Balancing populism with fiscal deficit
IT was a populist budget by all means — a reflection of election politics. Despite known key challenges facing the nation, not many steps have been taken to address the longstanding structural problems.
Nor was any attempt seen to broaden the tax net or take the taxation to segments hitherto contributing negligible revenue to national kitty despite thriving incomes.
In fact, tax relief to stock markets recently announced has been given protection through the finance bill. Power Sector problems that have emerged as the largest drain on national resources over the years remained largely unaddressed.
Incomes from real estate business and agriculture remained outside the effective taxation. Even though the government hides behind devolution while talking about taxing these areas, it has done little to facilitate provinces and bring them to a negotiating table to agree to a harmonised tax system as convener of the inter-provincial committees.
In this background that lofty claims of increasing the tax-to- GDP ratio to 15 per cent over medium-term remains a pipedream. That perhaps is the major reason behind a continuous squeeze on federal receipts that have to meet ever increasing debt servicing cost, defense needs, equitable regional development, and effective governance at the federal level.
The government has reduced power sector subsidies by almost 60 per cent for the next year when compared with those of current year with a stated objective of providing targeted subsidies to the poor and lower income groups. Yet the budget articulates no clear direction how the tariff differential subsidies are to be contained going forward, after having consumed over Rs1.6 trillion over last five years.
Even though the finance minister confirmed that power sector continued to remain a source of concern for the government as major chunk of the generation capacity relied on expensive imported oil and declining gas supplies, the budget document does not explain what steps the government was taking to reform the power companies, except that an independent board had been constituted to improve the performance of public sector companies.
There was no mention if in the immediate future there was any plan to cover the impact of higher fuel costs.
The budget claimed credit for adding over 3500MW of generation capacity into the system over the last few years but these have not been able to increase overall electricity supply that has in fact gone down this year when compared with that of current year. The major
hydroelectric and coal-based power projects being considered a solution to affordable energy like Neelum-Jhelum, Kohala and Diamer-Bhasha dam are still in the initial or groundbreaking stages and not expected to start production in five years.
And almost a week before the federal budget, the water and power minister announced that a major reform initiative to improve the performance of public sector generation companies through management contracts has been reversed. Having an installed capacity of over 6500MW, these units hardly provide a maximum of 2000MW of dependable supply and whatever they produce becomes so expensive, that policymakers and regulators discourage their utilisation even if shortages go beyond 7000MW.
It was perhaps in this background that at the concluding phase of the federal cabinet meeting, that approved the federal budget, decided to provide fiscal incentives for import of solar-based agriculture tubewells, UPS, generators and other alternate energy sources to ease sufferings of the middle class. The final shape of these incentives is to be worked out in the weeks ahead.
At the same time, the government should be given credit for introducing tax relief to the income tax payers who have always been the key source of government taxes. According to finance minister, the income tax burden on every existing taxpayer would come down by almost half — varying between larger and smaller benefits depending on income slabs.
While enhancing the salaries and pensions of its 600,000 employees for the fifth time in a row (cumulative increase of over 130 per cent) and resultant spillover to about 1.7 million provincial employees, the government did not comment in which direction the salaried class in the private sector would move in the presence of negligible economic growth rate and a lot of idle manufacturing capacity, stagnant investments and declining saving rates.
Likewise, in a major step to rationalise tariffs that should provide relief to the general public in the longer run, the highest tariff rates has been reduced from 35 per cent to 30 per cent in customs duties that has been one of the major reasons behind expensive cars and many other manufacturing sectors. A further gradual reduction in such customs duties should induce domestic manufacturers to compete, improve their productivity and quality and reduce financial burden on end users.
A 7.4 per cent fiscal deficit officially confirmed for the current year against a target of four per cent budgeted target, however, raised similar uncertainty for the next year. It was evident from the very beginning. While the finance minister estimated 4.7 per cent fiscal deficit for the next year, other budget documents differently put it at 4.8 per cent and 4.9 per cent.
Like the current year, the government estimated borrowing from the central bank at zero but given the fact that it ended up borrowing over Rs400 billion from the State Bank this year raised concerns that the situation may not be any different next year. And allocation of about Rs500 billion borrowing from commercial banks to feed fiscal deficit was again an indication that the private sector credit would remain at the receiving end.
The government attempt to provide skills and jobs through internship programme to about 100,000 youth is a positive development but absence of a clear roadmap for want of reliable energy supply to reinvigorate idle capacity of the manufacturing sector, raises concerns for overall employment situation. The manufacturing sector has already lost tens of thousands of workforce owing to lower capacity utilisation.
Unless those losing jobs are re-accommodated in producing sector and fresh youths offered decent earnings, the overarching objectives of poverty reduction and employment creation would remain unaddressed.
The economic managers enumerated at least five key challenges going forward. These included containing the twin deficits — current account deficit and budget deficit—, acceleration of growth and job creation, overcoming energy shortages, improving investments and reducing public debt.
One hopes that the stated budget objectives of providing relief to general public, stimulation of growth and investment, incentives to local industry, reduction in cost of doing business and improved regulation and enforcement would lead to a better future.