Fiscal deficit: unenviable inheritance

There is no respite from the soaring fiscal deficit; for 9MFY13 it stood at 4.4 percent as compared to 4.3 percent in the corresponding period last year and the budgeted target of 4.7 percent for the entire fiscal.
Yet there is no surprise here given the persistently rising deficit over the course of the outgoing government.
The deficit is likely to slip to 7-7.5 percent for the fiscal; and financing of this gap is haunting economic managers. Unless the PML-N government can find ways to boost government revenues and slash subsidies, the fiscal deficit will spiral with greater momentum than ever before.
The Federal Board of Revenue collected Rs1.548 trillion in the first nine months of FY13; registering growth of 4.7 percent over the corresponding period last year. While the full year budget target looks like a distant dream, even after being revised downwards to Rs 2.191 trillion from earlier Rs2.381 trillion.
But that too, is the tale for every year in the tenure of the outgoing government.
There is little to report on the growth story of direct taxes as they increased by a meager 4.6 percent, over the previous year. Taxes on goods and services also went up by just 2.9 percent, in this period. Other taxes doubled to Rs184 billion in the nine months of this fiscal, helping FBR post a double-digit hike in total tax collection.
Non-tax revenues exhibited growth of 62.3 percent in 9MFY13, thus explaining the overall growth of 22.2 percent in government revenues. Higher dividends accrued from government-owned entities, handsome growth in royalty on oil/gas and surcharges attributed to a better picture for non-tax revenues.
But government expenditure soared by 22.8 percent, effectively stifling any chances of containing the fiscal deficit. The current expenditure, that adds no new development to the economy, grew by 22.7 percent. Expenditure on general public service which swelled by 33 percent choked development which saw net lending of a paltry 4.4 percent in 9MFY13.
Simply put, the outgoing government spent most on servicing domestic debt, paying pensions and running the day-to-day affairs of government. Few, in any funds remained for spending on new infrastructure development.
Although there is not much difference in budget balance in terms of percentage of GDP, it is the change in the financing pattern which is alarming.
Net external flows were negative this time around, compared to inflows of Rs47 billion last year. Similarly non-bank domestic flows halved to Rs194 billion in 9MFY13. Thus, the onus of financing is primarily on the banking system which is doubled to Rs857 billion.
Due to the government’s heavy reliance on domestic banks to plug its financing holes; not only will private sector continue to be crowded out in its pursuit for credit; inflation may also rear its head in coming months.