EDITORIAL: The budget for 2022-23 not only did not implement key International Monetary Fund (IMF) conditions, particularly those relating to structural reforms, but is also being challenged domestically for projecting revenue figures that are grossly overestimated, giving rise to serious concerns that until and unless the expenditure is massively slashed the deficit will be almost double the budgeted 4.9 percent — a highly inflationary policy.
The IMF had urged the government to reform the tax structure through heavier reliance on direct taxes particularly personal income tax, premised on the ability to pay principle whose incidence is greater on the rich than on the poor.
The Federal Board of Revenue (FBR) with an inordinate focus on revenue targets, like in the past, as opposed to reforming the tax structure to render it fair, equitable and non-anomalous, reportedly argued that imposing a 2 percent poverty alleviation tax on profitable companies/individuals would raise collections by 38 billion rupees and tax on deemed income at 5 percent of the value of non-productive immoveable property would generate 30 billion rupees (both taxes likely to be challenged in the court) — taxes preferable to taxing those with income between one to 2 lakh per month (regarded as key swing voters) constituting around 75 percent of all income tax payees, who are currently taxed only 100 rupees.
FBR further ignored the fact that its projection of 8 billion rupees from the proposed capital value tax is unlikely to be realised as assets that were declared under an amnesty scheme are immune from this tax in view of provision of the foreign asset declaration schemes and judgements of the honourable Supreme Court in the field. In short, 76 billion rupees out of the total projected net increase of 355 billion rupees are unlikely to be realised in the next year due to litigations. Additionally, widening the gap between filers and non-filers in terms of tax on services/luxury items legitimatizes the non-filers, which is unfair to honest taxpayers.
FBR’s net additional collections through these measures are estimated at 355 billion rupees for next fiscal year while total additional collections are budgeted at a trillion rupees more than in the outgoing year — with 645 billion rupees budgeted to be generated through a projected 5 percent GDP growth rate. This rate appears to be a gross overstatement if the IMF’s seventh review is successful: (i) given that success would be contingent on appropriate adjustments in the budgeted tax measures as well as a further contractionary monetary policy that would, at best, halve the growth rate from what has been budgeted.
The proof of this claim lies in the fact that a more contractionary monetary policy is already in place relative to 2019 when the growth rate was projected at 1.5 percent pre-pandemic; and (ii) finance minister Miftah Ismail has already raised the external borrowing requirements from 36 to 37 billion dollars pre-budget to 42 billion dollars. With 21 billion dollars repayment (interest and principal as and when due) and 5 to 6 billion dollars required to strengthen the foreign exchange reserves, currently at 8.9 billion dollars, the rest is earmarked for budget support that envisages over a trillion rupees more than what was budgeted this year. This is simply untenable and one would hope that the authorities go back to the recipients, particularly of current expenditure, seeking their voluntary sacrifices.
The government has also budgeted 750 billion rupees under the Petroleum Levy (PL) for next fiscal year, an indirect tax whose incidence is greater on the poor relative to the rich. This too appears a gross overestimation for two reasons.
First, at present the levy is zero, and has been zero during the past two months of the coalition government, given the high international price of oil due to the ongoing Russian-Ukraine war. Western analysts are predicting a long drawn-out war and until and unless the war ends it is highly unlikely that prices would come down enabling the government to impose the PL; and second, the 750 billion rupees presupposes a 30 rupee per litre levy which would have repercussions on input costs that, in turn, will negatively impact on productivity as well as on competitiveness of our exports.
The 800 billion rupees projected as provincial surplus has already been proved a gross overestimation with Sindh presenting a 33.84 billion rupee deficit budget, KPK a balanced budget while Punjab a surplus of only 125 billion rupees which may not be realised for sheer political reasons.
The budget is out of synch even before it has been passed by parliament with major revisions expected for the seventh review success that the finance minister has said repeatedly, is not an option, as “all roads lead to IMF.” What is inexplicable is why if this was so did he present an unrealistic budget so contrary to what he was aware were the Fund’s prior conditions?
Copyright Business Recorder, 2022