Overview of the 2021-2022 budget
Under the given circumstances, the 2021-22 budget presented yesterday by Shaukat Tarin could not have been better. Let me explain why: The art of budgeting in Pakistan is about balancing needs with resources.
I classify our needs into four Ds: debt service, defense, day-to-day administration and development. Resources are generated from two streams: federal revenues (tax collection and non-tax revenues) and loans (from national banks and external sources). As needs always exceed resources, Pakistani budget makers continually struggle to match them.
What makes this complicated task even more complex is the fact that the conditions for borrowing from the IMF are always directly linked to fiscal indicators such as tax collection, inflation, primary deficit, rate of tax. interest and value of currency. When Pakistan receives financial assistance from the IMF, as it does now, budgeting begins with setting a primary budget deficit target – the gap between revenue and expenditure after debt service. Revenues are inflated and expenditures are deflated so that the imbalance between them does not exceed a deficit target set by the IMF.
A ‘V’ shaped recovery of a Covid-stricken economy, resulting in twice as high growth as expected (3.94%) for the outgoing fiscal year, helped Shaukat Tarin take bold action by saying no to the standard IMF resource mobilization recipe. Refusing to increase the tax burden on existing taxpayers and resisting the demand for increased electricity tariffs, he plans to expand the tax net through the use of data and technology.
Listening to the budget speech, my first reaction was that the Minister of Finance is trying to reduce the cost of doing business. The abolition of 40 percent withholding taxes, the elimination of tariffs and regulatory fees on many items, the limitation of discretionary powers of FBR officials, and the introduction of a third-party audit in Dispute cases between the RBF and the taxpayer would result in a reduction in business costs, an improvement in the ease of doing business, and – if implemented as perceived – help to improve the trust deficit between the population and tax collectors. Reducing costs and improving the ease of doing business will help revive the economy which in turn should lead to additional revenue collection, a rationale for the historical goal of high revenue in the budget.
The good news is that the budget has something positive for almost everyone. Industry and business sectors seem satisfied with the various measures that would improve their profitability and productivity. Agriculture is a provincial topic, and I expect provincial governments to allocate money to agriculture. However, the federal government has also allocated funds for some vital interventions in the agricultural sector. Taxes on silos and warehouses are reduced to allow farmers to store their produce and avoid exploitation through middlemen. Providing unsecured loans to small and medium-sized enterprises (SMEs) will help SMEs continue to provide jobs in the informal sector.
The reduction in duties and taxes on small vehicles (a small car would cost on average Rs 200,000 less) will help some people to switch from motorcycles to cars. It will also increase the production of small cars, creating jobs as well as additional income for RBF. Likewise, a record allocation for various initiatives of the Ehsaas program, for afforestation, water security, the Covid-19 vaccine, electrical infrastructure, reduction of regional disparities, climate change and a special grant for Sindh are all steps in the right direction.
To improve the purchasing power of the population, the minimum wage has been increased to Rs 20,000 per month. Likewise, a 10 percent increase was made in government salaries and pensions. Of course, these increases are not enough to cope with inflation. However, let me bring you back to the four Ds and limited resources.
Net federal income after the provincial share of the divisible pool for next year is budgeted at Rs4,497 billion. On the expenditure side, the three compulsory and non-discretionary expenditures – debt service / repayment (Rs3060 billion); defense (1370 billion rupees); and (in progress) until administration, salaries and pensions (1119 billion rupees) are budgeted at 5549 billion rupees. There will be a shortfall of 1052 billion rupees to meet these mandatory expenses.
Development-related spending which includes the PSDP (Rs 900 billion), grants and direct transfers (Rs 1,850 billion), subsidies (Rs 900 billion) and Covid-19-related spending (Rs 125 billion) are non-compulsory and discretionary expenses (which is why they are often reduced) and are budgeted at Rs2875 billion. The total shortfall for the above four Ds is 3.927 billion rupees.
The government expects revenues from privatization and a provincial surplus, but is expected to borrow at least 3.2 trillion to 3.5 trillion rupees if it obtains additional income from the aforementioned chiefs. This calculation is valid if the government sticks to the budgeted budget deficit. Any unforeseen expenditure or revenue slippage (increase in the budget deficit) – and the need for borrowing would increase.
Let’s also talk about some bad news. The bad news is that the things that hurt an ordinary citizen are no longer in the federal budget. I’m talking about energy prices; electricity and fuel – both oil and gas – the prices of which are determined by Nepra and Ogra and are linked to the international market.
The government has resisted the IMF’s request to increase the petroleum tax component in the budget, but the way oil prices are rising in the international market (the current price of crude is $ 71 per barrel) , it will soon be impossible for the government to continue subsidizing the oil process. The prices of commodities on the international market are also increasing. This will influence the domestic prices of edible oil, pulses and other imported items. If these trends continue, the government will need to borrow more – or pass the impact on to consumers.
The next fiscal year is about to begin. Let’s see how this plays out for the people.
The writer heads the Sustainable Development Policy Institute.