PRIME MINISTER Shehbaz Sharif’s new budget for the next fiscal year has laid out some ambitious targets — in line with the demands of the IMF to help Pakistan strengthen its case for a larger and longer bailout so that it can anchor its newfound economic stability of the last one year.

Overall, the budget seeks to boost the government’s tax revenues by over 40pc to Rs12.97tr from a projected collection of Rs9.25tr during the outgoing year through significant tax measures.

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The average annual increase in tax collection during the last five years has averaged around 20pc and is estimated to be 30pc this year. The additional tax measures of Rs2.2tr, equal to 1.8pc of GDP, seek to broaden the scope of consumption tax, significantly increase the existing personal tax burden on salaried and non-salaried individuals, do away with tax exemptions for various sectors of the economy, bring some untaxed incomes into the net, tighten the noose around non-filers, and boost the petroleum levy by Rs20 per litre to Rs80. The remaining increase of Rs1.5tr in tax revenues is expected to come from a nominal expansion in the economy due to a targeted inflation rate of 12pc and 3.6pc GDP growth.

The additional tax measures and the proposed increase in the petroleum levy will help raise the tax-to-GDP ratio for next year to an estimated 11.5pc of the size of the economy from this year’s estimated 9.6pc. Another major goal of the budget is to produce a primary surplus of 1pc of the size of the economy to hold down its fiscal deficit to 6.8pc for debt sustainability. The deficit would be further slashed to 5.9pc provided the provinces also throw up a surplus of Rs1.2tr as envisaged in the budget.

While the measures announced by Finance Minister Muhammad Aurangzeb are a step in the right direction, and seek to tax ‘sacred cows’ such as real estate investors, stock investors, exporters, the retail supply chain, and the like, these lack any “disruptive policy changes”, and represent incremental measures towards documentation of the economy.

Perhaps, political conditions in the country are not conducive for the government to implement the radical measures needed for taking a major leap towards boosting the economy. However, while the tax and deficit targets are ambitious, it is not impossible to pull those off.

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Yet doubts remain about the authorities’ ability to enforce the new measures fully and ensure greater compliance. While the government has raised the tax collection target to narrow the fiscal gap, the budget makes little effort to cut expenditure.

Though, in his budget speech, the finance minister talked about ‘right-sizing’ the government, he did not announce any tangible policy measure in this direction. Rather the total current expenditure is estimated to surge by 21pc to Rs17.2tr, with power and other subsidies jumping to Rs1.4tr and defence expenditure by 14pc to Rs2.1tr. Likewise, the consolidated development expenditure of the centre and provinces has been spiked by over 58pc to nearly Rs3.8tr as the government hopes to kick-start moderate economic growth through its spending on large infrastructure projects, in the absence of any appetite for new investment in the private sector.

Apart from accessing the IMF funds, the other major objective of the new budget is to shore up the stability it managed in the last one year. While fiscal consolidation aimed for in the budget will likely deepen stability, sustainable economic recovery remains dependent upon foreign flows from multilateral and bilateral partners. These are needed to bolster international reserves so that they cover three months of imports.

Although the authorities are hopeful that the new IMF deal will help them unlock these flows and improve the nation’s credit ratings, enabling them to access commercial loans, there is little indication of any substantial boost in foreign flows from these sources in the near term. The IMF deal would be helpful in unlocking multilateral funds, but that is not enough to reassure bilateral or commercial creditors or foreign investors. Sadly, the new budget does not do much in this respect.

Published in Dawn, June 13th, 2024