The federal government in its budget for the fiscal year 2010-11 proposed a 4 percent budget deficit and a growth rate of 4.2 percent. For credibility, these forecasts must be backed by the budget's tax and expenditure measures. The question is: is there a good fit between the two targets and the proposed measures?
There is unanimity amongst independent analysts that the deficit target is unlikely to be achieved at the end of the fiscal year 2011-12. Some in the government may challenge this assertion by stating that it is premature to judge the likelihood of meeting budgetary targets with just three days into the fiscal year. However, what is incontrovertible is the fact that the government's revenue targets have already been compromised by the provinces.
Thus the 125 billion rupees (1.46 billion dollars) consolidated provincial surplus that was identified as a revenue source for the government is not supported in the provincial budgets. The budget deficits/surpluses of the four provinces are as follows: Punjab proposed a surplus of 70 million rupees, Sindh proposed a surplus of 882 million rupees, Khyber-Pakhtunkhwa showed a balanced budget and Balochistan proposed a deficit of 6.73 billion rupees. Thus the consolidated budget deficit for the forthcoming fiscal year is 5.58 billion rupees.
Some argue that the federal government has some leverage over the provinces through the divisible pool that is released under the National Finance Commission (NFC) award. Those who maintain that the Centre has no right to slash off a province's share of the divisible pool must be reminded that in 2010-11, the federal government did not meet its budgetary obligations with respect to the NFC award. Thus Punjab was earmarked to receive 494 billion rupees and received 464 billion rupees in the budget 2010-11, Sindh was scheduled to receive 280 billion rupees and received 278 billion rupees, Khyber Pukhtoonkhwa was to receive 160 billion rupees and received 157 billion rupees and Balochistan was to receive 99.398 billion rupees and received 99.307 billion rupees. The shortfall for the provinces was as follows: Punjab in the lead at 31 billion rupees, followed by Sindh at 18 billion rupees, KP at 3.4 billion rupees and Balochistan at 91 million rupees.
The reason for the lower actual allocation to the provinces is however entirely attributable to the lower collections under five divisible pool taxes: actual sales tax collections were short by 23 billion rupees from budgetary estimates, income tax shortfall with respect to the budgetary target was estimated at 15.3 billion rupees, federal excise collections were 13 billion rupees lower than budgetary estimates and customs duties were around 4 billion rupees less than budgetary targets. In other words, the federal government did not slash allocation to the provinces in an effort to meet its growing budget deficit but because collections under the divisible pool was less than targeted in the budget.
Tax collections are a function of the growth rate. Thus with productivity rising value added tax collections (Pakistan's sales tax is in the value added mode) are higher The fact that sales tax collections were lower than anticipated in the budget 2010-11 reflects the decline in productivity that is largely attributable to a number of factors ranging from heavy load shedding, high utility rates, higher transport costs, high cost of borrowing and last but not least, the federal government's heavier reliance on bank borrowing that led to crowding out the private sector borrowing.
The question is would 2011-12 be any different? There is nothing in the budget that leads one to expect that the energy crisis would be resolved any time soon. The Federal Ministry for Water and Power remains powerless to ensure that the intransigent inter-circular debt is resolved and not allowed to reemerge fourth year running. The cost of borrowing remains high for the private sector and it is likely that the federal government would be compelled to increase borrowing from the domestic banking sector; and the International Monetary Fund (IMF) is unlikely to reactivate the stalled Stand-By Arrangement (SBA) based on the taxation measures and expenditures identified in the budget document though there are reports that the IMF will reserve judgement till the budget statistics and implementation are shared with the Fund staff.
In 2010-11 the government met its rising deficit by reducing the federal component of the Public Sector Development Programme (PSDP). In marked contrast current expenditure witnessed an increase in 2010-11 - an increase of 298 billion rupees in 2010-11. The major contributor to this dramatic rise in current expenditure was servicing domestic debt (32 billion rupees). Subsidies rose by 269 billion rupees in 2010-11, compared to the revised estimates for the year.
At the same time, it is relevant to note that the present government, like its predecessors, opted to slash development expenditure for the third consecutive year in an attempt to keep the deficit target within the range acceptable to the IMF. In short, the growth target of 4.2 percent for 2011-12 is unlikely to be met, given the range/quality and cost of infrastructure in this country which, in turn, will impact on the revenue collections for the year with its consequent impact on the deficit.
Political pressure on the government to subsidise essentials would also rise in 2011-12. The largest component of subsidies that the government intends to reduce is the inter-disco tariff differential. In 2010-11 the Centre earmarked 30 billion rupees under this head. However, in actuality it released 239 billion rupees for this item (2.3 billion dollars or around a billion dollars more than the second last IMF tranche that the government appears to rely on). In the budget 2011-12, the government has earmarked 50 billion rupees for this purpose and it would be next to impossible for the government not to exceed this target.
To conclude, there appears to be little chance of the budget targets being met in the forthcoming year. And with the rising mistrust between the United States and our government/establishment, as well as the donors continuing concern over our accountability safeguards, it stands to reason that multilaterals as well as bilaterals may not disburse pledged assistance second year running, leading the government to rely heavily on domestic borrowing, slashing development funding and raising taxes rather than on the more appropriate measure: embarking on a rigid austerity drive. In other words more of the same is expected in 2011-12!
(Concluded)