Budget targets may remain beyond reach
By Babar Ayaz
A temptation that is hard to resist, while writing on the
lackluster budget for the coming fiscal year, is to reproduce much of my last
year’s article that was published in this space. Most of the targets set in the
last year’s budget, though they were modest, have been missed. The only new
factor that pushed growth down and inflation high was the unprecedented flood.
Other factors were predictable right from the beginning of the year.
However, if one keeps the present macro-economic situation
in the country in mind then it is no surprise that Dr. Hafeez Shaikh was unable
give a please-all budget 2011-12. Like many of his predecessor he had to
knock-together a budget sitting in a tight room with no elbowroom.
Just check out what are the constraints under which the
budget-makers of the country have to balance the books. In the first place all finance ministers have
faced the problem of working out a budget with a small tax revenue. All finance
ministers have tried and failed to bring in the undocumented economy in the tax
net. (Well some people suggest that the term ‘tax net’ should be given a
positive spin and called ‘tax club.’ It would make people feel part of an
exclusive club — that has membership of only a couple of million in a country
of over 177 million). Last year attempts to levy Reformed General Sales Tax
across the board were not only resisted by the opposition but also by the
coalition partners of the government. Reason: the parties like PML (N) and MQM
have the support of the bazaar which does not pay taxes.
I am not aware of any new study, but according to a couple
of studies done in the 90s, 50 percent of the country’s GDP is not accounted
for. So while the good news is that this sector flourishes consistently hence
it can be said that our growth rate is mostly under-reported, the bad news is
that the government is deprived of revenue from parallel economy.
Realising the constraints of the ruling political alliance,
the finance ministry has decided to spread tax resources by removing GST exemptions
from selected industrial sectors and by enhancing the direct tax club
membership. The latter is being done by identifying 700,000 potential tax
payers who don’t file their tax returns. Notices of 71,000 have already been
issued. This is the right step considering that the number of people who file
returns in this country is just 1.5 million.
In spite of this constraint where tax revenue income
expansion is the challenge the budget has estimated almost 23 percent increased
income from this head over the actual receipts in the out-going year 2010-11.
The assumption of the budget makers is mainly based on two magic numbers – 4
percent GDP growth and 12 percent inflation. The rest of the increase it has
been assumed will come from new tax administration.
Now these are ambitious targets and once again at the end of
2011-12, we may find that most targets would be missed. Why? Most conspicuously
the external inflationary pressure is not likely to ease this year. Those who
complaint of high inflation rate completely ignore what has happened in the
international market. In one year the food prices globally have shot up by 48
percent, oil prices have jumped up by over 40 percent and gold by 25 percent. The Economist 4th June issue
shows that maize prices have soared by around 80 percent, wheat by about 65
percent, sugar by 45 percent, palm oil by over 40 percent, beef by 20 percent
and rice by 5 percent. The way the world
is today global inflation is transmitted to all countries, the only difference
is the variation of the impact. The efforts to contain inflation through higher
interest rate and tight monetary policy have their negative impact on
Okay more inflation may help in getting more revenue as it
did in the outgoing year. But this means revenue collections from the existing
taxed sources and persons. The real test would be how fast and effectively the
‘tax club’ forced membership is expanded in the coming fiscal.
Another constraint for the budget-makers is that like
2010-11, the foreign receipts from IMF and Kerry-Lugar assistance programme may
fall much short of expectation. This may result once again on a heavy reliance
on domestic borrowing like the last fiscal year and we may end up with a higher
deficit financing target than envisaged in the budget. Even this year’s deficit
which the government claimed has been brought down from 6.3 percent to 5.1
percent, accounting experts say is understated. Their view is that energy
sector circular debt, for which government has given sovereign guarantees, has been
parked outside the budget in a separate entity. If that is included the deficit
would be higher, a leading financial expert explained.
So how do we meet the deficit? We borrow from the people
through the banks and central bank; we borrow from the multilateral agencies
and other countries. There is lot of rhetoric about breaking the proverbial
‘begging bowl.’ In the first place borrowing is not begging. No country or
business grows without borrowing. The prudential borrowing is for generating output
more than the borrowed input. It becomes dangerous when a country or a person
start borrowing for the current expenditure.
Let us put emotionalism aside. The 2011-12 budget shows that
after providing for the Rs1,203 billion provincial share, the federal
government revenue and capital receipts would be Rs1,925 billion only. This
does not include the external receipts which are borrowings, Rs303 billion domestic
bank borrowing and Rs125 billion envisaged provincial surplus. As against this
Rs1,925 billion real resources it has current expenditure of Rs2,315 billion
leaving a yawning deficit of Rs390 billion. We have not yet talked about the
development expenditure. Add to this an ambitious Rs452 billion development
budget and the total deficit comes to Rs842 billion.
Usual criticism is that the government should cut its
expenditure to live within its means, which in this case is Rs1,925 billion. Of
this amount 53.7 percent goes to repayment of loans and interest; 25.7 percent
to the mighty defence, 2.3 percent to pensions and grants, 8.6 percent to
subsidies and 10.5 percent to running the government. So where is the fat that
can be cut for breaking the ‘begging bowl’? Obviously we cannot cut on the debt
repayment. The other two major areas left are running the government and
defence. We are told that the country is in a state of war so we cannot cut on
defence expenditure, which is nonsense. The war we are fighting does not need
buying expensive F-16s, increase in nuclear stockpile and missiles if we decide
that we are not going to fight with India. Expenditure on civil government and
subsidies should also be slashed. But even after doing all this we would need
to borrow for development expenditure which of course is attached with strings
as all lenders want to ensure the payback capacity of the borrowers.