The mirage of the first halfs fiscal deficit

That the government has yet to put its fiscal house in order should not be much of a surprise for close followers of the Pakistani economy. Against a target of 4.7 percent of GDP for FY12, a budget deficit of 2.6 percent in 1HFY12 may lead one to think that the overall target for the entire fiscal year may not be too hard a feat. However, according to SBPs second quarterly report The State of the Economy meeting this years target will not be a piece of cake. Firstly, SBP observes that the fiscal deficit in the second half has historically been greater than that in the first half since FY08. Secondly, the government may spend more than the budgeted amount on PSDP this year. Thus, whether the budget deficit will exceed the target this fiscal year appears more likely than not. Growth in FBR revenues played a significant role in helping keep the budget deficit low during 1HFY12, though the revenues collected were Rs43 billion less than the estimated Rs884 billion for the first half. Growth of 27 percent in total collections came at the heels of a rise in direct taxes - thanks to FBRs improved efforts towards auditing and assessing filed tax returns - as well as a robust growth in sales tax collection owing to better rupee value of imports and the withdrawal of several sales tax exemptions and limiting zero-rated regimes. Provincial fiscal management, however, is what leaves a lot to be desired. A provincial surplus of Rs20.6 billion during 1HFY12 against a full year target of Rs125 billion makes one doubtful about the state of fiscal affairs in the provinces. While current expenditures of the provinces increased by Rs99.8 billion in 1HFY12 relative to 1HFY11, lead primarily by Sindh followed by Punjab, provincial development expenditures increased by Rs31 billion during the same period vis-à-vis the previous year. However, the provinces have yet to put their revenue enhancing efforts in top gear in order to meet their individual budget deficit targets. Unless the provincial targeted budget surpluses are met, non-tax revenues from Coalition Support Fund inflows and 3G license auctions and strict control of government expenditures is observed, meeting the 4.7 percent budget deficit target for FY12 appears to be a tad farfetched.

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Summary of Public Finance
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(Rs bn)                         FY11      FY12   chg (%)
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Total revenue                    990     1,135        15
Tax revenue                      722       905        25
Non-tax receipts                 268       231       -14
Total expenditure              1,480     1,668        13
Current                        1,227     1,399        14
Development and net lending      208       231        11
Overall deficit                  490       533         9
As % of GDP
Overall fiscal deficit           2.7       2.5
Revenue deficit                  1.3       1.3
Primary deficit                  1.1       1.9
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Source: SBP