Punjab spells innovative budget

On paper, the Punjab budget has some innovative steps and relief measures; but the lion’s share of Rs2.24 trillion budget revenues (Rs1,433 bn) has to come from federal divisible pool. Since FBR tax revenue target is elusive, the share of Punjab will be short. Development spending could be compromised and provincial surplus of Rs125 billion would only be on paper. The federal shortfall is to cascade to the provinces. Provincial own share of revenues is set at Rs317 billion for Punjab.

The thought process behind making Punjab budget in the limited fiscal space is to revive the economy. There are numerous pro-business steps. Various provincial tax rates are being cut. Public work programmes are carefully crafted by including employment intensive programmes. The government is aiming to not reduce the development budget. The idea is to focus on business growth and employed generation. Taxation is secondary. First aim is to revive the economy.

Following the federal footstep, there is no increase in salary and pension of provincial employees. The good step in this budget is the formation of a framework for rolling expenditure to preempt adjustments based on earnings. The releases will be monthly instead of quarterly. The relief plan is to be demand driven – a deviation from traditional supply based methodology. It is a realistic approach as Punjab government knows that the revenues from federal government will be short. That is the right way to go as the numbers are meaningless in federal budget.

In FY20, Punjab estimated revenue shortfall is Rs579 billion – Rs473 billion from divisible pool and Rs106 billion from own sources. Punjab was supposed to have Rs233 billion in surplus for federal government and is giving none in revised estimates. Federal government is expecting Rs242 billion from provincial surplus in FY20. Don’t expect anything in it and the consolidated fiscal deficit will surely slip further from 9.1 percent of GDP. Next year surplus of Rs125 billion is first line of defence for Punjab. Don’t expect an iota on this for federal government.

Punjab has done some innovation and shown some generosity in providing tax reliefs. Rs56 billion worth of tax relief has been offered to combat COVID related impact. Health insurance and doctor consultancy taxes are now zero rated. Tax on 20 services including hotels, marriage halls, IT services, tour operators etc are reduced from 16 to 5 percent. Not many of these were paying taxes. With reduced rates, there is a chance for these to come in the net. On such example of reduction of entertainment tax from 20 percent to 5 percent. This is good for an entertainment starved country. In order to boost construction, the stamp duty is reduced from 5 percent to 1 percent.

The best part of the tax relief is reduction of sales tax on restaurants and beauty parlor for credit card and debit card transactions to 5 percent. The GST on cash transactions is kept unchanged at 16 percent. This a big and right step towards documentation and digitization. The SBP is striving for incentivizing POS machine installation. Now the restaurants and parlors having these machines will attract crowd. Plus, this will encourage consumers to sway away from cash. Not to mention, this will reduce the practices of tax evasion by retailers.

The government own tax and non-tax revenues are budgeted at Rs317 billion in FY21 from revised estimates of Rs281 billion in FY20 (budgeted at Rs381 bn). PRA was supposed to get Rs166 billion in FY20 and now is revised down to Rs105 billion (down by 37%). Similar is the fate of Board of Revenue and Excise & Taxation.

Development budget for FY21 is set at Rs337 billion – 32 percent higher than revised ADP of Rs255 billion. Spending on roads and bridges is reduced from revised Rs41 billion (FY20) to Rs30 billion in FY21. There is no increase in development of irrigation works. The spending in construction and transport is increased from Rs73 billion to Rs104 billion. Development on health is to grow by Rs3 billion to Rs30 billion. Foreign funded projects are budgeted at Rs134 billion.

The current budget expenditure is almost frozen - up by 1.5 percent to Rs1,318 billion. There is nothing much that can be done in current expenditure as majority of spending is in salary and other inflexible expenditure. One fourth of the current expenditure is salary bill. One fifth of total is pension bill (Rs250 bn). The Punjab pension liabilities for future is estimated at over Rs5 trillion and only one percent of it is funded. Pension is on its way to become the biggest expenditure in the Punjab budget.

One third of current expenditure (Rs456bn) is to be transferred to districts through PFC. Remaining one fifth is for service delivery. Rs20 billion are allocated for subsidies (Rs17 bn in revised budget FY20). The main subsidy elements are metro bus and orange line fares, combined at over Rs12 billion. The overall agriculture subsidy at Rs8.6 billion is less than the amount for urban transport in Lahore.

The overall budget is well balanced and focused on relief measures. But the catch is in revenue generation from divisible pool and provincial own resources. In case of shortfall, the room to innovate and create employment will shrink.