• Govt sets challenging tax revenue target of Rs13tr, around 40pc jump from outgoing year
• GDP growth target set at 3.5pc, inflation at 12pc
• Rs5.545tr collection targeted through income tax earnings; GST collection expected to be Rs4.9tr
• Petroleum levy upped from Rs60 to Rs80/litre
• 25pc rise proposed in salaries for govt employees in grades 1-16, 20pc in grades 17-22; pensions up 15pc
• Power subsidy to AJK increased to Rs108bn after unrest
• Aurangzeb stresses structural reforms to escape low-growth cycle

ISLAMABAD: Finance Minister Muhammad Aurangzeb presented his inaugural budget on Wednesday with clearly another “longer and larger” IMF bailout package in mind, unveiling aggressive taxation measures, including higher taxes on personal incomes and petroleum products, new taxes on real estate, and the withdrawal of several tax exemptions.

These steps are projected to generate additional revenues of more than Rs2.2 trillion, or 1.8 per cent of GDP, in the next fiscal year.

With an inflationary outlook, this is on top of another Rs1.5tr additional revenue that would automatically accrue next year because of 12pc inflation and 3.5pc economic growth rate. This would deliver a revenue target of Rs12.97tr — up 40pc from the current year’s revised estimate of Rs9.252tr, which missed the budget target by about Rs163bn.

Even in non-tax revenue, the petroleum levy on petroleum products has been increased from Rs60 to Rs80 per litre, increasing its annual yield by 47pc to Rs1.28tr.

“Taking forward home-grown reforms, the government is negotiating an Extended Fund Facility with the IMF. Macroeconomic and fiscal stabilisation, building foreign exchange reserves, making debt sustainable and reforms in power and SOEs for improved transparency and governance would be focused during the new programme,” the finance minister said candidly in his opening remarks of an hour-long budget speech in the National Assembly amid continuous anti-government sloganeering by the opposition Sunni Ittihad Council members.

“It is time for reforms. Our options are limited,” Mr Aurangzeb said, adding that Pakistan needed structural reforms to get out of a low-growth cycle in which unnecessary financial burden had been put on the state in the past and its cost was being borne by people in the shape of inflation, low productivity and low-income employments.

Salary, pension, social support

However, the government does not appear to reduce its expenditures for next year, as it expanded salary, pension, and development budgets. The finance minister promised reforms in the pension scheme and rightsizing of government jobs going forward.

He announced a 25pc increase in the salaries for government employees in grades 1-16, 20pc in grades 17-22 and 15pc for pensioners, as government employees built pressure outside the Parliament House ahead of the budget session.

It also set aside significant amounts of taxpayer money for subsidies and income support to lower-income groups and special areas and protected influential sectors like high-income groups in the highest tax slab and banks and financial institutions from any additional tax burden.

The budget speech that was delayed for almost two hours owing to political challenges posed by the PML-N’s coalition partner PPP resulted in the deletion of a major tax reform. This pertained to withdrawal of tax exemptions to formerly tribal areas now merged with Khyber Pakhtunkhwa and instead the introduction of income tax exemption to the people of provincial and federal tribal regions for one year. Both these measures were removed from the speech as influential industrial and commercial operators secured protection.

Income tax revenue

No wonder then, the income tax earnings would outpace all taxes by 48pc, or by Rs1.77tr, to become the single-largest revenue stream, with Rs5.545tr collection targeted under this head in 2024-25.

In comparison, the general sales collection is expected to increase by 36pc to Rs4.9tr next year, up by Rs1.3tr. During the current fiscal year, both income tax and sales tax collections are estimated to be Rs3.6tr.

The finance minister said that a reduction in budget deficit would be a critical objective for the next year budget for which “we would increase incomes through a fair taxation policy and cut in unnecessary expenditure without compromising on human development, social and climate resilience”. In this regard, he cited the abolition of government posts vacant for years with a Rs45bn saving.

Therefore, the federal budget deficit was estimated at 6.9pc of GDP (Rs8.5tr against Rs8.4tr this year), which is targeted to be brought down to 5.9pc of GDP or Rs7.28tr, thanks to Rs1.217tr or 1pc of GDP cash surplus promised by the four provinces.

Expenditure and borrowing

The primary account — the gap between total resources and expenditures, except interest payments — has been targeted to be in a surplus of Rs2.49tr, or 2pc of GDP, next year against 0.4pc during current year.

This is based on assumptions that the next year’s total expenditure would amount to Rs18.88tr against Rs14.5tr in the current year, up by over 30pc. Almost half of this expenditure stems from Rs9.8tr interest payments next year.

This is also significant when seen in the context of finance minister putting the net federal income at Rs9.119tr after provincial transfers, resulting in heavy borrowing to not only finance existing interests but for all other expenditures. A substantial amount of Rs313bn has been allocated for emergencies and unseen expenses.

To finance the gap, the government has estimated domestic bank borrowing of Rs5.14tr and about Rs666bn in external receipts or foreign loans (almost $2.4bn). A notional amount of Rs30bn has been booked for the next year as privatisation proceeds.

Directional changes

The finance minister also proposed a few directional changes to shift from a government-determined economy to a market-driven economy, promoting exports while moulding economic system to global economy and from consumption-based to investment and saving-based economic development.

For that, he called for eradicating state footprint through regulatory reforms except for essential public services, encouraging local and international investment for improved productivity and regulatory and investment climate improvements.

The minister said that besides the additional taxation measures, documentation and digitisation would be key drivers of revenue expansion. On the pension side, he proposed a contributory pension scheme and other pension reforms in line with international practices that would “significantly reduce pension liability over the next three decades”.

No wonder the pension bill will be beyond Rs1tr next year with the addition of Rs122bn, an additional burden announced in the budget of Rs821bn this year. Next year’s pension bill includes Rs662bn in military pensions and Rs220bn in civil pensions. The budget also showed Rs10bn for the pension fund for the next fiscal year, which was also announced by former finance minister Ishaq Dar in the previous budget and fully utilised.

Published in Dawn, June 13th, 2024