All is not well beyond budget numbers

ARTICLE: The budget was a non-event. It was presented as a yearly routine. In the last decade or so, budget-making has increasingly become an exercise to plug in the revenues for meeting the so-called inflexible expenditure. There was some sanctity of targets (in recent past), now it is mere juggling and mingling with meaningless numbers.

For the past three years (including last year of PMLN), the revenue targets have been set based on whims and wishes without giving much regard to the ground realities. The real issue is governance; but what's in improving it beyond speeches and screen-time. Plus, like service delivery, governance of many is a provincial subject.

Different methodologies are being applied to enhance the tax to GDP ratio. But it's like one step forward and two back. In PML-N's time, the manufacturing and exporting sectors were compromised for additional direct taxes in indirect form. The tax-to-GDP ratio grew slightly; manufacturing and exports fell. This government is undoing it; but the FBR's tax-to-GDP is back in single digit - at FY15 level. And now the energy prices are haunting manufacturing potential.

In the last regime, non-filers and undocumented sector were brought in the tax net through numerous presumptive tax measures. There was some uptick in collection; but undocumented economy widened. The PTI government came up with another stick to penalize. The undocumented economy widening grew at an unprecedented level. Now, there are some carrots in this budget. Nothing is working. The issue is mistrust between the taxpayer and tax collector; taxpayer and public service provider (delivery). That can only be bridged by improving governance. But that cannot be quantified in numbers.

The problem is that nothing is really working at federal government level to enhance the tax to GDP ratio. The stabilization measures and Covid-19 have significantly dented the economic growth momentum. The bottom line is that not only tax-to-GDP ratio is falling; but the GDP is plummeting too. It is a double whammy; especially when the state does not have resolve on lowering expenditure.

It is important to distinguish between the state and the federal government. The defence budget allocation has been increased by 5 percent in revised budget; and 12 percent from budgeted numbers of last year. The pressure of government employees was on salary and pension increase. The Finance Minister was welcomed by chanting of Q Block employees on the budget day as all they wanted a salary increase.

Debt servicing is the biggest head. The pressure from the PM's office could not be more on the SBP Governor to further lower the interest rates. Businesses want negative real rates and appreciation in currency. That defies economic logic. The Federal government is asking provinces to be prudent in budget making. But provinces have their own limitations on cutting expenditure. Are they working on taxations measures within their domains?

The situation is going to worsen. This year, the federal government salary bill and pension bill (including military) are at the same level. Time is not far when, after debt servicing, pension bill would become the biggest expenditure item. There is virtually no funding of pension liabilities.

Every actor of state is entitled to expenditure while the tax revenue generation is (primarily) in the hands of the federal government (mainly FBR). No one is ready to leave his or her share in expenditure. All want real growth in expenditure. At the same time, the private sector is pushing for lower taxes. Not to mention the role of the IMF.

The only one way to move forward is to expand the economic pie. The tax revenues are linked to the GDP while major expenditures are ought to grow absolutely irrespective of GDP growth. Thus, without sustained 5 percent plus GDP growth, a default on domestic debt is imminent.