A Bid To Appease All

By Amir Zia
Monday, June 13, 2011
Money Matters
The News

The finance minister has presented a “business-as-usual” budget, which could work perfectly well under the normal circumstances. But the only problem is that these are abnormal times for Pakistan

In these tough economic times, Finance Minister Dr Abdul Hafeez Shaikh has managed to present a “politically correct” budget for fiscal 2011-12 – at least on the paper. All the key budgetary targets, including the intention to keep fiscal deficit at 4.0 percent of GDP, raising a record 1.952 trillion rupees in revenues and slashing subsidies to 166 billion rupees from the current year’s 395 billion appear ambitious and aimed at reviving the stalled programme of International Monetary Fund.

To cheer up influential business circles, the government aims to lower the general sales tax (GST) to 16 percent from 17 percent, abolish regulatory duty on 392 items and scrap the special excise duty. The proposed budget also plans to remove federal excise duty on 15 items out of a list of 52. The government’s generosity does not end here. It has decided not to raise any taxes or customs duty, thus maintaining a status-quo and ensuring that no major group gets a chance to moan and groan.

For the government servants, there is a gift of a 15 percent raise in salaries.

The powerful land owners, feudal lords and tribal chiefs remain snug and cozy as there is no measure to impose tax on the agricultural income. The government managed to sidestep the issue under the 1973 constitution, which gives powers to impose this tax to provinces. And the good news for the rural-elite is that the provincial governments do not want to upset the apple cart in a bid to secure vote bank ahead of next elections.

The government felt confident about its resource mobilisation, raising the Public Sector Development Programme by almost 58 percent to 300 billion rupees. It jacked up defence spending by more than 11 percent to 495 billion rupees and set aside 791 billion for loan retirement and interest payment – the biggest chunk in the budgetary expenditure.

The finance minister has presented a “business-as-usual” budget, which could work perfectly well under the normal circumstances. But the only problem is that these are abnormal times for Pakistan — shaken to its core by political instability, terrorism and a struggling economy.

Many analysts say that the budget sets unrealistic targets, which will surely be missed by wide margins as has been happening for the last three years.

“The government has again avoided taking any meaningful reforms,” said Dr Ashfaque Hassan Khan, dean & principal of NUST Business School, Islamabad. “The tax measures are not enough to achieve the revenue target. As it happened in the past under this government, the budget deficit target will be the first casualty. It appears as an election- year budget, which will only add to the country’s economic woes.”

Sayem Ali, an economist at Standard Chartered Bank, also remains in doubt about the government’s capacity to meet its targets. “The government’s record on budget targets inspires little confidence,” he said in a post-budget research report. “In the last four years every tax and spending target has been missed.”

Ali predicts that in 2011-12 too, there remains a “real risk” that targets will be missed again including the deficit target, which is likely to stay high at 5 percent of GDP. “While the tax collection target of 9.3 percent of GDP in FY12 is very ambitious, it is not backed up by measures needed to boost revenues.

A cutback in subsidies through a 12 percent hike in power tariffs will be a difficult sell for the government. Bank borrowing is likely to rise to 550 billion rupees against the budget target of 304 billion.”

However, while economists may criticise the budget, an analyst at a leading brokerage house in Karachi says that major political parties will find little to oppose in the budget.

“This budget has tried to keep all the interest groups happy and it is likely to sail through the parliament notwithstanding the dramatic posturing and emotional speeches by parliamentarians,” said the analyst, who according to company policy wanted to remain anonymous.

But a senior finance ministry official brushed aside all the scepticism, saying that the budget targets remain achievable. “Last year, the economy passed through difficult times due to the internal and external shocks,” he said. “But now the economy is getting back on track. The new budget aims both for stabilisation and growth.”

He said all the expenditures and tax measures have been factored-in and the government remains confident that the budget deficit and all the other targets would be met.

An analyst working for a multi-donor agency said the budgetary objectives appear reasonable, including the plan to slash subsidies, but durable measures to achieve them seem lacking. The foremost of the challenge is how to expand the tax base, he said.

The government, however, says that by bringing new sectors under the ambit of GST, targeting 70,000 wealthy individuals outside the tax net, and administrative measures would be enough to meet this year’s revenue target.

But analysts feel that the government’s plans hinges on many ifs and buts.

First, like the previous year, the government expects provinces to give surplus budgets to help it meet the budget deficit target. But last year, provinces failed to do that and with all eyes already set on the next general elections, due in 2013, they would want to spend more rather than give surplus budgets.

The second factor, which could disturb the government’s plans, remains the volatility in the international crude oil prices. The government’s commodity operations are also piling up to the debt burden.

Given the fragile state of the economy that remains stuck in high inflation and low growth cycle for the last three years, the proposed budget fails to take those difficult measures, including taxing the agricultural income, which are seen vital for its revival.

In the absence of reforms, the target of putting the country back on the high growth trajectory and curbing inflation to a single-digit number – which is a must to reduce poverty – would remain elusive. It is a budget for the status-quo aimed to meet the government’s political challenges rather than serve the country’s long-term interests.