- The usual budget at the unusual time
The government budget serves as a harsh reminder each year of the collapse of Pakistan’s economy and the meaninglessness of statistics. Now, with no end in sight to this craziness, the mediocrity of the quantity of outlays, the absurd aims, and the crushing weight of debt are all repeated elements.
The coalition government unveiled an expansive budget for fiscal 2023-24 with the impending elections in mind, increasing federal employee salaries by a whopping 30-35%, increasing development spending by 33% and announcing tax incentives for industry, construction, information technology, agriculture and other sectors only Rs97.098 billion for education and Rs24.21 billion for the health sector. All expenses were offset by higher tax rates for people who don’t file taxes, a heavier tax burden on capital markets, and a forecasted greater yield from the petroleum levy. Curiously, it has planned a $2.4 billion inflow from the loan organization for next year despite the challenges it continues to encounter in getting the International Monetary Fund (IMF) to start viewing things its way.
Source: Business Recorder
The budget records showed no IMF inflows for the remainder of this year, despite the ministry’s assertion that all IMF requirements had been satisfied and that a staff-level agreement about the 9th Review could be signed as soon as possible. Surprisingly, as part of the roughly $24 billion (Rs6.87 trillion) in foreign loans that the government hopes to raise, they did make provisions for a $2.4 billion (Rs696 billion) infusion the next year.
The projected levels of foreign borrowing for the upcoming fiscal year are 114% greater than the actual inflows of Rs3.2 trillion this year. In contrast to the $2 billion received this year, the government anticipates a total of $5 billion in inflows from Saudi Arabia, comprising $3 billion in time deposits and $2 billion in new deposits. The government has set further goals of $1.5 billion in foreign bonds, $4.5 billion in foreign commercial loans, and $4 billion from China’s SAFE deposit, which is nearly twice as much as it has already received from China this year.
Since the prime minister anticipates their realization as a result of his interaction with the managing director of the fund, the majority of these loans would continue to be conditional on Pakistan’s re-entry under the IMF’s auspices. The government appears to be pinning its hopes for the continuation of the IMF program on a little adjustment it made to the subsidies it provides to the electricity industry (Rs894 billion for the upcoming fiscal year compared to Rs870 billion in the present year).
The majority of these subsidies of Rs315 and Rs310 billion, respectively would go to K-Electric and Independent Power Producers (IPPs), leaving just Rs150 billion for the tariff differential subsidy (TDS), down from roughly Rs225 billion this year. On the other side, KE’s TDS has increased by 63% to Rs315 billion for the following fiscal year from Rs193 billion this year.
Overall, this will result in an increase in the average power rate across the country. It is disappointing to know that the rise in salaries are incapable to cope up the inflationary pressure on the citizens. The entire planned expenditures of the federal government, which are estimated to reach Rs14.46 trillion, look to represent a fundamental difficulty on the fiscal operations side. The government would have a total income of Rs6.89 trillion, which includes non-tax revenue of Rs2.96 trillion, after distributing Rs5.27 trillion to the provinces through NFC Award.
However, interest alone will cost more than Rs7.3 trillion. In other words, the federal government’s revenue is insufficient even to cover its interest costs, let alone fund development, defense, civil government expenses, subsidies, etc., all of which will ultimately be covered by borrowing from domestic and international sources. The budget deficit of Rs7.57 trillion (or 7.1% of GDP) in the next fiscal year, which is higher than the Rs6.4 trillion reported in the previous fiscal year, is thus not surprising. A projected Rs650 billion provincial cash surplus will help to offset some of this, reducing the overall deficit to Rs6.9 trillion, or 6.5% of GDP.
It is anticipated that Rs2.5 trillion in foreign loans and Rs5 trillion in domestic borrowing will be used to cover the fiscal deficit of Rs7.57 trillion. Pension spending, which is expected to reach Rs761 billion next year, up 25% from this year, seems to be another escalating economic concern.
The expected cost of administering the civil administration, which is estimated to be Rs714 billion (up 29 percent from the previous year), now exceeds this figure. Next year, it is predicted that military-related pension costs would climb by 26 percent to Rs563 billion, compared to a 16 percent growth in civil pension costs to Rs188 billion. In spite of concerns from big industry, the government has broadened the super tax’s applicability to additional areas by “converting it into progressive taxation” and raising tax rates. The government has also raised the withholding tax on cash withdrawals for non-filers to 0.6 percent and imposed a 10 percent tax on withdrawals from foreign currency accounts for non-filers.
Ministry of finance announce a plethora of tax and credit incentives, especially for value-added and machinery, as well as for IT and IT-enabled services, in the form of tax facilitation, lower tax rates, and the creation of a provision for the availability of more affordable loans. Additionally, for the next two years, through June 30, 2025, the income tax on the construction industry, agriculture, and SMEs has been cut in half, from 39 to 20 percent. Additionally, from Rs250 million to Rs800 million, the threshold for an organization to be classified as a SME for tax reasons has been dramatically raised. Similarly, tax relief has been offered to industrial and export sectors, including metals and minerals, textiles and rice mill machinery, etc.
Pakistanis living abroad have also been granted incentives. Similar incentives have been provided for regional energy production, notably coal and solar. These consist of exempting raw materials for batteries, solar panels, inverters, etc. from customs taxes. To facilitate the import of crude oil and its byproducts, a new plan for bonded bulk storage of POL products will also be revealed separately. Additionally, a number of populist measures have been introduced for the youth, including the laptop program, tax breaks for independent contractors, income tax reductions for young business firms, loans, skill-development initiatives, and more. The BISP’s size, which was recently enhanced by Rs40 billion to Rs400 billion, has now been increased further to Rs450 billion for the next year.
To solve our ingrained issues, we must take strong action in light of our continued economic woes. The proposed budget for 2023-24 falls short of addressing important concerns including widening the tax base, funding human development and education, controlling the growing fiscal imbalance, and fostering an atmosphere that is conducive to business. Until we increase exports and collect fair tax money from the real estate, agriculture, and retail sectors, Pakistan cannot develop. The tax burden on the already compliant formal sectors has increased as a result of the budget, which would restrict capital formation and growth-oriented efforts in the manufacturing sector.
It remains to be seen if these actions will have the desired outcome, but it is quite evident that the administration is unaware of just how large the trust gap has grown. The last straw was a shutdown of the internet after more than a year of terrible economic management, trade restrictions, and currency devaluations so, the budget 2023-24 is nothing but a candy given by the state without realizing the fact that, a few goody bags won’t be able to repair the harm of skyrocket inflation so, deprived citizens demand unusual budget in this unusual time instead of usual budget in unusual times.
The author is MD IRP/Faculty Dept of H&SS, Bahria University Karachi