Defending the budget

EDITORIAL: The statement of PML-N’s Birjees Tahir on the floor of the house that the budget 2021-22 was a “pack of lies” prompted an unscheduled outburst by Finance Minister Shaukat Tarin who took the statement personally and recounted examples of patriotism exhibited by his father in pre-partition India and post-partition Pakistan as well as his own. While holding no brief to charges of treason routinely hurled in and out of our parliament yet it needs to be acknowledged that parliament is a forum used by the opposition to ideally attack the government’s policies, as opposed to personalities, and a budget provides an opportune moment for criticism as it constitutes an economic treatise that would shape the next fiscal year for the general public with implications on all sectors of the economy.

Tarin took over as the country’s finance minister during an extremely challenging time with the general public reeling under the burden of second to fifth review pledges made in February 2021 by his predecessor Dr Hafeez Sheikh that showed a marked lack of empathy with the public on the one hand and an inordinately high reliance on borrowing on the other - domestic debt rose from 16.5 trillion rupees to over 25 trillion rupees in two and a half years while foreign debt rose from 95 billion dollars to nearly 120 billion dollars. Inflation, especially food inflation, has remained prohibitively high and the previous economic team blamed it on supply side issues, read collusion, reflecting serious market imperfections that remain undealt with, in spite of their identification in the wheat and sugar inquiry reports, as prices of these two items remain high. Ignored however is their own contribution to the erosion of the quality of life through unsustainable budget deficits, contractionary monetary and fiscal policies, including the decision not to raise salaries in 2020-21.

In this milieu, Shaukat Tarin pledged renegotiation with the International Monetary Fund (IMF) and a focus on growth which necessitates easing of the monetary and fiscal policies. In line with this pledge Tarin’s budget 2021-22, whose implementation will commence from 1 July 2021, envisages a set of ambitious targets whose achievement many economists consider challenging, leave alone members of the Opposition who are mandated to criticise the budget. With the sixth IMF review remaining inconclusive, the general perception is that the government must achieve the budget revenue and expenditure targets (proportional) in the first three to four months which, in turn, would determine the success or otherwise of the next IMF quarterly review. Thus a lot is hanging on the capacity of the government to establish achievement of its stated ambitious targets.

Perhaps to calm the choppy waters of criticism Tarin directed Dr Waqar Masood, the Special Assistant to the Prime Minister on finance and revenue, to defend the tax proposals, however, his defence was weak at best on a number of counts: (i) the budget Dr Masood argued is revenue neutral, a contention that defies the claim that an additional 264 billion rupees would be generated through revenue measures. In this context, Dr Masood would be well advised to acknowledge that by removing exemptions on specific benefits unrelated to salary, for example medical, there will be positive implications on revenue which no doubt have been factored in the additional 58 billion rupees envisaged to be generated under income tax; the 17 percent sales tax on crude oil and some other imports may be adjusted later but would create cash flow issues at the earlier stage for refineries and other importers whose borrowing costs would certainly rise; and finally, adjustments are possible only when the standard sales tax rate is applied at both ends of the production process and which it is not on some items, including ingredients of poultry feed; (ii) an estimated 621 billion rupees out of the total one trillion rupee additional collections budgeted for next fiscal year are premised on GDP growth of 5.02 percent and inflation of 8.2 percent. This of course does not require any effort on the part of the Federal Board of Revenue and in the event that neither of these targets is achieved one would assume the onus, unfairly, would rest entirely on the Finance Minister; (iii) enforcement measures to generate 242 billion rupees which have been used for the past decade as a revenue source that has never been fully realised; (iv) revenue from privatisation; however, there was no mention of the major lacunae in this process ranging from lack of appropriate investment climate as well as worker resistance that has stalled privatisation for the past seven to eight years; and (v) the provincial surplus of over 570 billion rupees with only Punjab showing a surplus of 120 billion rupees.

In the face of these concerns, the finance ministry’s contention that in the event that one set of projected revenue measures does not pan out other sources would be employed maybe reminiscent of Dr Hafeez Sheikh’s reported comments to the IMF (massive SBP profits were used last year to shore up the deficit); however, they do provide little comfort to economists as well as multilaterals.

It is important to note that poverty levels have been rising due to the pandemic as well as the pre-Covid contractionary policies and Tarin would have to be vigilant to ensure that small interest-free loans by the private banking sector reach the poor farmers and are not hijacked by the rich as in the past.

Although the Ehsaas programme and incentives to the housing sector have not only extended protection to the poor and vulnerable through cash disbursements but also jump-started the economy and generated employment, poverty levels are on the rise and that must remain a source of concern.

Copyright Business Recorder, 2021