Hassan Yousaf Shah

Federal budget is the lifeline of the economy and main strategy document for how to run our finances for the next fiscal year. Build around macro economic variables, social economic priorities, and test for the political government to deliver, it is the most important task for a political government and the people. The upcoming federal budget will reflect the same and try to place expenditures against revenue targets. It has serious repercussions for everyone living.

Its failure to achieve assigned targets, will trickle down to the most common basic person on the streets, and effect different level of companies. The budget is expected to come up with revenue target of Rs 2,810 billion against this year target of Rs 2,275 billion, an increase of Rs 535 billion, 25pc increase. This is important to note that the pressure on the revenue generation is in fact due to mounting pressure on the expenditure side which is increasing phenomenal rates over the years. Not to miss the fact that government has been failed to meet this year assigned revenue targets. According to industry sources, government has revised its targets more than once during the year and is closing 15-20pc below the assigned targets set in the last year budget. How does government justify present jump over last year? It is equally important to question why is there sudden increase in expenditure to support such a jump in revenue targets?

UMDERSTANDING THE INCREASE IN THE

EXPENDITURE SIDE

How can we understand that the government budget which is a deficit budget which is plugged through borrowings and receipts of privatization?  The budget deficit is increasing every year and main reason cited in expenditure side of the budget is expanding while the revenue side is dropping significantly. It is important to highlight that the subsequent past budgets were clearly made to be revised later. The revision is clearly a sign that the initial budget is often made on over estimation, misjudged and made with clear assumption that it will not be realistic. Budget deficits are plugged from bank borrowing and foreign loans. Why can’t we have a balanced budget and why do we end up presenting budgets where we need to borrow? Below table is a overview on the expenditure side of the budget and reveals an alarming trend.

The forecast values are estimates and may undergo changes, rest of the figures have been taken from government statistics.

The current expenditure as a percentage of GDP is far higher than the development budget. The development budget which is of prime importance for any government is 1/4th the size. Development budgets which includes, providing social services like hospital, schools, education, healthcare, are being slashed over the years. The main thrust of the expenditure is the current expenditure, which by definition, includes, government’s spending on running itself. The defense expenditure (which is 4.4-4.7% of GDP), is still low, compared to government expenditure.  The interest payments on the hand are 4-4.4% of the GDP and are on the rise since last 5 years. Interest charges is a direct correlation with the borrowing which government has increased from Rs 717 billion in 2010-11, to 902 billion in 2012-13. Present government N league has increased the debt levels by nearly more than 20% over last, which is going to increase the interest payments to new unprecedented levels. The interest charges are going to increase mainly due to three critical reasons

1) Government has borrowed heavily from both domestic and international sources. Figures show that the recent surge in international loans have taken total debt from 14,000 billion levels to over 16000 billion figure (as per sources in the ministry) and that too at expensive rates. As per some economists, this will increase the interest charges to over Rs 1,100 billion in the coming budget. The exorbitant interest charge will eat into any revenue increase. The worst scenario will be when government will be borrowing long term loans from international sources, plus borrowing from local banking system just to pay the interest and current expenditure. The estimate is once again based on certain set of assumptions and like past, even if it most likely undergo revision in the coming months.

2) The government is holding back development expenditure and restricting outflow towards development projects.  As per press release, Federal government released only 55% of its Public Sector Development Program (PSDP) in the 11 month period for fiscal year 2013-14. This is another alarming trend in the disbursement and expense of development side projects. The development is solely being restricted to cosmopolitan of Lahore, Islamabad, Rawalpindi and perhaps Multan. The rural and semi rural side is being ignored at the behest of the certain political leaders in the government. This is also alarming trend as the development funds for the rest of the districts, and provinces is being stopped. According to opposition parties, the pace with which government is spending money on certain “chosen” projects, and choking development fund for socio rural support projects in deprived far flung districts is raising serious questions on the government’s priorities. Development expenditure is decreasing, ignored, while the money is being spent on development projects which according to some opposition most of the projects seem “unnecessary, ill planned and skewed”

3)  Government expenditure for the year 2013-14 was scheduled around Rs 3,985 billion which has been exhausted long before the year ended due to increase in the current expenditure. Needless to highlight that the current expenditure was mainly increasing due to government exorbitant borrowing while, increasing interest charges, and government spending on its own running. Defense expenditure is necessary as part of the ongoing war against terror and as some government quarters try to shift the blame, it is highly unfair to single out defense because they are a small portion compared to current expenditure.  The expenditure side in 2014-15 upcoming budget is expected to increase by nearly 15% as per one estimate. As per economists, this alarming increase in the expenditure is mainly due to uncontrollable quest for international loans, unnecessary expenditure at the government’s end.

REVENUE SIDE –Tax and other non tax income falling short yet again.

Interestingly the most important side and somewhat mismanaged part of the budget is the revenue side. Tax collection is the main source for revenue collection of which, direct taxes contribute a small portion 37.5% while the rest is made up from indirect taxes. Most income is generated from regressive and indirect taxes which is neither business friendly nor helps the common man.

The tax collection history is another interesting fact which shows how deficit is a bottomless pit, which has never seen its bottom. Government and its successive predecessors have been falling short on achieving the revenue targets as shown in the below table 2.

Table 2: Revenue and Tax targets against actual achieved. All figures in Rs billion.

The forecast values are estimates and may undergo changes, rest of the figures have been taken from government statistics.

1. Revenue for the 2013-14 targets will once again be missed. Even by prudent standards, there will be shortfall to the tune of Rs 500-350 against target and revised targets respectively. Interestingly, government plans an aggressive target for the next year. 

2. According to sources, the 2103-14 revenue shortfall has been cited due to three main reasons. One, the drop in economic activity which is evident from the drop in the GDP. The government failed to boost economic activity amid, energy crisis, weak policies. Two, certain SROs were introduced which were supporting certain sectors and helped them, but not the tax targets in any ways. The timing and purpose of such mystery SROs remains unexplained.

3. Government cannot fudge figures regarding the revenue, but it can certainly play around with it. According to sources, the government posted an increase in the revenue side over last year, however it is said that it has withheld sales tax refund to the tune of Rs 400 billion in the government released figures last month. These refunds were included in the tax collection while if one were to deduct the refund, the revenue figure drops by 15% over last year. Ministry sources denied the report and still claim refunds were excluded from the figure.

4. The government at the start of the fiscal year decided to increase the tax collection by increasing the sales tax rate and also include certain excluded retail sector in the gambit of GST. The move clearly showed that government is not interested in direct taxation and wanted to focus on generating revenue from indirect sources. The move also showed that the government will increase indirect burden over 2014-15 budget as well. As per sources, it is expected that government will increase revenue collection target by nearly 25%. Amidst last few year’s performance, even the most ardent supporters know that indirect taxes cannot fill the revenue targets. Successive governments failed, while this one succumbed to the business communities, kept low tax vigilance, but increased its 2014-15 revenue targets to extremely ambitious and unattainable levels. 

5. In the upcoming federal budget government plans to increase the revenue target by 25% or an increase of Rs 535 billion additional income. The important question is that if government fell short of the revenue targets in the first year, which some claim is the “honeymoon period”, how will it plan to recover an additional 500-700 billion from the same pool?

6. Government has another set of plans to increase the revenue sources. As per industry sources, the scheme includes withdrawal of SRO which was introduced in the first place to support “politically sponsored” business groups / business houses.  These SROs include, favor offered in terms of GST, and FEDs. As per government sources, the withdrawal may actually put Rs 260 billion back to the government kitty. However critics are of the other opinion. It is widely believed that the SRO withdrawal may help revenue collection but not more than Rs 70-110 billion. This leaves government short of Rs 100 billion again.

7. Government also plans to increase the GST to some other sectors. FED is expected to be enhanced to 17% in certain sectors and withholding tax may yet again undergo an increase. These efforts though may help increase the revenue but analysis reveal that they may still fall short of the actually help government achieve additional Rs 250-350 billion through taxes.