• Budget for next fiscal year headlined by massive increases in federal govt salaries, pensions • Development spending jacked up by a third
• After paying provinces’ share, govt income insufficient to cover debt servicing expense
• External borrowing to be 114pc higher compared to outgoing year
• Revenue target through PDL raised by 60pc to Rs869bn

ISLAMABAD: With the looming elections in mind, the coalition government presented an expansionary budget for fiscal 2023-24 late Friday evening, increasing salaries for federal government employees by a massive 30-35 per cent, increasing development expenditures by 33pc, and announcing tax incentives for agriculture, information technology, construction and industry.

It balanced these with increased tax rates for non-filers, an increased tax burden on capital markets and a projected higher yield from petroleum levy.

Curiously, despite the difficulties it continues to face in convincing the International Monetary Fund (IMF) to start seeing its way, it also budgeted a $2.4 billion inflow from the lending agency for next year.

“No new tax is being imposed this year, and the government has tried to provide as much relief as possible,” Finance Minister Ishaq Dar announced at the beginning of his budget speech, which continued without the customary interruptions thanks to a ‘friendly’ environment in the National Assembly, which is currently devoid of any real opposition.

Even though the finance minister insisted that all conditions of the IMF had been met and that a staff-level agreement over the 9th review can be signed at the earliest, the budget documents indicated no inflows from the IMF for the remainder of this year.

Surprisingly, they did provision for a $2.4bn (Rs696bn) injection the next year as part of the about $24bn (Rs6.87trillion) in external loans that the government plans to raise.

The external borrowing projections for the next fiscal are 114pc higher than the actual Rs3.2tr of inflows recorded this year. The government expects a total of $5bn in inflows from Saudi Arabia, including $3bn in time deposits and $2bn fresh deposit, compared to about $2bn received this year.

The government has also targeted $1.5bn in international bonds, $4.5bn from international commercial loans, and about $4bn from China’s SAFE deposit, which is almost double the amount received from China this year. Most of these loans would remain subject to Pakistan re-entering the IMF umbrella, as the prime minister expects their materialisation on the basis of his engagement with the managing director of the fund.

The government’s hopes for the continuation of the IMF programme seem to be banking on a negligible change it has made in power sector subsidies (Rs894bn for the next fiscal against Rs870bn in the current year).

The major chunk of these subsidies would go to K-Electric and Independent Power Producers (IPPs) — Rs315 and Rs310bn respectively — leaving only Rs150bn for the tariff differential subsidy (TDS) for consumers of other Discos, down from about Rs225bn this year.

KE’s TDS has, on the other hand, been racked up to Rs315bn for next year against Rs193bn this year, an increase of 63pc. In sum, this will mean the national average electricity tariff will go further up.

The allocation for overall subsidies has been brought slightly down for next year to Rs1.074tr against actual subsidies of Rs1.1tr this year. But then, the budget last year had set aside only Rs664bn for subsidies, which were almost doubled as the year passed.

The increase in salaries and other benefits for government servants is the highest in about a decade — likely a signature PPP move, as the party had previously announced a 50pc increase in salaries in its previous tenure.

The finance minister has announced a 35pc increase in ad-hoc relief for grades 1-16 and 30pc for grades 17-22. On top of that, outstanding travelling and daily allowances and additional charge allowances have been increased by 50pc, orderly allowance for officers raised by 43pc, and a 100pc increase has been made in the special conveyance allowance for the disabled. In addition, constant attendant allowance (military) and authorised pensioners’ driver allowance have also been increased by 50pc.

It bears pointing out that the percentage increase in salaries and allowances announced is much higher than the core inflation rate of 16-18pc, which the minister had mentioned just a day earlier, and also higher than the average inflation rate of 29pc for the outgoing year.

Similarly, the pensions of government employees have been increased by 17.5pc. EOBI pensions have been increased to Rs10,000 per month from the existing Rs8,500 and returns on saving schemes have also been improved.

While announcing these sweeteners, the finance minister urged the people to recognise who their friends and well-wishers were, and who was responsible for their economic distress. Whatever that may mean, these measures may require a mini-budget when the caretaker government takes over.

The minister said the Federal Board of Revenue’s (FBR) tax target had been set at Rs9.2tr, up 28pc compared to the Rs7.2tr in expected collection this year. It is worth noting that the FBR will miss its budgeted target of Rs7.47tr for the outgoing fiscal by Rs270bn. The single-largest chunk of the new target, Rs3.7tr, has been budgeted to flow from income tax, showing an increase of 32pc over the current year.

On the other hand, proceeds from indirect taxes have been projected at Rs5.44tr for next year, up 25pc against the current year’s revised target of Rs4.35tr, with the major share of Rs3.5tr coming from sales tax, up 26pc against the revised estimates for the outgoing year. Custom duties, meanwhile, are projected to increase by only 8.7pc to Rs1.178tr.

On top of that, a non-tax revenue target of Rs869bn has been set under the head of the petroleum development levy (PDL) — an almost 60pc increase from the estimated collection of about Rs542bn during the current year.

The PDM government had set a Rs855bn target for PDL for the current year, but later gradually scaled it down as POL consumption plunged amid rising prices and greater unregistered petroleum flows from neighbouring countries.

A fundamental challenge on the fiscal operations side appears to be the total expenditures of the federal government, which have been projected at Rs14.46tr. After transferring Rs5.27tr to the provinces from the divisible pool, the government will be left with a total income of Rs6.89tr, including non-tax revenue of Rs2.96tr.

On the other hand, interest payments alone will exceed Rs7.3tr. In other words, the federal government’s income is insufficient even to finance its interest payments, let alone finance development, defence, civil government expenditures and subsidies etc., which will subsequently be met through local and foreign loans.

No wonder, then, that the fiscal deficit of Rs7.57tr next year (or 7.1pc of GDP) is the highest so far in history, compared to the Rs6.4tr recorded during the current fiscal year. This will be partially offset by an anticipated Rs650bn provincial cash surplus, bringing the consolidated deficit to Rs6.9tr or 6.5pc of GDP.

It may be remembered, however, that provinces have seldom met their surplus expectations, as evident from the current year’s cash surplus provision of Rs750bn, which has now been revised down to Rs459bn.

On the other hand, the primary surplus — a key indicator for the IMF, as it shows the financing gap other than interest payments — has been targeted at Rs379bn (0.4pc of GDP), even though the government missed the target this year by a wide margin. The target for the primary surplus for the current year had been set at Rs153bn or 0.2pc of GDP, which actually turned out to be a Rs421bn (0.5pc) deficit.

The fiscal deficit of Rs7.57 trillion is projected to be met through external loans totalling Rs2.5tr and Rs5tr from domestic borrowing. Another rising challenge on the fiscal side appears to be the growing pension expenditure, which is projected at Rs761bn next year, up 25pc from the current year.

This expense has now gone beyond the total expenditure on the running of the civil administration, which is projected at Rs714bn (up by 29pc over the previous year). Within pension, military-related expenditures are estimated to grow by 26pc to Rs563bn next year, against a 16pc increase to Rs188bn in civil pensions.

The finance minister said the government will create a Rs10bn pension fund to contain pension expenditures going forward, but the same announcement in the budget for last year remained unimplemented throughout the year.

Contrary to large businesses’ complaints against the super tax, the government has expanded its application to other areas as well by “converting it into progressive taxation” with increased tax rates. Likewise, the government has also increased to 0.6pc the withholding tax on cash withdrawals for non-filers as well as imposed a 10pc tax on non-filers on withdrawals from foreign currency accounts.

The minister also announced a slew of incentives in taxes and credit for the agriculture sector, particularly those relating to value-addition and machinery, as well as for IT and IT-enabled services, in the form of tax facilitation and lower tax rates after giving it SME status and creating a provision for the availability of cheaper loans. Further, the tax on income for the construction sector, agriculture and SMEs has been halved to 20pc against 39pc at present for the next two years until June 30, 2025. The turnover threshold for an enterprise to be considered an SME for tax purposes has also been increased drastically from Rs250 million to Rs800 million.

Likewise, tax relief has been offered to industrial and export sectors, including metals and minerals, textiles and rice mill machinery, etc.

Incentives have also been offered to overseas Pakistanis. Similarly, incentives have also been offered for local sources of power generation, particularly solar and coal.

These include exemptions from customs duties on raw material for batteries, solar panels, inverters, etc. A new scheme will also be announced separately for bonded bulk storage of POL products to facilitate the import of crude oil and its products.

On top of that, a series of populist schemes have also been announced for the youth in the shape of the laptop scheme, tax relief for freelancers, cuts in income taxes for youth enterprises, loans, skill development programmes, and so forth.

The size of the BISP, which was increased by Rs40bn recently to Rs400bn, has also been jacked up further to Rs450bn for the next year.

Published in Dawn, June 10th, 2023