Mini-budget: Old wine in new bottle

Iqbal Khan

NEW government’s measures of financial discipline stand unfolded. Some real some symbolic, put together they indicate a tough spell for a common man. Mini budget’s ‘emergency’ measures lack the conceptual shift that is needed to document the growing informal economy and increase economic growth to create more jobs. Measures unveiled by the new government suggest that it had not done its homework and has, by and large, continued the policies of previous government. Despite trumped up austerity drive, the cost of running the civilian government has been reduced by only Rs3 billion.
Tax measures of previous regime will continue. Some of the efforts to document the informal economy stand reversed. Cosmetic changes include withdrawal of tax-free perks of provincial governors and federal ministers. The proposed Rs1.9 trillion (5.1 percent of Gross Domestic Product (GDP) budget deficit target is Rs89 billion higher than the original budget deficit target. The finance minister said if no measures were taken the budget deficit could shoot up to Rs2.9 trillion (7.2 percent of GDP). That is, the budget volume could have gone up to Rs6.1 trillion by end of fiscal year as against Rs5.246 trillion projected in the main budget.
Finance minister described “increasing employment, enhancing economic stability and supporting exports” as top priorities of his government. However, despite Rs814 billion fiscal adjustment, the revised size of the budget will be Rs5.3 trillion; Rs63 billion or 1.2 percent higher than the original budget for this fiscal year. This is because the government has increased the current expenditures budget to Rs4.4 trillion (an increase of Rs234 billion or 5.6 percent of the original budget).
Instead of bringing any new sector or class of people in the tax net, the government has increased the burden on the existing taxpayers. It did not scale back non-development expenditures but has cut the development budget, which will pull down the economic growth rate to a level that will not be sufficient to absorb new entrants in the job market. Government has lowered the annual tax collection target to Rs4.4 trillion, deviating from its pre-election promise of increasing revenue collection and reducing reliance on indirect taxes. The Rs4.398-trillion target is only 14.4 percent higher than the collection of Rs3.841 trillion in the previous fiscal year. Promise was to increase revenue collection to Rs8 trillion. To achieve this, first year target should have been at least 20 percent higher.
Tactical level small impact effects, which have begun showing up are not due to trickle down of reforms, but due resource squeeze. Worst hit is Public Sector Development Programme. Nearly 450 schemes, costing 1.6 trillion rupees, which were in the pre-approval stage, have been dropped. Government has decided to release Rs4.5 billion for construction of 8,276 housing units for labourers. Employees Old Age Benefit Institute (EOBI) pensions have been upped by 10 percent. And 52 item categories of medical instruments and equipment have been exempted from sales tax. Earlier decision to increase petroleum levy by three fold to Rs30 per litre has also been withdrawn. This will result into Rs110 billion cut in non-tax revenue estimates. Government has also lowered the cost of doing business by providing Rs44 billion relief to the five export oriented sectors.
Two main pillars of economy agriculture and textile industry have been given added incentives. Textile that accounts for 60 percent of net exports is thrilled on a massive cut in input costs. The cut in duty on 82 items would give a benefit of Rs5 billion to the textile industry in remaining months of the current fiscal year. Moreover sector would get gas supply on subsidised rates. This is in addition to the Rs44 billion benefits the industry is being provided through gas subsidy to make the utility price uniform across the country. Textile sector is hopeful of doubling the exports within five years. Government has also promised to reduce electricity tariff for the industry to the regional competitive level. Agriculture got support prices upped alongside multi-billion subsidy in fertilizer and gas.
Government has increased the withholding tax on banking transactions being carried out by non-filers of tax returns. This would encourage the growth of informal economy. Cash will be withdrawn from the formal banking sector due to increase in the withholding tax on banking transactions. Non-tax return filers have been permitted to purchase cars and properties; this would encourage further growth of undocumented economy. More innovative measures need to be thought about rather than axing own feet. This is all the more important as country is struggling to get out of the Financial Action Task Force (FATF) grey listing.
The government also increased the sales tax on RLNG supply to all the sectors to the standard 17 percent. Natural gas tariff has been upped up to 143 percent in one go, one hopes that its comprehensive impact has been calculated. Moreover, Rs92 billion will be collected from tax evaders through administrative measures. The International Monetary Fund (IMF) however does not recognise administrative measures. Mini budget has left the government with an overall budget deficit of Rs1.9 trillion or 5.1 percent of the GDP against IMF guideline of 4 per cent.
The government’s net revenue receipts have been projected at almost original budget target level of Rs3.04 trillion after transfer of Rs2.6 trillion to provinces as their shares in federal taxes. Mini-budget did not announce new projected annual economic growth target but said it will be significantly lower main budget’s announced target of 6.2 percent. The exercise of mini-budget is not likely to ease out economic pressures through any substantial economic gain. At best it could be called a reprioritisation of spending.
—The writer is a freelance columnist based in Islamabad.

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