ISLAMABAD: Finance Minister Ishaq Dar said on Saturday that the additional financial impact of tax and relief measures introduced in the 2016-17 budget would be Rs148 billion.

Speaking at his post-budget news conference, the minister said “the full focus of next year’s budget is on growth” because the difficult journey from a default risk to macroeconomic stability had been completed.

Pakistan would increase foreign exchange reserves to $30bn by the financial year 2018-19, he said.

In his view an effort has been made through budgetary measures to support agriculture, boost industry and trigger economic growth for job creation, poverty reduction and improvement in living standards of people. “It was necessary to support agriculture in an agrarian economy because of its 44pc share in employment and 21pc in gross domestic product (GDP) and dependence of almost 70pc of the total population (on it).”

A finance ministry official explained that the combined impact of new taxes and enhanced rates in the budget would be Rs200bn. Given relief in duties and taxes approximating Rs52bn, the net additional gain to the government from the new revenue measures is around Rs148bn.

Salaries of govt employees

A substantial increase in salaries and allowances of government employees is coming under increasing scrutiny for its impact on the finances of provincial governments, who will be under pressure to follow suit, and on the private sector too. The combined financial cost of the package for government employees and pensioners has been estimated at Rs57bn. The financial impact of 10pc increase in salaries and pensions is estimated at Rs25bn.

The minister said the pay and pension committee had recommended an increase in line with consumer price index which was around three per cent but the government had allowed 13-14pc increase as the financial situation improved.

The provincial governments are expected to allow reciprocal 10pc increase in salaries and pensions for their employees with a cumulative additional financial impact of about Rs100bn. This does not include a series of measures announced by the federal government for the upgradation of various employee groups and compensatory duties, the finance ministry official said.

He said the government had consulted the provinces over the salary package before announcing it. The biggest financial impact of salary and pension increase would be on the Punjab government which will have to set aside an additional Rs50bn followed by Rs25bn by Sindh for the 10pc increase in salaries and pensions.

The governments of Khyber Pakhtunkhwa and Balochistan would jointly shoulder an impact of Rs25-26bn to treat their employees and pensioners on a par with their federal counterparts.

Amer Zia, an assistant professor of economics, said the 10pc increase in salaries and pensions was not enough to compensate for the increase in the cost of living. He said an indirect objective of the increase in wages was to encourage consumption but it did not offer room for savings and resultant higher consumption.

In his opinion, the public sector employees would not benefit from the increase in wages because the housing rentals have already increased by more than 10pc over the last year.

Last year’s budget had also seen an increase in government salaries which boosted the number for growth in services to 11pc during the current year against its target of 6pc. This impact had a significant contribution to the 4.7pc growth in GDP announced for this fiscal year.

Tax exemptions

The finance minister and the Federal Board of Revenue’s chairman, Nisar Mohammad Khan, gave different amounts of tax exemptions withdrawn through discriminatory statutory regulatory orders (SROs) in the past three years. Mr Dar put the amount at around Rs400bn while Mr Khan said it was below Rs300bn. They were not sure if the cost of rollback of SROs in the next year budget would be Rs80 or 90bn.

They, however, could not explain why the cost of exemptions still stood at Rs394bn as reported in the Economic Survey, when the amount was at Rs480-500bn before the process of withdrawal of exemptions was initiated three years ago. “The cost of exemptions from free trade agreements and preferential trade agreements as well as exemptions for diplomatic missions have not been touched” in this process of withdrawal of SROs, the FBR chief said in response to the question.

He said the cost of tax exemptions is now given more transparently in the Economic Survey and most of them were covered under preferential and free trade agreements and diplomatic exemptions.

The finance minister underlined the lessons learnt from international sanctions after 1998 nuclear tests, saying it was the country’s top priority to support agriculture to become self-sufficient in food grains. Therefore, he said, the last year’s Rs15bn worth of tax relief for the agri sector would continue into the next year while reduction in fertilizer price and taxes would cost around Rs47bn to be shared by federal and provincial governments.

When asked why the Kissan package announced last year failed to arrest the collapse of agriculture, the minister said it had a lagged effect and agriculture would have taken the GDP down to 3.5pc had that assistance not been provided.

He said the poultry industry was generally kept unaffected – in spite of new tax measures on poultry and its feed announced in the budget – on the commitment of its leaders that average price of live chicken and poultry meat would not go beyond Rs145 and Rs200 per kg, respectively.

Mr Dar laid stress on his measures for the export sector which declined 11pc during the current year. He said the government was targeting to increase exports to $45bn or 15pc of GDP if Pakistan were to become an emerging market and an “Asian Tiger”. He said exporters, especially in the textile sector, have assured him of an increase of 25pc in their exports due to this support.

Moreover Rs19bn worth of relief has been allowed to industry to encourage capital investment and machinery import for economic growth. He said it was not possible to achieve 7pc growth rate, targeted for 2018 and considered necessary to absorb fresh entrants to the labour force every year, without the public sector development. To this end, a total public sector investment of Rs1.675 trillion (Rs800bn federal and Rs875bn provincial) would ensure public-private investment ratio of 30:70.

Mr Dar said the allocations for defence had been increased by 11pc while non-defence expenditure of the government was hiked by about 7pc.

Outlining his medium-term targets, he said the government would work to gradually increase GDP growth to 7pc by 2018-19, contain inflation within single digit, raise investment-to-GDP ratio to 21pc, cut down fiscal deficit to 3.5pc of GDP and improve tax-to-GDP ratio to 13.9pc.

Published in Dawn, June 5th, 2016