Blending expectations and hard realities
By M. Sharif
Monday,JUNE 11,2007
The budget has been presented amidst hard realities of day-to-day living experiences imposed on a large number of people through free market mechanism. They have been groaning under the weight of inflation, particularly food inflation (registered over 10 per cent during the outgoing fiscal year) during the past four years. The segment of society that suffers the most is low income category, the unemployed and daily wage workers. They have been waiting with the expectations that budget will bring substantial relief to them in hard pressing areas. What does budget really offer to these segments of society and many other smaller segments in between them, is one of the most important questions to be addressed.
The most important issues to be addressed by budget planners were making best use of fiscal space and generating financial resources for development and meeting current expenditure. In addition to these, the government is to provide incentives for various sectors of the economy to sustain high growth and above all demonstrate political will to address social and economic problems confronting people. Together with this, to be able to address critical issues facing the economy, not at their face value but at their core points. Equally important is the fact that budget 2008 has been presented in an election year and under somewhat politically stressful conditions for the government thus some softening by providing some relief to hard pressed segments of society was in order. Also required was some incentives to various sectors of economy to achieve growth target of 7.2 per cent for FY08.
Background
Before looking at the budget proposals, it is essential to look at the performance of the economy during outgoing fiscal year. It did well on a number of accounts despite the fact that the government revised macroeconomic targets for the outgoing fiscal year. The economy achieved growth rate of 7.0 per cent, FDI increased beyond the target of $5.0 billion to $6.0 billion during first 10 months of the out going fiscal year, fiscal and current account deficit despite being high remained manageable, rupee-dollar parity remained stable despite a little pressure of devaluation to boost textile exports, forex reserves increased to more than record $15.0 billion and economy’s rating in international financial market remained more than satisfying to fetch $800million in May2007 for budgetary support. Capital formation in stocks has touched new heights and is considered to reflect strength of the economy.
Somehow these strong macroeconomic indicators do not go along with independent analysts who see the economy beyond fiscal and monetary indicators on certain obvious accounts. Conspicuous among them are high inflation, huge trade deficit, shortfall in exports by around $1.0 billion, dependence of the economy on external inflows of more than $8.0 billion each year and huge inequality that government policies keep creating among different segments of society during each fiscal year. According to independent analysts and quarterly reports of SBP, expansionary fiscal policy that has a direct bearing of fuelling inflation, weak supply side of economy, lack of full utilisation of PSDP expenditure and efforts to correct structural imbalances in the economy particularly with respect to increasing tax revenues are some of the important factors that did not make outgoing fiscal year a good year for the general public.
The budget
The budget, in terms of outlay, is a mega budget with record outlay of public expenditure under various fiscal heads as well as revenue collection. Its outlay is Rs1.847trillion with the largest ever PSDP expenditure of Rs520 billion and subsidies of Rs204 billion. PSDP expenditure is planned to be met through private and public sector partnership. Revenue collection target has been fixed at Rs1.030547 trillion. Further details of the budget outlay, fiscal targets and important budgetary proposals are as follows:
(1) Budget outlay is 35 per cent higher than the outlay for outgoing fiscal year, and projected revenue collection is 22.0 per cent higher than last year target of Rs835 billion that is likely to be achieved comfortably by the end of current fiscal year.
(2) Non-tax revenue is estimated at Rs337.593 billion. In case of adding it to tax revenue collection of Rs1.030547 trillion, total revenue collection is projected at Rs1.369trillion. After disbursing Rs465.964 billion to the provinces the federal government would be left with a net-revenue of Rs902.176 billion as against total fiscal expenditure of Rs1.599611trillion. The budget document shows heavy dependence on external borrowing of Rs258 billion, bank borrowing of Rs130 billion privatisation proceeds of Rs75 billion to meet the fiscal gap.
(3) Current expenditure is projected estimated to be Rs1.353trillion that is 54 per cent of the total budgetary outlay. This includes Rs275 billion for defence, Rs24.5 billion for safety affairs, *** Rs641.875 billion *** for general public expenditure and Rs520 billion for public development expenditure. Out of public development expenditure of Rs520 billion, federal government is to spend Rs370 billion and provinces share is projected at Rs150 billion.
(4) Projected fiscal deficit of Rs398 billion is 21.0 per cent of budgetary outlay. This is quite high percentage and also quite high in absolute terms. It would generate its own inflationary pressure and tight monetary policy likely to be pursued by the SBP during the FY08 which, might prove to be less effective to contain inflation once again.
(5) 25 per cent increase in the PSDP from Rs435 to Rs520 billion is certainly a big increase which will go a long way in creating jobs, reducing unemployment and alleviating poverty. 52 per cent of it is allocated for development of infrastructure and 48.0 per cent is meant for social sector development and welfare of the people. The projected allocation reflects concern of the government in two development areas. One, power sector development has a serious deficit vis-ŕ-vis around 7.0 per cent growth of economy over past four years. Shortage of power has serious implications for mid-term economic growth targets and cost of production of manufactured goods specially meant for exports. Current power crises are quite serious and it is feared that 1200mw deficit might take at least 2-3 years to bridge the supply and demand gap. The budget proposes to spend Rs40.0 billion on construction of dams. Two, social sector development has a direct bearing on poverty alleviation that the government claims to have been reduced to around 24.0 per cent, despite persisting high inflation over past four years.
(6) Provinces share has been increased substantially to Rs497.2 billion that is 46.0 per cent of divisible pool.
(7) Allocation for subsidies has been increased to Rs204 billion. It includes of subsidy on food items, power and fertilisers.
(8) Defence allocation has been increased from Rs250.0 billion to Rs275 billion.
(9) Rs34 billion has been allocated for Khushhal (people’s welfare) Pakistan scheme.
Relief to low-income group
The budget includes quite a few proposals to provide relief to the common people. A few important of them are listed as follows:
(a) Subsidies worth Rs204 billion will be provided including items of daily use to help the common man.
(b) Salaries of the government employees have been increased by 15.0 per cent and the pensions 15.0 and 20 per cent.
(c) The government plans to combat poverty by selling items of daily use such as rice, edible oil, dales, tea, sugar and other items of daily use at comparatively cheaper rates than the market. It intends to commission 5000 more utility stores with at least one at each tehsile (sub district) level. The stores will also sell discounted medicines.
(d) Old age scheme has been increased from Rs1300 to Rs1500 and minimum salary of unskilled labour has been increased from Rs4000 to Rs4600 pm.
(e) Allocation for Baitulmal (public welfare funds) has been increased to Rs7.5 billion.
(f) Rozgar (employment) Scheme has been allocated Rs105 billion over next five years, with around Rs20 billion a year.
(g) Housing problem will be addressed in Islamabad by constructing 5000 apartments and 3 to 5 marla schemes will be launched to help poor segments of the society.
(h) It is planned to open up 5000 utility stores across the country at the grassroots level to combat inflation.
(i) In order to augment existing health facilities, 815 basic health units are planned to be established.
Industrial sector
Industrial sector did not meet its target. Favourable budgetary proposals have been made to boost industrial sector. Some of them are as follows:
(i) Zero-tariff slab has been proposed to reduce the cost of raw material.
(ii) Custom duty has been withdrawn on import of machinery used in horticulture, furniture, surgical and medical instruments.
(iii) Custom duty on generators to be used for domestic and commercial use has respectively been withdrawn and reduced.
Some concerns
Fiscal deficit of Rs359 billion is projected to be met through bank borrowing of Rs130 billion and foreign borrowing of Rs229 billion. It is around 4.0 per cent of GDP. Two important factors need to be highlighted because of high deficit that could affect economy adversely.
One, it will add to the public debt which is already high in absolute terms. Borrowing from foreign resources is intrinsically linked with political stability in the country. One only hopes that the government successfully rides over somewhat disturbed situation in the country.
Two, the government prefers to borrow from the central bank than from commercial banks to have less debt servicing liability. It builds inflationary pressure as has been happening till now.
Thrust towards an expansionary fiscal policy is likely to persist during FY2008 as well despite tight monetary policy that the SBP has vowed to pursue. It might prove to be difficult to bring down inflation from its current level of 7.9 to 6.5 per cent as has happened during the outgoing fiscal year. High inflation and expansionary fiscal policy could discourage some FDIs that is upbeat because of surplus liquidity available in the Gulf States and western countries and their willingness to help the government in Islamabad for political reasons.
Amount of subsidies doubled from Rs109 billion for current fiscal year to Rs204 billion under various heads starting from power, fuel, fertilisers and food to pension. It will certainly provide some relief to common people.
The increase in subsidies despite being a welcome measure has the inherent drawback of not being the right solution of the issues that can be resolved only through correct economic policies that should enhance tax-to-GDP ratio, boost industrial output, change trade deficit into surplus, increase savings and employment and should curb effectively income inequality that is on the increase according to the Economic Survey 2006-07.
No new taxes have been imposed and a few changes have been made in the existing taxes. One per cent surcharge has been imposed on all but some essential imports.
Some of the taxes that should have been imposed have been left aside. They could have generated substantial tax revenue. For example, capital gain tax that could have been imposed on stocks and real estate business - has not been levied. Likewise, it is unlikely if the provincial governments would take the major step of levying agriculture income tax.
Current expenditure is on the increase. It calls for fiscal discipline to have less dependence on borrowed money for fiscal management.
Conclusion
The budget has been termed pro-people, relief and development oriented and perhaps the best one announced by the government during past seven years.
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