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Budget 2021-22 could focus on sustainability!

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  • Budget 2021-22 could focus on sustainability!

The government unveiled the budget for the fiscal year 2021-22, with the outlay kept at Rs8,478 billion and the tax target set at an ambitious Rs5,829 billion. With certain limitations imposed by the ongoing Covid-19 pandemic and the International Monetary Fund (IMF) program, the budget is with an expansionary and feel-good approach, significantly increasing subsidies and incentives for big business, manufacturing, corporate market, and agriculture sectors and proposing about 24 percent hike in revenues, including Rs506bn worth of additional measures. The government has set the target of tax revenue at Rs5,829 billion, non-tax revenue at Rs2,080 billion. Other than that, non-revenue receipts are expected to be 4,497 billion, non-bank borrowing to touch 1,241 billion, net external receipts to come in at 1,246 billion, bank borrowing to be Rs681 billion and privatization proceeds to fetch Rs252 billion. The provinces are also expected to run a surplus of Rs570 billion, which the government will repurpose to finance its spending. Current expenditures will include interest payments of Rs3,060 billion, pensions of Rs480 billion, defense services spending of Rs1,370 billion, and grants and transfers to provinces, and other subsidies of Rs1,168 billion. A separate provision of Rs100 billion has been made for disaster, emergency, and COVID. There is a separate provision for ‘pay and pension’ of Rs160 billion. Apart from this, development expenditures under the federal Public Sector Development Programme have been allocated Rs900 billion, while the government also expects to lend Rs64 billion for development purposes.

In a year when, according to government data, 20.7 million people were rendered unemployed between March and October 2020, the economy’s productive power keep going is more than a miracle for a government that won the election on the promise of creating 10 million jobs. The data also shows that the government’s decision to steer clear of a complete lockdown resulted in employment rising again after Sep

tember 2020, and by the end of the year, Pakistan’s workforce was once again at about 55 million. Official estimates show that Pakistan’s economy has grown by almost 4% in the current fiscal year (FY2020-21). Not only is this double what the government projected in July 2020, but it far outstrips the predictions of multilateral financial institutions, mainly the International Monetary Fund (IMF) and the World Bank, whose growth projections for Pakistan were 1.5 and 1.3%, respectively.

Economic Survey 2020-2021 indicate that much of the credit for the recovery goes to large scale manufacturing (LSM), which grew by about 9% overall. The government is targeting a GDP growth of 4.8pc for FY22, compared to 3.9pc achieved in FY21; and if achieved, this will be the highest GDP growth since FY18. The government’s stimulus packages in shape of tax refunds for exporters, deferment of loans for small enterprises, and of course the Ehsaas programme payouts to the poorest sections of society seem to have played a role in keeping production and demand going. All of this looks rather rosy, but Pakistan’s population, which falls in the lower three income quintiles, could be forgiven for looking around and wondering where the much-vaunted V shape recovery has occurred.

 In terms of key features, tax collection has been targeted at a record Rs 5829 billion, but the emphasis is on reducing rates and extending the tax net. Even the tax collection target is almost 18% higher than this year’s collection, once again ambitious and stringent, possibly leading to an increased debt burden. Moreover, work towards automation of the tax system and implementation of the track-and-trace system is likely to be a key focus in achieving higher tax revenue. How this revenue will be collected is somewhat vague, when the government is reducing sales tax in some areas. In a move designed to set off a rally in the stock market, the capital gains tax on securities has been reduced from 15 to 12.5%. It’s not clear why this was considered necessary, given that the strength of the stock market was being cited as a sign of the economy’s resilience. 

There are also some business-friendly measures for small businesses, like raising the turnover tax ceiling quite drastically, from a turnover of Rs3 

billion to Rs10 billion. The withholding tax on bank transactions has been removed, but whether all this happens

depends entirely on how tax evasion is curtailed and the tax net widened. The strings attached to borrowing from the IMF are always directly linked to such budgetary indicators as tax collection, inflation, primary deficit, interest rate and currency value. When Pakistan is getting financial assistance from the IMF, as it is doing now, the making of the budget starts with the setting of a target for primary fiscal deficit – the gap between revenue and expenditure after debt servicing. The revenue gets inflated, and the expenditure is deflated in such a way that the imbalance between them does not exceed an IMF-mandated deficit target.

 A ‘V’-shaped recovery of a Covid-struck economy resulting in double than expected growth 3.94 percent for the outgoing fiscal year helped the government to make some bold-steps by refusing the IMF to increase the tax burden on existing taxpayers and resisting the demand for electricity tariff increase, and eying on expanding the tax net through use of data and technology. Reduction of duties and taxes on small vehicles will also help the middle class. It will also increase the production of small cars, creating some jobs as well as additional revenue for the FBR. Likewise, record allocation for different initiatives of the Ehsaas Programme, for afforestation, water security, the Covid-19 vaccine, power infrastructure, reducing regional disparities, climate change, and a special grant for Sindh are all steps in the right direction. To improve the purchasing power of the people, the minimum wage has been increased to Rs20,000 per month. Likewise, a 10 percent increase has been made in government pays and pension. Admittedly, these increases are not sufficient to cope with inflation. The government is expecting some proceeds from privatization and some provincial surplus but would have to borrow at least Rs3200-3500 billion if it gets some additional revenue from the above-mentioned heads. 

Ensuring and implementing sustainable growth will require relaxation in taxes and duties while improving corporate cash flows. Non-tax revenues will also remain in focus. The government has resisted the IMF’s demand to increase the component of petroleum levy in the budget, yet the way petroleum prices are increasing in the international market, it will soon be impossible for the government to keep subsidizing the oil process. The government may adopt a more targeted approach towards power subsidy, which in last year’s budget amounted

to Rs140bn. However, the government is expected to keep total subsidies at around Rs530bn compared to last year’s budget of Rs209bn.Unfortunately, the PTI Government, has made no effort to reform the fragmented and highly complex tax system, remove policy distortions and reduce fiscal deficit.  Unfair taxation is the root cause of our multiple socio-economic ills, resulting in inequitable distribution of resources. Earlier section 64C of Income Tax Ordinance, 2001 was withdrawn on the dictates of IMF before the release of a tranche of US$ 500 million to make amendments in the Income Tax Ordinance, 2001 immediately, which is a blatant violation of the Constitution. Pakistan has a complex tax system of over 70 unique taxes and at least 37 government agencies administering these taxes, yet not collecting enough and pushing the country into a deeper debt trap. The balancing of books through more loans—going to IMF for 22 times and 13 bail-outs in 60 years—to bridge fiscal deficit has been the favourite mantra of all governments. Maintaining fiscal stability and improving fiscal health while adopting a pro-growth and expansionary fiscal policy will be a real challenge for the government.

 It can be said that economic growth, improved employment, pandemic support measures, and managing fiscal imbalances will be the salient features of the upcoming budget. Moreover, the education, Infrastructure, agriculture, manufacturing sector, as well as incentives to stimulate construction and housing are expected to be on the priority list. The stabilization phase is now over, and budget 2021-22 will focus on inclusive and sustainable growth fostering growth with investment.