Revenue shortfall

In June last year, the federal government budgeted privatization revenues of Rs150 billion. The year has almost passed and not a single piece of asset has been sold off in the fiscal year to date. Nor even stake sale at the stock market. Yet in budget FY21 documents, the revised estimates for FY20 reflect privatization revenues of Rs150 billion. No less than miracle can bring in these proceeds before June 30, 2020, which means this year’s fiscal deficit would be higher than government’s current reported estimates.

In FY21, the federal government expects to raise Rs100 billion worth of privatization proceeds. It is not clear whether these proceeds are expected to materialize from the sale of 28 properties (whose auction tender was floated in April 2020), or the SME Bank transaction (which was near completion before Covid hit the economy), or perhaps the much-delayed LNG power plants transactions. In any case, uncertainty abounds over the fate of FY21 proceeds on account of Covid-19, and a hostile political environment to say the least.

A few shortfalls, however, appear more certain for FY21. The first is the combined provincial surplus. Every year the federal government holds high expectations of combined provincial surplus, and nearly every year the provinces dash those hopes. The fiscal year 2021, being a difficult year, should be no different.

The federal budget expects a combined provincial surplus of Rs242 billion. But let’s say in an optimistic scenario, provinces do post a combined surplus of Rs100 billion, leaving a gap of Rs142 billion. Add to that the expected shortfall under petroleum levy. As argued in the adjoining piece on petroleum levy, the government has overestimated its target of Rs450 billion for FY21. Even in the most optimistic scenario, one can expect a shortfall of Rs100 billion under the head of petroleum levy.

Onto FBR tax target. That they are very ambitious, has been discussed in detail in these pages in this week so far. Based on FBR’s recent tax collection trends, the fact that no major increases have been announced in tax rates have been accounted (in fact rates have been reduced in many cases), and slowing economy means that FBR is all set for a shortfall.

Let’s give a benefit of the doubt and assume that FBR will be able to grow its revenues by 7.5 percent in FY21, which is a very optimistic assumption considering that last four years’ average growth has been 4 percent, where FY20 saw a growth of 2 percent and FY19 zero percent. But even under this optimistic assumption, FBR taxes would be Rs700 billion short of the Rs4.9 trillion target.

Totaling these three major sources of shortfall alone translates into an additional 2 percent of the GDP over and above the 7 percent (of GDP) of fiscal deficit currently budgeted. Any slip on the expenditure side, such as subsidies (which is quite likely if Covid’s impact worsens), or military expenses in the wake of hostilities on the eastern border, would only increase that number towards 10 percent. Plan accordingly!