Budget strategy 2012-15

The budget strategy paper prepared by the Finance Division accepts the 'possible fiscal risks' to the budget for the forthcoming fiscal year and identifies 'detailed assumptions underlying the projections for the next year.' The fiscal risks have been made abundantly apparent in recent months for two reasons.
First and foremost, the Federal Tax Ombudsman (FTO) has finally challenged the Federal Board of Revenue's annual revenue statistics based on documentary proof that it presents gross as opposed to net figures (with refunds not factored in) and collecting advance tax from large taxpayers for July-September and reporting it in June collections of any given year to shore up revenue figures that not only overestimate revenue collections for the outgoing year but also allow the government to present a deficit figure much lower than realistic for the forthcoming fiscal year. Secondly, the claim in the strategy paper that the government took appropriate measures to improve the tax system by citing the doubling of total tax collections from 1 to 2 trillion rupees during four years would not convince economists who lend credence to the tax-to-GDP ratio as a better indicator of an improved tax system rather than total collections. The tax-to-GDP ratio in 2008-09 was 9.1 percent, which declined to 8.6 percent by 2010-11.
The paper indicates that the original estimates of 9.3 percent for the ongoing year would be achieved - a projection that is appallingly low by all standards and additionally is hardly believable based on clarifications sought by the FTO from the FBR. The paper itself acknowledges the veracity of this focus by not giving a target for total tax collections for 2012-15 but instead stating that the "tax-to-GDP ratio, estimated at 9.3 percent for the current year is proposed to be increased to 10.3 percent over the next three years."
Additionally, some projections made in the paper do not stand the test of plausibility. The GDP growth rate is projected at 4.5 percent for 2012-13 and 5.5 percent by 2014-15. Without a focus on meeting domestic energy needs it is hardly likely that growth would be above what was achieved last year at 2.4 percent. The strategy paper's claims with respect to energy are disturbing to say the least: the "government injected professionalism in the power sector by restructuring the Board of Directors of some PSEs, initiated alternate energy programme, put hard budget constraints and resolved the circular debt issue partially." Each of these claims is easily challengeable by a citizenry subjected to ever-rising hours of loadshedding. The paper however does acknowledge that the power sector and public sector enterprises currently cost 2 percent in growth and around 2 percent in fiscal deficit.
The paper also notes Pakistan's growth rate at 4 percent for the current year (with China showing a rate of 8.2 percent and India 7 percent) - a rate that nonetheless is better than in the US, the European Union, Latin America and the Middle East with a large GDP base. While Pakistan's largely consumer-based exports would be negatively impacted by the recession in the West, with imports rising faster due to higher oil prices, yet Pakistan has benefited enormously from a massive rise in home remittances due mainly to historically low interest rates in the West (to tackle recession) as well as the high rate of domestic inflation which of course is partly a consequence of heavy domestic borrowing by the government.
There is no doubt that the country is facing security challenges as well as grappling with an eroding rupee value that is pushing more and more people below the poverty line. However, the social safety net system (Benazir Income Support Programme) is being largely funded by borrowing from multilaterals, albeit at concessional terms, yet it is not grant assistance, and untargeted food and energy subsidies are fast depleting the treasury. The challenges identified by the paper seem insurmountable and include (i) rising oil prices, (ii) slowdown of external inflows mostly project assistance (needless to add programme assistance shriveled up as soon as the International Monetary Fund refused to extend the letter of comfort to the government), (iii) the hold up of the Coalition Support Fund, (iv) delay in transfer of 800 million dollars from Etisalat, (v) delay in auction of 3G licences, (vi) power sector and food-related subsidies, and (vii) increase in bailout packages to public sector entities.
However, one factor that is often ignored was rightly identified in the paper: the need to support provincial tax efforts with the objective of increasing their contribution from 0.4 percent to 1.2 percent of GDP in the medium-term. It is the responsibility of all provincial governments to not only enforce fiscal discipline through enhancing their collections but also in terms of reducing their borrowing and ensuring transparency in their expenditure allocations. A major achievement of this government is the 7th NFC Award that allows greater financial autonomy to the provinces but unfortunately the provinces continue to mainly rely on federal injections, rather than taking bold steps to increase their revenue collections. One would hope that Punjab and Sindh as relatively richer provinces begin to take bold decisions including taxing their farm income at the same rate as levied on industrial units and begin to develop capacity to make a difference in providing social sector services that have been devolved under the 18th Constitutional Amendment.