At the outset, I feel a clarification is needed for those who have started to browse this article in the belief, emanating out of the topic, that this is a satire on the budget. Budget bashing is in full swing and there is hardly any justification for another such analysis. This reminds me of a story I read in school, titled "Insaan kisi haal main khush nahi rehta".
Everyone who has any understanding of public finance and 99.9% of the population, expecting excessive taxation in this budget, had drawn their daggers just waiting to cut the government to size. One can empathize with the analysts on being pleasantly surprised and caught off guard, but why the hype. Unfortunately criticising has become our nation's favourite past time.
Conceded that the government played a fast one by adopting certain indirect taxation matters in the current fiscal year, which fundamentally is the reason for budgeting higher sales tax collection in the ensuing year. However, any government is expected to take all measures to pacify the populace nearer to an election.
"I come to bury Caesar, not to praise him" Antony in the play Julius Caesar by William Shakespeare. Should the budget be ambitious, the government will grieve upon it, but let's cross our bridges when we come to them. Let us for the moment enjoy the perception of no additional tax!
In any case our fascination with the budget is inexplicable. By now we should have realised that the budget is a legal formality only, which enables the government to spend money. It may be enlightening for most to know that the government has a tool known as the Presidential Order and the SRO mechanism through which taxation measures and incentives can be introduced or withdrawn in a jiffy. When was the last time that actual results even came even near to budgeted numbers?
Nonetheless, it is a surplus budget. Consider that the deficit financing of Rs 724 billion is earmarked for development. After all, our own resources are utilised towards paying our debts, ensuring our security and running our government in the same order of priority. So in essence if we limit our development expenditure to only Rs 6 billion, we don't need to borrow at all! In fact in the absence of any contingent liability in grants, we will have an additional Rs 150 billion to spend on development. Finally if we don't subsidise power, we probably have another Rs 74 billion lying around. And to be honest I am unable to figure out why we need a provision for pay and pension of Rs 25 billion when the previous year's allocation of Rs 45 billion remained unutilised.
The crux of the matter is that while we are lagging in generating the requisite revenues, it is more essential that we spend what we have wisely. I am not in any way suggesting that we curtail development; contrary to this I on record have earlier encouraged more borrowing for development, except that we spend on projects, which spur growth. The budget should not be about going through the motions. In our current fiscal scenario, any expenditure should have ample and detailed justification to be even considered for budgeting.
"A budget tells us what we can't afford, but it doesn't keep us from buying it" William Feather, American author and publisher. A cursory glance on expenditure heads in the Budget Brief highlights certain expenditure, which appears anomalous. We seem to have taken Feather's quotation to heart.
Critically we have decided to spend less on education this year. Globally, literacy is acknowledged to be a key factor between developing and developed nation status. Unless we have discovered a "totka", we seem to have resigned our future generations to illiteracy and consequent poverty. Unfortunately, what little we do spend is in my opinion misdirected. Primary education may be important, however empowering our youths with skills commiserate with employment opportunities should take priority.
I may appear to be contradicting myself, if development expenditure is critical then how can I perceive a surplus by eliminating the deficit. Simply since the government has incentivized the private sector to come forward and take the baton. The proposed amendment in the income tax law allowing for 100% tax credit where investments are made in industries purely out of equity is definitely laudable. It would, however, be wise to carefully draft the related legislation since in its current form it appears to be a last minute inclusion. No incentives are better for fostering trust in government actions, compared with the incentives strangulated in unachievable conditions precedent.
Going further, the government can even consider additional incentives for equity-based projects set up in the geographical areas affected by the war on terror and for projects which provide sufficient employment opportunities. Such taxes may include cheap power, indirect tax exemptions and donor-backed project grants. Reduction in project costs through grants invariably increases project IRR, which may excite investors.
The opponents to this hypothesis of a surplus budget will quickly point out that reduction in development expenditure occurs not because the Government borrows less but due to shortfall in revenue collections. While in principle I agree with the pessimists, I must point out that if we don't move towards tightening our belt and continue to incur current expenditure through additional borrowing, we as a nation are digging our own grave. For this reason alone I reiterate that any and all expenditure should pass the test of necessity.
The optimist in me, however, is quick to point out that while net revenues are expected to increase by 23% over this year's revised estimates, inflation will take care of most of the increase. Whether we like it or not, inflation is the most unnatural form of taxation. Spiraling inflation begets higher prices and even if this does not result in higher incomes, indirect taxation gains should be sufficient.
Further, the budget envisages reduction in subsidies on power. Unless we have invented a mechanism to channel electricity from thunderstorms, the additional burden is going to be passed on to consumers. While it is hoped that this is done in an intelligent manner by providing targeted subsidies to the very poor, increased power tariffs will, in any case, contribute to further inflation. Which should mean more taxes for the Government? The government may also be banking on this assumption since minus additional taxes, the budget projects a decrease in receipts against saving schemes.
The bigger concern, however, is meeting the targets set for profit from the PTA of Rs 75 billion (probably for a 3G license yet again), additional dividends, including surplus SBP profit of Rs 36 billion and expected privatisation proceeds of Rs 70 billion. In addition the exact quantum of projected aid and/or grants from our well-wishers remains an enigma. Figures easily discernible from the Budget Brief suggest a rather aggressive position and in the absence of any basis, any comment thereon is considered futile.
All in all, fiscal management will continue to be a challenge for some years to come at least. "When it comes to the future, there are three kinds of people: those who let it happen, those who make it happen, and those who wonder what happened." John M. Richardson, Jr. Let us unite to as a nation to make our future happen.
(The writer is a Chartered Accountant based in Islamabad.)