When Finance Minister Shaukat Tarin presents the PTI’s third full-year budget on June 11 in the National Assembly, it will be interesting to see him change gear from strangulating stabilisation to economic growth that he has been advocating in the past two months.
To his advantage are healthy provisional indicators from the real economy that posted almost four per cent growth from a historically bad year of 2019-20. The downside is the still unclear Covid-19 path along with the International Monetary Fund’s (IMF) programme and at the crossroads is the reform agenda.
Key benchmarks for the next year have already been revised up — economic growth is being targeted at 4.8pc and inflation rate at 8.2pc along with higher fiscal and primary deficits. This mainly stems from a higher public-sector development programme (PSDP) at Rs900 billion instead of Rs800bn and about Rs150bn lower revenue target than given by the IMF (Rs5.96 trillion). The government is aiming for a Rs5.82tr revenue target for the Federal Board of Revenue (FBR). The two heads together lead to about 0.5pc of GDP adjustment in deficit.
The minister has been promising relief for ordinary people under a growth-oriented and business-friendly budget for 2021-22, arguing that the trickle-down theory had failed and, hence, he would adopt a bottom-up approach, which would support the vulnerable through health cards, targeted electricity subsidies and an expanded Ehsaas programme.
The government has committed to continuing the existing policy of imposing levies, cesses and surcharges to enhance resources for the federation
An unprecedented amount of Rs74bn has been allocated for the Special Development Goals Achievement Programme (SAP) — a namesake of the PPP’s Social Action Programme (SAP) of the 1990s. Ironically, a larger chunk of Rs56bn is placed in the Cabinet Division’s budget as block allocation without specific projects to be later taken up on the wishes of the ruling party parliamentarians.
The new economic team has pledged it will increase revenue by using innovative means and technology to bring retail traders into the tax net through the cross-matching of data available at different layers of government. It has promised promoting self-assessment and giving incentives to businesses and individuals while simultaneously adopting third-party audits with heavy fines and punishments for tax evasion.
The overall budget deficit limit has now been pitched at 6.5pc of GDP instead of the earlier 6pc while the primary deficit will be around 0.6pc instead of 0.1pc. It has to be kept in mind that the inflation rate last year was budgeted at 6.5pc, but it increased to 9pc. Similarly, the budget deficit was estimated at 7pc, which turned out to be 7.2pc last year.
The government’s key objectives for the next budget are based on revenue mobilisation through administrative measures and use of technology, expeditious disposal of tax refunds, broadening the tax base, increasing the share of direct taxes, reducing tax expenditures, simplifying tax procedures and lowering tax litigations.
On the spending side, sustainable and inclusive growth, protecting the poor and the vulnerable, containing inflation through a freeze on administered prices of energy, increased development spending for job creation and a minimal increase in current expenditures will be key objectives. This will be done through housing programmes and initiatives like Kamyab Jawan and Kamyab Kisan. These are likely to generate between 1.2m and 1.9m additional jobs next year.
About Rs350bn worth of unspent funds out of Rs1.2tr Covid-19 funds were still outstanding. About Rs200bn of these funds will be spent next year. Subsidies in the power sector are being increased to about Rs500bn as per actual estimates of the Power Division rather than about Rs300bn that were insufficient and added to the circular debt this year.
The authorities expect the IMF to relax its stance on the ongoing third wave of the coronavirus and want the Fund to consider the chances of higher growth built on a robust 3.94pc GDP growth rate in the current year. As such, the government will pitch a total of Rs1.9tr development programme, including Rs1tr from the provinces, to get closer to 5pc growth.
With about 4.8pc GDP growth and 8.2pc targeted inflation next year, revenues are expected to automatically increase almost 13pc, leaving a gap of about 7pc or about Rs350bn through additional measures as already hinted by Mr Tarin. About Rs80bn-90bn worth of revenue measures have already been introduced through a presidential ordinance for income tax exemptions that will be protected through Finance Bill 2021-22.
That means the government will require no more than Rs250bn worth of additional tax measures that can easily be achieved through administrative means and from traders and other minor adjustments here and there in the sales tax regime. This will be done through a mix of administrative changes and lower tax rates for those who will electronically integrate with the tax machinery.
The salaries and pensions of existing and former government employees will be increased by at least 10pc — just above the 8.2pc rate of inflation — and their tax rates will remain generally unchanged in view of a freeze on the salaries of senior civil and armed forces’ officers this year. The argument is that real wages have already actually gone down since the PTI government came to power three years ago as inflation has been taking a heavy toll on individual earnings.
The government has committed in its budget strategy paper to continuing the existing policy of the imposition of levy, cess and surcharges to enhance overall resources for the federation to finance the rising debt servicing costs. In order to introduce new streams of non-tax revenue, a comprehensive revision of the existing legal frameworks is in the consultation process with ministries for necessary amendments to the relevant enabling laws, rules and regulations.
The budget 2021-22 will also see the elimination of about 20 withholding taxes as the authorities contend that their collection, mostly in the sales tax mode and incorrectly credited under direct tax receipts, was not only highly inflationary but also their incidence on the poor was higher than on the rich.
Published in Dawn, The Business and Finance Weekly, June 7th, 2021