A directionless budget

The budget is built on expectations and assumptions (prayers) of global commodities to move out of the super cycle in the next few months. The government built the budgetary framework on 5 percent GDP growth and 11.5 percent inflation. That is far from reality. The government might be thinking to convince the IMF on low growth and high inflation to reach similar levels of nominal GDP growth to justify the taxation growth assumptions.

However, historically, in the days of low growth and high inflation, the tax collection in terms of GDP usually falls. The situation would become clear in the first quarter; and a mini budget to be in the offing before October — the question is whether or not the government will survive by that time. And more important question is how the IMF would take these assumptions.

The budget is based on increasing the petroleum levy to Rs30 per liter (right now the levy is zero and the government is providing Rs10-25 subsidy on petrol and diesel). Seeing the flight of oil prices, imposing such a hefty PL could be a political suicide.

The government is trying to give relief through enhancement of social sector protection. The government is lowering tax slabs on the middle income while increasing the tax on higher incomes. But all these relief measures lose their gloss in the presence of higher taxes on petroleum, lower subsidies on power and gas (which implies higher electricity and gas prices). It is not easy to manage. And then a mini-budget with new taxes could make things worse.

The government has taken a few steps to broaden the tax net – such as applying tax on deemed income on real estate at one percent of capital value – both for plots and constructed houses. Then the fixed tax regime is in place for small retailers based on electricity bills. These both steps have lacunae and difficulties in implementation. Especially for real estate tax, where the tax is wealth tax and is on capital value of the real estate. That is a provincial subject. This can be challenged in courts. A better way would have been to let the provinces impose these taxes in coordination with the government. Both Punjab and Sindh governments are with the federal government. This should be done right as this step would help to shift savings towards productive assets.

The government is having general election in mind which is not too far, and at the same time it has attempted to present an austerity budget as agreed with the IMF. In the process, the government could not do justification to both. The fear is that the IMF might not agree with the numbers (for example petroleum levy of Rs 750 billion, GIDC of Rs 200 billion and Rs 800 billion provincial surplus in the election year) and at the same time, the government loses political capital due to high inflation and job losses.

The government is stuck in a tricky situation. The government cannot afford to go against the will of the IMF seeing the precarious balance of payment situation in the backdrop of rising global commodity prices. And at the same time, the PML-N leadership has elections in mind. The party is boxed in. Have they resorted to brinkmanship?

The real problem is that the numbers are not adding up. The tax collection targets raise serious doubts. The growth would be challenging at the time of falling growth. Then the government is aiming to compress imports and there is a wish to bring currency back to 180 levels once stability is achieved. The indirect tax revenues are going to be compromised in PKR term. This can be attained if PKR falls. And that would hit the political capital more.

Then the government wants 5 percent growth and lower current account deficit due to curtailing imports. There is a contradiction in both the objectives seeing the balance of payment constraint of the country. And if the commodity prices remain in the super cycle for most of the fiscal year, the government may have lower growth and higher current account deficit. That could be the worst outcome. That is why the budget is made while praying that the global commodity prices to ease by the second half. From the looks of it, the budget is both ambitious and directionless.

Copyright Business Recorder, 2022