Introduction: Despite high claims, budget 2016-17 does little to address the real issues of the economy or to revive growth. IPR does not find a strong economic strategy driving the budget 2016-17. There is need to build productivity of agriculture and industry to revive the economy and place it on a path of sustained growth. While government has announced a series of measures for these sectors, IPR prefers an approach that does not rely on fiscal incentives alone. These sectors need long term commitment to build competitiveness.
The Pakistan economy faces many challenges. Its growth has been moribund for several years. Agriculture production has declined. Exports are in a precipitous long-term fall. Power and energy remain short. The external sector is vulnerable, as government borrows new loans to pay off old ones. The performance of industry is mixed. Textile production is stagnant and some other key industries languish. Services, not the productive sectors, have fueled the economy's growth of 4.7%. The situation demanded a strong and well-considered policy response.
It is curious that the basis of government's mid-term and annual plans rely on population estimates extrapolated from the 1998 census. It makes suspect all planning and budgets.
Limiting increase in current expenditure in 2016-17 to 3.6% over 2015-16 will be a challenge. In the ongoing fiscal year, current expenditure was set to reduce from the previous year, along with reduction in debt servicing. In effect, they grew by 6.4% and 19.5% respectively. Next year too debt-servicing expenditure will increase. Along with increase in allowances of government servants and in pensions, this will stress the fiscal framework and make it that much more difficult to achieve the deficit target.
The 2016-17 budget reduces provision for subsidies by 29% from the revised estimate of 2015-16. Over two thirds of this amount is for the power sector. As fuel price is on a slight increase, it seems that government plans tariff increase or further postponement of payment of the tariff differential subsidy.
The budget estimates provincial surplus of Rs 339 Billion. The fiscal deficit will go beyond the target of 3.8% of GDP if provinces do not yield the surplus amount. In a positive move, the Finance Minister announced GoP's plan to observe provisions of the fiscal responsibility law and to strengthen its provisions.
Recently, some members of the Tax Reforms Commission have expressed dismay for not relying on their recommendations. Most of these aim to strengthen tax administration and enforcement. They feel that adopting the recommendations could help reduce tax evasion. In IPR's view, it is important to raise the cost of tax evasion and, especially, non-filing of returns. As a run up to the budget, some GoP officials seemed to favour this approach in their public statements.
Fifty fiveoecent of the extra tax collection in 2016-17 comes in the shape of indirect taxes. These are desirable to the extent they withdraw exemptions. However, they could affect economic activity. IPR supports use of withholding tax as a means to attract non-filers. However, the best course is for this tax to be collected through annual assessments. IPR welcomes the proposal for zero rating of five major export products. This will ease a major issue faced by exporters.
The development budget directs few resources towards reducing the social deficit. Admittedly, this is a subject for the provincial and local governments to address. However, the federal government does not state it as a priority. There was no mention of SDGs as a national narrative. Improving provision of basic human needs adds to the total capacity of the economy and stimulates growth.
Some of the incentives to revive agriculture and industry should have a positive effect. Reduction in cost of agriculture inputs will help farmers. It is to be seen how the rest of the incentives benefit growth.
In essence, the effective federal PSDP is Rs 655 Billion and not Rs 700 Billion. It includes allocation to a number of items that in fact belong to the current budget. Provision of Rs 100 Billion for resettlement of IDPs is for an important cause, but is not investment. Similarly, provision of Rs 20 Billion for the PM's Youth Programme is current budget shown as investment. The PSDP document does not show projects against these provisions indicating that they may not have gone through the rigorous process, which evaluates efficacy of expenditure and evaluates past efforts.
To reiterate a problem that has existed for long, the PSDP minimally meets the needs of an oversized projects portfolio. The modest scale of the PSDP contrasts with the enormous size of the federal government's public investment programme. Projects in the federal PSDP number 992. Of these, about 179 are financed off budget by WAPDA, PEPCO and NTDC, leaving some 813 projects. Of the Rs 655 Billion, -- CPEC projects are allocated about Rs -- Billion. The rest of the PSDP has with Rs -- billion for a -- projects having a throw forward of over Rs 3 Trillion. On an average, these projects would take about eight years to complete, if there were no cost increase from delays. Most water- sector projects will take eight to twelve years to complete at present costs. Because of renewed focus on roads, NHA's throw forward alone is Rs 1.4 Trillion.
Compared to the revised PSDP of Rs 700 Billion for 2015-16, next year's budget shows an increase of 14%. Since 2015-16, cuts have been placed in some critical areas. The combined allocations for higher education and federal education and training are a Billion more than last year, but Rs 5.4 Billion below 2014-15. The allocation for HEC mostly meets stipends for students studying abroad. Many HEC projects which has a total throw forward of Rs 142 Billion would stall. Allocation for health has increased by Rs 4 Billion, but it is still Rs 3 Billion less than 2014-15. As noted above,water is a big cause for concern. As a water stressed country and with high dependence on agriculture, this is alarming.
Of the Rs 130 Billion for the power sector shown in the PSDP, GoP's budget is Rs 74 Billion. The rest is to be met by WAPDA, PEPCO, and NTDC. Of the Rs 74 Billion, Rs 60 Billion the two LNG power projects. IPR would have preferred to see such large amounts go to hydro projects and not to an expensive fuel source. In fact, other than LNG power plants, federal allocation for the power sector has declined substantially compared to 2014-15. This is astonishing when the country faces extreme power shortage. On the other hand, allocations to roads and highways have increased by 17.5%. Allocation for NHA had increased by a large 46% in 2015-16.