FACING the difficult task of balancing fiscal stabilisation with economic growth, the PML-N government’s third budget would involve around Rs270bn in fresh tax measures in order to increase the tax-to-GDP ratio by 0.8-1pc.

“The fiscal 2015-16 will consolidate the gains made by the government in stabilising the economy, yet enabling growth to accelerate to provide jobs and reduce poverty,” says the government’s budget strategy paper approved by the cabinet last week.

The path of austerity will be followed, as in the past two years, with current expenditures targeted to increase by less than the inflation rate.

With inflation targeted at 6pc against 4.8pc this year, it is expected that the general expenditures would be kept under a tight squeeze. Meanwhile, salaries and pensions for government employees would be increased by a maximum of 10pc; those for officers would go up by less than 7pc.

“Except for defence, all other government expenditures would see a very nominal increase,” finance secretary Dr Waqar Masood Khan told the National Assembly’s Standing Committee on Finance and Revenue.

Like last year, the broad outlines of the budgetary framework, including the next year’s fiscal deficit and tax targets, were agreed upon by Finance Minister Ishaq Dar and the IMF mission chief to Pakistan Harald Finger last month. After this, homework was done to make the numbers fall in place.

It is estimated that the withdrawal of SROs would yield about Rs100-110bn, while duties on items like ghee, cooking oil, sugar, beverages and cigarettes may go up

At the conclusion of the talks, both Dar and Finger announced the staff-level agreement for the disbursement of the next $506m tranche before June 30. Both also confirmed increasing the fiscal deficit limit for next year to 4.3pc (instead of the programmed 4pc) to make room for the Rs100bn ‘one-time extraordinary expenditure’ for Operation Zarb-e-Azb (OZA) and the resettlement of temporary displaced persons. The current year’s deficit was left at 4.9pc.

It was then that the defence expenditure was projected at Rs772bn for next year, excluding around Rs45-50bn for OZA. The next year’s budget deficit, in absolute terms, is projected at around Rs1.435trn, while federal development allocations have been put at Rs580bn.

The FBR’s revenue target for next year has been put at a little over Rs3.1trn, against revised estimates of Rs2.605trn for the current year — suggesting a 19pc increase. The tax machinery missed this year’s revenue target by Rs205bn, but this was blamed on the reduction in international oil prices, and lower-than-targeted economic growth and inflation.

With this year’s GDP growth rate clocking in at 4.2pc instead of the targeted 5.1pc, the next year’s target has been revised down to 5.5pc.

And to achieve that, the government is banking on the $46bn worth of energy and infrastructure agreements under the China-Pakistan Economic Corridor (CPEC), as well as the falling in place of LNG imports and the resultant improvement in power generation, which will support the industrial sector. The government expects the sector to rebound next year to grow by 6.4pc on the back of better energy supplies and early harvest projects of CPEC.

All of this will be expectedly supported by historically low interest rates, but it would depend more on the government’s debt servicing operation to create room for credit offtake by the private sector. The debt servicing cost of around Rs1.4trn for next year would remain a major hole in the federal budget.

The investment-to-GDP ratio has been targeted at 17.7pc of GDP against this year’s 15.1pc, while national savings are expected to improve from 14.5pc to 16.8pc in 2015-16.

The government is also aiming to generate around Rs270bn in additional revenue from improved efforts by the tax machinery, withdrawal of tax exemptions under discretionary SROs, and fresh taxation measures.

According to FBR Chairman Tariq Bajwa, tax efforts by the authority alone would contribute an additional 0.6pc to the tax-to-GDP ratio. He said the next year’s tax strategy would be based on reducing one-third of tax exemptions (like last year), as well as on increasing tax rates for non-filers (to increase their transaction costs) and taxing the hitherto untaxed areas. The burden would not be increased on tax-compliant people, he added.

It is estimated that the withdrawal of SROs would yield about Rs100-110bn. An additional 2pc GST would be imposed on supplies to unregistered persons, while the rate of the additional sales tax would be doubled from 1pc to 2pc through the Finance Act 2015. Similar measures would also be introduced for income tax filers and non-filers, which would be supported by the replacement of NTNs by CNICs.

While the normal GST rate would remain unchanged despite calls for its reduction, duties on some items like ghee, cooking oil, sugar, beverages, cigarettes may go up. The capital gains tax on sale of securities is also expected to be increased.

Another proposal is to raise the advance tax on residential electricity consumption by reducing the threshold. This means that the current 7.5pc tax on monthly bills of over Rs100,000 would now become applicable on monthly bills of Rs50,000.

A fresh incentive package would be announced for the construction and manufacturing sectors, while the tariff rate and custom slabs would be reduced. The customs slabs would come down from six to five, and the maximum tariff would fall from 25pc to 20pc in the coming budget.

Meanwhile, four fresh surcharges were already introduced in the power tariff a few days ago to reduce subsidy and circular debt. The circular debt, according to IMF’s Finger, stands at around Rs600bn (Rs280bn fresh stock and Rs335 parked in the power holding company).

The government has given an undertaking to liquidate this completely in three years by introducing surcharges, controlling fresh flows and reducing the existing stock.

Published in Dawn, Economic & Business, June 1st, 2015

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