehat Insaf Card to cover doctors' fees and medicines on an immediate basis. The prime minister has also asked the Punjab government to introduce the facility in that province as well."

"We have also directed the release of Rs4.5bn for the completion of a housing scheme for labourers on priority basis. As soon as these are built, we will start work on 10,000 more."

Minimum pension has been increased by 10pc for EOBI pensioners who qualify for the lowest category of pensioners, the finance minister said.

"The past government had projected that it would increase the petroleum levy from Rs189bn to Rs300bn, but we feel that this is highly unfair on the underprivileged customer. We want to provide relief in this area and will absorb that impact."

"The previous government had imposed regulatory duties on some goods, which we support as they have provided some relief on imports. However, we have decided to relieve duties on 82 tariff lines concerned with raw materials and inputs for export oriented sectors. This will translate into a Rs5bn relief."

"The bigger decision that we made yesterday concerns the five zero-rated sectors. The textile industry in Sindh was already receiving gas at subsidised rates, but the industry in Punjab had to pay higher rates, which resulted in an imbalance in their competitiveness.

"Nearly 500,000 workers were jobless in Faisalabad and machinery was being sold at scrap rates. We wanted to revive it. We have therefore provided a Rs44bn benefit for the textile industry in Punjab so that they can retain their competitiveness among regional countries. We will also work to ensure more benefits for zero-rated sectors in our electricity policy."

"We have only two priorities: protect the poor, and protect the exporter because they bring in the dollars," the minister explained.

Revenue measures

"We will raise Rs183bn in additional revenue. Half of this, Rs92bn, will be raised merely through better administrative procedures that utilise technology to plug tax evasion and leakages in the system. The Federal Board of Revenue has accepted this challenge."

To encourage taxpayers who are not filers to enter the tax net, the finance minister said the government was increasing the rate of WHT on banking transactions — not withdrawals — for non-filers back to 0.6pc.

The government would also remove the bar on non-filers from buying property in Pakistan because a lot of Pakistanis living abroad had complained saying the measure prevented them from buying property in Pakistan even though they were not even obligated to file taxes in the country.

"Please note that there are no additional taxes on tax filers," the finance minister said.

"We have also decided to increase taxes on cigarettes. This is also something that is close to my heart — yes, national policies are not made on personal beliefs — but my own brother passed away a few months ago from lung cancer."

"We have also increased some taxes on the rich. We have doubled the federal excise duty on cars of 1800cc engine capacity or more from 10pc to 20pc. The tax on several imported luxury items will be increased. Likewise, the duty will be increased on expensive phones. Pakistan Telecommunication Authority has the technology to prevent smuggling."

"Last thing: we've deliberated this in detail. The last government had given sweeping tax relief to all kinds of people, including the most rich [...] The final decision we've taken is that we'll maintain the Rs1.2 million annual salary limit on exemption. We are also maintaining the lowered tax rate for those earning between Rs100,000 to Rs200,000 per month."

"That leaves 70,000 people. We believe that the people who have the means will not oppose us on this: we are increasing the tax rate applicable on them that was introduced in May, but still keeping it lower than what it was last year."

The maximum tax rate will be 25pc for salaried persons and 30pc for non-salaried persons, the finance minister elaborated.

"And, since we're asking the privileged to sacrifice for the sake of Pakistan, we have also decided to withdraw tax exemptions on various services from the prime minister, governors and ministers," he added.

Development budget

"We recognise that the development budget provides a foundation for the future. The former honourable planning minister is seated here. He kicked off the CPEC programmes, which we will not allow a single rupee to be taken away from."

"Mr Khwaja Asif also mentioned the budget for dams, and we will not alter anything about it. We will try to complete the two dams — Diamer Bhasha and Mohmand — in five or six years, instead of eight or nine," Umar said, assuring the opposition.

"Rs661bn was spent on development last year; we will spend Rs725bn this year. But we need some financial innovation to do this. I invite the finance committee to meet on this separately.

"Out of this, we will be spending Rs50bn on development in Karachi. This is a joint venture between the federal and Sindh governments and the commissioner Karachi will be its chief executive."

"We have also identified infrastructure priorities in detail with the National Highway Authority, on which we will spend Rs100bn. We will spend another Rs575bn on PSDP, and another Rs150bn off the balance sheet."

'A lot of potential in this nation'

Saying that he was sure past governments had done whatever they believed was necessary for the benefit of the country, Umar said the nation collectively needed to acknowledge that something needed to change.

"I believe that everyone in this room is a patriot," Umar said, "But we need to acknowledge that the decisions we made in the past have not worked. We have not succeeded. We need to do something differently."

Promising that he would uphold and continue with the projects introduced by past governments "that worked" — especially the China Pakistan Economic Corridor and dams — the finance minister stressed that there needed to be change.

"A lot of people sacrificed a lot for this country, but this country wasn't gained by human effort alone: this nation was given to us by God. This nation has to succeed. We will do it together: Bilawal Bhutto will be a part of it; Shahbaz Sharif will be a part of our success. The leadership may be with Imran Khan, but the country will prosper together. There is so much potential in this country, and we will, God-willing, take it to new heights."

"This nation has to succeed. We will do it together: Bilawal Bhutto will be a part of it; Shahbaz Sharif will be a part of it. The leadership may be with Imran Khan, but the country will prosper together." — Asad Umar

Pre-adjustment speculation

Media reports had suggested that the government was looking at a fiscal adjustment of 1.5 to 2pc of gross domestic product (GDP), or Rs600-750 billion, through amendments to the federal budget 2018-19.

The government is aiming at a massive cut in development expenditure to the extent of over one per cent of GDP and through the withdrawal of tax and duty exemptions.

Consultative sessions continued until the last moment to deliberate completely banning the import of some 130-150 unnecessary items such as second-hand cars, while increasing duty rates on others including luxury items such as expensive phones, jewellery and food items. These trade measures are estimated to have an impact of over $1 billion on the current account deficit.

The current cumulative cost of tax and duty exemptions is estimated to be to the tune of Rs550bn which the government aims to bring down to around Rs200bn, thus transferring an impact of almost Rs350bn back to the people.


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