WE have been here before. Every time a government gets some fiscal space it immediately shifts gears to growth, ditching politically unpopular reforms. The ‘growth-friendly’ budget, based on an expansionary fiscal policy, for the next financial year rolled out on Friday is no different. After pursuing contractionary economic policies during the last three years — and getting nowhere, the PTI-led administration has decided to switch to growth as the 2023 elections draw closer. In the new budget, the incumbents have revisited their spending priorities, decided to increase development investment by a hefty 40pc to Rs900bn while offering a slew of significant tax incentives and relief to businesses, and announcing some schemes to put a bit of money in the pockets of low-middle-income segments. That is in line with what Finance Minister Shaukat Tarin had promised a day earlier — a combination of the bottom-up and trickle-down approaches for supporting the poor and incentivising businesses. It is another story that the policy still appears tilted more towards the trickle-down philosophy than the bottom-up approach.
Apart from political considerations, the build-up of an unexpected growth momentum during the present fiscal year on the back of major monetary stimuli, provided by the central bank to help businesses cope with the impact of Covid-19, and significant improvement in the external sector have helped the government reverse its contractionary policies. The planned US exit from Afghanistan has also enhanced Islamabad’s leverage with Washington. So for the government the time is ripe to defer IMF-mandated policies and change course to create a feel-good effect. How these factors play out is anyone’s guess.
More than the above-mentioned factors, the success of the budget for 2021-22 hinges on the ability of the government to raise estimated tax revenues of around Rs5.83tr, up by 24pc from the projected collection of Rs4.69tr during the outgoing year. The target is ambitious, given the fact that the government has let go significantly large revenues through its tax incentives, and is difficult to achieve if the performance of the FBR in recent years is anything to go by. A look at the Finance Act 2022 shows that the government plans to achieve the ‘additional revenues’ through a 30pc increase in income tax and sales tax. That will require tough decisions and serious efforts to broaden the tax base by bringing untaxed and under-taxed sectors such as retail into the net. This is something that many governments, including the incumbent, have tried many times in the past and failed because of their fear of the political fallout of the move. The failure to achieve the targeted tax revenues will force the government to slash its fiscal stimulus or borrow more to finance its development package. Similarly, the targets for non-tax revenue collection and privatisation yields are also on the higher side. Hence, the scepticism about Mr Tarin’s overall growth-budget plan.
Published in Dawn, June 12th, 2021