The next fiscal year's budget, announced by Finance Minister Miftah Ismail on the floor of the National Assembly earlier today, is not just expansionary in nature — in a constrained fiscal environment against the backdrop of geopolitical volatility and a potential global recession — it also expects a substantial drop in commodity prices to square off its books.

For starters, the price of petroleum products, which basically influences the growth trajectory and sustenance of the economy, is assumed to drop sharply, as evidenced by a targeted inflation rate of 11.7 per cent and a fairly liberal Petroleum & Development Levy assumption of Rs750 billion.

In reality, however, as the impact of increased fuel prices is passed on, inflation is projected to stay close to the 20pc mark, or may even exceed it. A targeted inflation rate of 11.7pc builds in expectations of a significant drop in commodity prices — a prayer that may, or may not work out.

Hits and misses

Nonetheless, the new budget appears to be an attempt to nudge the economy to snap out of a boom-bust cycle and increase reliance on export-oriented growth through an increase in competitiveness. This is a welcome departure from the typical focus on import substitution.

The budget targets a growth rate of 5pc over the next fiscal year without expanding the current account deficit, while also reducing imports — something we haven’t been able to do in the last 20 years with the exception of a pandemic-related drop.

Similarly, the introduction of the laptop scheme and support for IT infrastructure of Rs17 billion is a welcome addition. More importantly, efforts have been made to enhance the after-tax disposable income of a large chunk of salaried taxpayers through the adjustment of tax slabs, and elevation of minimum income for taxation purposes. In a double-digit inflationary scenario, this will certainly assist households in balancing budgets.

Targeting non-productive areas

One of the more critical structural changes in the new budget is the introduction of the concept of deemed rental income, and a wealth tax on immovable property, which isn’t primary residence.

The introduction of 15pc capital gains in immovable property would dampen the speculative activity in the real estate market, which had been spiralling out of control, largely driven by excess cash in the economy. Through such a structure, the intent is to redirect capital from non-productive areas such as real estate to more productive areas, such that they may create incremental revenue, and jobs, which have a higher economic multiplier. One hopes that the government will remain steadfast with this proposal and will not capitulate under pressure.

An increase in the allocation to the Benazir Income Support Programme (BISP) to Rs364 bn from Rs250 bn last year will provide additional comfort to the most vulnerable segments of the population, with more than eight million households getting direct cash transfers of Rs2000 per month in lieu of fuel subsidies. This will be in addition to the usual transfers that are done via the BISP.

Swapping out subsidies with cash transfers would avoid market distortion, while facilitating a soft landing for the most vulnerable segments of the population.

The tone of the budget has largely been pro-poor as taxes have increased on segments that were untaxed earlier, or are expecting windfall gains. One example of such segments are private banks, which would benefit from a high interest rate environment and end up accumulating windfall profits. Taxing the same at a higher rate of 42pc, rather than 39pc will generate precious incremental revenue for the government.

Broadening the tax net

Another innovative measure is bringing in retailers in the tax net through electricity bills, with a fixed tax payment varying from Rs3,000 per to Rs10,000. More clarity is not available at this stage, but this will ensure that suddenly all retailers — with an electricity connection — can become tax payers. Although similar schemes have been brought earlier as well, how this tax is imposed, and how it is transitioned towards a more economic activity driven tax will remain a question of execution.

The new budget is slightly different from the usual boilerplate that is presented every year.

There is a gradual nudge towards moving capital away from non-productive segments to more productive ones. The expansionary nature of the budget, and the expectation embedded in the targets that commodity prices may go down is considerably optimistic.

In the absence of such a scenario coming to fruition, we may see a few more mini-budgets to bridge deficits, or keep them under check. Bringing in retailers into the tax net, while providing a breather to the salaried class, and an expanded BISP umbrella are tweaks that will provide some relief in a double-digit inflationary environment.

Taking inspiration from the 1986 chart buster: "We are halfway there, we are living on a prayer".

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