Mini budget?

Hafeez Shaikh seems focused on meeting the IMF targets without any supplementary tax measures (aka mini budget). There is no doubt that FBR tax revenues are ought to be short of revised target. FM is trying to hike the non-tax revenues, other taxes and curbing developmental expenditure to keep the primary fiscal deficit within target. That is his leverage to negotiate with the IMF to further reduce the FBR tax revenue target. This can happen as primary deficit is a binary target whilst FBR tax revenues is an indicative target.

There are news reports suggesting that IMF’s country representative and FBR chairman are hinting at a mini budget in couple of months. The assertion is based on the perception that even revised FBR tax revenues target is likely to be missed. The Fund has reduced the full year target from Rs5.503 billion to Rs5,238 billion. The reduction of Rs265 billion is allowed based on better performance in non-tax revenues and controlled expenditure.

The FBR missed the 1Q FBR tax revenues target. It fetched Rs964 billion against the target of Rs1,071 billion. The shortfall of Rs107 billion is overcompensated by other factors. The primary deficit target was Rs102 billion while the government showed a surplus of Rs305 billion. Based on better non-tax revenues, the government is able to revise the FBR full year target.

However, the revised target is still elusive. There are two options. One is to revise the target further down. The other is to impose new taxes (mini budget). Shaikh does not want mini budget. Asad was bashed for having couple of mini budgets in FY19.

The SBP is helping the FM by higher than targeted profits transfer- 45 percent of full year target was released in 1QFY20. Channel checks confirm that second quarter performance is similar. The other element of non-tax revenues is that a good chunk is coming from telcos’ license fees. The non-tax revenue in first half is close to 75 percent of full year target of Rs895 billion.

In other taxes, Petroleum Levy (PL) is the key. Government has higher allowance on PL than what is being applied currently. This means the government can increase the petroleum taxes (PL, not GST) without a mini budget. The advantage of PL is that 100 percent of it goes to federal pool. On the other hand, roughly three fifth of GST is provinces’ right. But by applying higher PL, the petroleum prices will have to be raised. It is an unpopular move. No less or more unpopular than a mini budget, anyways.

Apart from that, the FM is keeping a tight hand on PSDP releases. The first quarter releases were made the last days to not let the ministries spend. The tactic continues in second quarter. The current Planning and former Finance Minister is getting uneasy on low releases. The IMF is raising voice against slow PSDP spending too. PM is taking briefing on PSDP spending on weekly basis now. There is an obvious impact on growth. The BISP releases are slow too. But Q Block seems happy as long as IMF targets are met.

The question is whether there will be a mini budget or not in 3Q. That will depend on the Fund’s second review scheduled to take place in Feb-20. If the Fund says, ‘do more’, more will be donw. If it doesn’t, Hafeez Shaikh may well boast of a year without a mini budget.