Comments: Measures not bold enough

The noisy backdrop of Finance Minister's budget speech was an anticlimax that left the opinion makers to dig budget documents and the finance bill for commentary. Was the budget populist, business-friendly or did it address the key economic reforms? The answer is none; in fact it was a reflection of the government's performance in past three years: drag the debate and bury the issue.
The finance bill, contrary to past years, is a thin document with only 36 pages and doesn't describe much about how the FBR will meet its revenue target of Rs 1,952 billion, now that the GST has been slashed from 17 to 16 percent. The Federal Finance Minister Hafeez Shaikh admitted in his speech that lack of political consensus eluded the RGST law. Nonetheless, exemptions and zero ratings earlier withdrawn by presidential order have been included in the budget, along with the removal of a few other distortions.
However, the initial impression of one tax expert was that 28 percent jump in sales tax to Rs 837 billion in FY12 is too optimistic, who added that "history is not with us, as the FBR is known for missing its targets".
Although, reducing the incidence of sales tax is a step in the right direction, however non-implementation of RGST will prevent IMF, and in turn other multilateral agencies, from helping us. This seriously questions the external receipts of Rs 414 billion budgeted, up 43 percent from revised estimates of the outgoing year.
Raising Rs 658 billion from non-tax revenues seems to be a high aim as well. Mind you, last year with zero privatisation proceeds budgeted by the government, it is expected that it will miss its non-tax revenue target for FY11 by 12 percent.
The government had envisaged to raise Rs 51 billion by the issuance of two 3G licenses (each of Rs 25 bn) in 2010-11, but it sold none. This year it plans to raise Rs 75 billion by issuing three 3G licenses in FY12. However, at the time when industry players are looking for mergers and acquisition amidst falling margins and negative bottomline, generating revenue from this avenue is not a highly probable source for the government.
On the expenditure side, there appears to be a trade-off between running subsidies and development programmes. In FY11 subsidies were budgeted at Rs 84 billion but are revised by 3.5 times to Rs 296 billion primarily owing to inter-disco tariff differential on account of WAPDA/PEPCO and KESC. This overrun in subsidies is compensated at the expense of Rs 163 reduction in development expenditure which is revised down to Rs 263 billion.
In upcoming year, subsidies are budgeted at just Rs 123 billion in the hope of resolving the circular debt issue and expediting other power sector reforms. Still, the government has already subsidised power sector losses over Rs 1,000 billion in past three years.
Empowerment of regulatory body NEPRA with professional management and corporatisation and independence of DISCOs and GENCOs is imperative for plugging holes. The government's verbal commitment is there, but only time will unveil its efficacy and its impact on development expenditure which is budgeted at Rs 300 billion for federal government.
And meeting subsidies target can only ensure achieving 8 percent growth in expenditure from revised estimates to Rs 2,314 billion. The point of concern is interest payments, which, budgeted at Rs 791 billion (primarily on domestic debt) in FY12, is little over half of net revenue receipts - gross revenue minus provincial share. And if we add foreign debt payments (as IMF repayment starts from next year), defence expenditure, and pension payments, oops, the balance turns negative by Rs 36 billion.
This implies the government has to bank upon domestic banking sources or depend on capital receipts (mainly borrowing) and external receipts (including Rs 70 bn from privatisation) to run its day to day affairs, grants and transfers, subsidies and spending on development. Making a full and final tax of 10 percent on investment in PIBs and T-Bills for both residents and non-residents that makes it compatible to CDNS is a good move and may entice individual investors in this domain.
Nonetheless, while keeping capital gains tax on equities, against the strong lobby by the brokers' community, KSE and SECP, raising Rs 70 billion from privatisation may require greater marketing efforts by our economic managers. While, theoretically, increasing the tax credit from 5 to 15 percent for first year on new listing may entice some new companies to come on local bourses, the chances of that happening appear slim on account of weak capital formation and troublesome business environment.
Coming back to the financing of expenditure issue, the government is expecting a surplus of Rs 125 billion from provinces which is the right of federal government as main expenditure -debt servicing, defence and subsidies - falls in its domain while provinces are getting 57 percent of gross revenues. But the reality could be different as federating units have not yet developed the capacity to raise sales tax revenues on services and may not have the will to tax agriculture and real estate.
Last year, the government envisaged a surplus of Rs 167 billion from provinces while initially they had shown deficit owing to not having been taken on board about the raise in salaries by 50 percent. Nonetheless, after long deliberation, the federal government now expects Rs 120 billion from provinces in revised estimates. It is feared that the federal government may not have taken provinces in confidence on raising salaries by 15 percent this time around, either.
However, the partial removal of FED and the plan to phase it out in two years is a good move, as the FED is primarily levied on services which fall in the provinces' domain and they must now build capacity to assume responsibility.
In order to gain some sanity on the fiscal front, after reaching a whopping fiscal deficit of 7.6 percent of GDP in FY08, the government imposed special excise duties on a number of items. Now, however, these are being abolished. This along with the raising of tax-free limit by Rs 50,000 to Rs 350,000, the reduction in custom duty on pharma products are some of the much-required populist measures.
To address the grave issue of low and falling saving rates steps like making investment in government papers compatible to saving schemes, tax credit for listing and most importantly bringing withholding tax on cash withdrawals above Rs 25,000 from 0.3 to 0.2 percent is the right step. This, along with removing service-charges on saving accounts in banks may help in bringing money back to the system.