AS expected, the country’s consolidated fiscal deficit — the gap between the government’s income and expenditure — is increasing by the month. It expanded to 1.7pc of GDP in the first four months (July-October) of the present fiscal year, up by 17pc from a year ago, according to new economic data released recently by the federal finance ministry. The size of the deficit would have been a bit higher at around 2pc had the provinces not delivered a cash surplus. The primary balance, or the overall fiscal balance net of interest payments on public debt, however, remains in surplus although its size shrank to 0.4pc of GDP at the end of October from 0.6pc recorded a month earlier. The increasing size of the fiscal deficit is blamed on the double-digit growth of 13.5pc in government expenditure, especially owing to the 34pc rise in debt payments to Rs931bn, despite decreasing defence and development spending. It is crucial to control expenditure, particularly non-development spending, where possible to hold down the deficit. But government expenditure is not the only devil here. The real problem lies with the government’s inability to ramp up its tax revenue collection.

The FBR revenues, for example, have increased by a mere 4pc during the first five months of the ongoing fiscal on a year-on-year basis against the required growth of around 24pc if the tax target of Rs4.96bn for 2020-21 is to be met. In other words, the FBR will have to grow its collection by at least 40pc in the remaining seven months (December-June) to achieve the targeted tax revenues, which tax experts believe is next to impossible. Thus, many are already predicting that the government may breach the overall fiscal deficit target of 7.5pc for the entire year by a big margin. The extremely low tax revenue growth is mainly attributable to the government’s consistent failure to reform its tax machinery and broaden the net through documentation of the economy. The only other plausible reason for the listless tax revenue growth could be that the economy is not picking up as fast as the government claims in the Covid-19 period since July. With the increasing number of coronavirus infections in Pakistan and its trading partner countries dampening the hopes of any significant recovery, chances are that the government will be forced to substantially reduce its tax target going forward, as well as cut development and other essential spending to achieve the deficit target.

Published in Dawn, December 9th, 2020