Apr 30, 2011

Warming up to the budget

What factors should be taken into account while preparing budgetary proposals?

By Mehtab Haider

Pakistan’s budget-making exercise revolves around three Ds -- debt-servicing, defense, and development. Allocation of budgetary resources for these areas reflects priorities of the government for the financial year.

A budget shows total revenues and expenditures of the government in a financial year. A government sets priorities both on revenue and expenditure side. In the aftermath of 7th NFC Award, more resources were transferred to the provinces without increasing their capacity to spend in an effective manner as well as their reluctance to accept responsibilities for taking development projects after devolving 18 ministries after the 18th Constitutional Amendment.

Growing debt-servicing is going to consume a lion’s share of resources as the requirement will jump up to Rs1000 billion after start of repayments of IMF loan. Debt-servicing stood at Rs800 billion in the outgoing financial year 2010-11. It is going to cross Rs1 trillion mark in the upcoming financial year.

Defense allocation is going to consume Rs518 billion in the next budget against the initial allocation of Rs442 billion for the ongoing fiscal year. The major victim will be development allocation because the Planning Commission and Finance Division are at loggerheads at the start of the budget making process. The Planning Commission asked the Finance Division to allocate Rs365 billion for federal development outlay against Finance Division’s indication of Rs280 billion in the next budget.

It will not be any easy task for the PPP government to come up with a status-quo budget as no option is left to rely on external inflows to bridge the deficit. The government will have to take tough measures both on revenue and expenditure side.

According to preliminary macro-economic and fiscal framework for the next budget, the government planned to curtail budget deficit at 4 percent of the GDP in 2011-12 in order to please the IMF with an objective to revive the stalled programme of $11.3 billion under Standby Arrangement (SBA) against an average level of 6 percent of GDP over the last three years.

It will be the biggest challenge for the PPP government to contain deficit at such lower level by raising revenues as well as cutting down expenditures at a time when new political alignments are on the cards. The provision of financing to bridge budget deficit is another challenge at a time when the donors are not ready to provide a few billion dollars.

Government will have to increase revenue in the shape of imposing Reformed General Sales Tax (RGST), reviving wealth tax, exploring ways to bring agriculture income into the tax net, and fully taxing the real estate and capital market to yield Rs2 trillion on FBR’s tax collection target for 2011-12.

In case of Pakistan, a major chunk of budgetary allocation is going to be utilised by three Ds as these left no fiscal space for meeting expectations of the masses for providing basic necessities of life through development schemes. The government was forced to borrow from international donors to allocate any amount in the name of Public Sector Development Programme (PSDP).

The budget-making process for the next financial year kick-starts in March every year. The ministry of finance has so far finalised initial blueprint for macro-economic framework for the next financial year 2011-12. The concerned stakeholders always complain that they are not taken on board by the finance ministry and FBR on key budgetary decisions. Even parliamentary committees, including National Assembly’s Standing Committees on Finance and Revenues as well as the same committee of Upper House of Parliament have been protesting for the last three years that they are never taken into confidence on budgetary proposals.

Renowned economist and former advisor Dr Hafeez A Pasha, who is currently Convener of Economic Advisory Council (EAC) and Revenue Advisory Council (RAC), tells The News on Sunday that the government implemented all recommendations of RAC in the last budget 2010-11 for setting the FBR’s annual target of Rs1,667 billion. But the government’s inability to enforce RGST and other measures in an effective manner, coupled with slowdown in economic activities in the aftermath of floods, severely damaged FBR’s target and finally it was revised downward to Rs1,588 billion. "We have serious doubts about the FBR’s ability to generate the desired revenue collection target of Rs1,588 billion by end June," says Dr Pasha said and adds that "tax collection of outgoing financial year would determine the basis for fixing the tax target of FBR for the next budget".

When his attention is drawn towards government’s preliminary estimates for generating Rs2 trillion as FBR’s revenues, he says there could be some guess but there should be some basis for fixing such an ambitious tax target. The EAC and RAC in a meeting held this month asked the government to consider revival of wealth tax, implement existing laws by the provinces to collect agriculture income tax from land holdings of over 50 acres, evolve consensus on RGST as well as with provinces to bring services into the tax net, rationalize tariff regime, and plug leakages for broadening the tax base to overcome fiscal woes.

A special committee was also constituted by the RAC comprising of Member FBR and tax experts to consider proposals for reviving wealth tax in the upcoming budget. Now the committee would come up with its recommendations before the next RAC meeting which is scheduled to meet on April 30.

The RAC had estimated that even after taking additional revenue measures of Rs53 billion last month, the FBR’s revenue would be standing in the range of Rs1,535 billion by end June 2011. The government estimated FBR’s revenue would touch Rs1,588 billion till the end of the financial year.

The revised fiscal deficit target of 5.5 percent of GDP will also rely on the provinces’ ability to generate 0.7 percent of GDP otherwise the deficit will shoot up to 6 percent on June 30, 2011. The EAC recommended the government to follow the Malaysian model by establishing a company to deal with cash bleeding public sector enterprises with immediate effect. The Malaysian government under Mahathir’s regime had established Khazana Holding Company to overcome woes of public sector enterprises.

Without abolishing role of ministries and establishing one Board of Directors having credible names, the much-needed restructuring of eight PSEs, including PIA, Railways, PASSCO, TCP and others will not achieve success. Former federal minister, Jehangir Khan Tareen, had recommended the government in the EAC meeting to enforce the existing law to collect agriculture income tax from big landlords. Provincial governments are authorised under the existing law of 2001 to collect agriculture income tax from those who possess land holding above 50 acres. There is fixed rate of tax per acre on those who possess land less than 50 acres.

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