A non-serious budget
14 June, 2011
By Dr Ashfaque H Khan
Finance Minister Abdul Hafeez Shaikh presented his second budget on June 3. The federal budget for 2011-12, the present government’s fourth, is a non-serious budget because it understates expenditures and overstates revenue and thus injects elements of risks. No sensible finance minister and his team would prepare a budget replete with serious risks.
There are several risks associated with revenue, expenditure, budget deficit, and financing of fiscal deficit. On the revenue side, the first and foremost risk is the tax collection target of the FBR itself. The FBR is targeted to collect Rs1,952 billion in 2011-12, up 23 percent over this year’s revised collection of Rs1,588 billion. Whether the FBR could collect Rs1,952 billion next year is dependent upon its collection of Rs1,588 billion this year, the chances of which are slim. With all its efforts, the FBR may collect revenue – including a one-off collection from the energy and banking sectors in the range of Rs1,530-1,540 billion.
Any slippages in this year’s tax collection would make the task even harder for the FBR to collect Rs1,952 billion next year. Tax elasticity in Pakistan has fallen below unity (0.9), hence the autonomous growth in tax collection would lead to a collection of Rs1,760-1,770 billion next year. The FBR has taken various tax measures in the budget which, instead of raising revenue, has in fact estimated to be Rs23 billion in the red. The FBR is trying to bring its house in order and striving to improve its efficiency. Assuming that its efforts will bear fruit, an additional amount of Rs30-40 billion could be added to the next year’s tax collection, thus taking the total tax collection to Rs1,790-1,800 billion – Rs150-160 billion short of the target.
There are three major risks associated with non-tax revenue. The first is the expected sale of licenses of third generation (3G) cellular services. Rs75 billion have been added in the non-tax revenue under the sale of licenses. Interestingly, the government had kept Rs50 billion under the same heading in non-tax revenue last year as well. Can the PTA sell these licenses in a transparent bidding process this year? The answer is in the negative, and as such the Rs75 billion may not be collected.
Secondly, the government expects to receive Rs119 billion under the Coalition Support Fund (CSF) in the next budget. In the current year it has received Rs63 billion ($742 million) and is striving hard to get the remaining amount in the next two weeks. Can Pakistan get the remaining amount this year? Can we expect $1.35 billion (Rs119 billion) under the CSF next year from the United States? Certainly, there are serious risks involved in such inflows.
Thirdly, the government has targeted Rs200 billion from the profit of the State Bank of Pakistan in next year’s budget. To deliver Rs200 billion to government, the SBP will have to further hike the discount rate and also allow the government to borrow directly from the SBP to finance the budget deficit. I expect neither of these to take place in the next fiscal year, and as such there is risk attached to the Rs200 billion from the SBP.
Let me now turn to the risks on expenditure side. The Inter-DISCO tariff differential has fluctuated wildly in the current budget. The government had targeted a power-sector subsidy of Rs30 billion in last year’s budget, but the year is expected to end with Rs240 billion. The government has targeted a power subsidy of Rs50 billion in next year’s budget – a reduction of Rs190 billion. How credible is this number? Is the government ready to increase power tariff in the range of 22-25 percent next fiscal year? Has the power tariff hike resolved our power-sector issues? An increase in power tariff alone has not worked, is not working and will not work in the future. By raising the power tariff the government is perpetually financing the inefficiencies, theft, corruption and overstaffing of WAPDA/PEPCO and the power distribution companies. Thus, like last year, there will be massive slippages in power-sector subsidies, given the fact that Budget 2011-12 is an election budget as the finance minister has himself proclaimed.
The government has targeted a budget deficit of Rs851 billion, or four percent of the GDP, consistent with the IMF requirement for the next fiscal year. The federal government deficit is targeted at Rs976 billion, or 4.6 percent of the GDP, and it is assumed that the provincial governments would generate surpluses of Rs125 billion or 0.6 percent of the GDP to arrive at the targeted deficit of 4.0 percent of the GDP. The governments of Sindh, Punjab and Khyber-Pakhtunkhwa have already presented their budgets with combined surpluses of less than Rs1 billion. In other words, the budget presented on June 3, 2011, will not even see the light of the new fiscal year. Pakistan will begin the new fiscal year with a budget deficit target of 4.6 percent of the GDP, instead of four percent. Slippages on both revenue and expenditure sides, as stated above, would certainly take the deficit to over six percent of the GDP; that is, in line with the average deficit of the last four years.
There are risks on the financing side of the deficit as well. The government will need Rs976 billion to bridge revenue-expenditure gap. On external sources of financing, the launch of Euro Bond amounting to Rs44 billion is not going to be materialised. Similarly, Rs118 billion is expected to come under programme loan as against the revised estimate of Rs39 billion this year. What would make such a large difference in the next fiscal year?
From the foregoing, it is safe to conclude that Budget 2011-12, far from being people-friendly, is a non-serious and a non-functional budget whose fate will not be different from the current budget.