Introduction:
The upcoming
federal budget of Pakistan for 2023-24 holds significant importance, with speculations
ranging from an election-focused budget filled with tax breaks and subsidies to
a budget driven by the need for structural reforms and adherence to the
International Monetary Fund (IMF) agreement. Striking a balance between these
opposing pressures, the government must adopt a more nuanced budget strategy
that encompasses progressive taxation, resource mobilization, and expenditure
containment. This article aims to present a comprehensive budget strategy that
creates fiscal space for providing relief to segments of the population
severely impacted by unemployment and high inflation.
Budget
Targets for 2022-23:
The
ambitious federal budget for 2022-23 was formulated in consultation with the
IMF, embodying key targets outlined in the IMF Staff statement following the
completion of several reviews. The targets included a projected 5% economic
growth rate, inflation below 12%, and a 21% growth rate in Federal Board of
Revenue (FBR) revenues. Achieving these targets necessitated additional
revenues of approximately Rs 900 billion through new taxation proposals.
The budget
proposed various measures such as a super tax on large incomes, taxation of
deemed property income, an increase in corporate income tax rate for banks, and
enhanced excise duty on high-class air travel and cigarettes. Additionally, a
mini-budget was presented to generate an extra Rs 170 billion through a sales
tax rate increase. The introduction of a larger petroleum levy was expected to
contribute an additional Rs 728 billion in non-tax revenues. Overall, Federal
revenues were targeted to increase by over 28%, with a 3% growth rate in
current expenditure.
Budgetary
Outcome in 2022-23:
The Ministry
of Finance released data on fiscal operations for the first nine months of
2022-23. While FBR tax revenues showed a growth rate of 17.6% (short of the 21%
target), direct tax revenues exhibited exceptional growth of over 46%,
indicating progress in making the tax system more progressive. Non-tax revenues
grew by 26%, falling short of the targeted growth rate of over 63%.
The budget
estimates faced significant challenges, primarily due to a high growth rate in
current expenditure (26%) compared to the targeted 3%. The surge in debt servicing
costs by 69% was a primary reason for this increase, partially offset by a 20%
reduction in development spending. Consequently, the budget deficit for the
first nine months stood at 3.7% of GDP, with a primary surplus of 0.6% of GDP.
However, projections indicate a consolidated budget deficit of around 7.5% of
GDP by the end of 2022-23.
Budget
for 2023-24:
The Federal
budget for 2023-24, set to be presented shortly, faces speculation regarding
its nature: whether it will be an election-focused budget or one emphasizing
structural reforms and compliance with the IMF agreement. The government
projects a GDP growth rate of 3.5% and an average inflation rate of 25% (though
currently over 38%). Efforts to reduce external financing requirements may lead
to a near-zero current account deficit, necessitating a devaluation of the
rupee by around 30% or more.
Setting the
target for the primary surplus/deficit in the consolidated budget of the
Federal and Provincial governments becomes crucial. With an anticipated primary
deficit of over 1% of GDP this year, achieving a zero primary deficit will
demonstrate a strong budgetary balance and meet IMF requirements. To achieve
this, the following targets should be set:
a. FBR
Revenues: With a 30%
growth in the tax base (domestic and imports), normal revenue growth is
estimated at 24.8%. Additional taxation proposals should yield a 10% increase,
raising the tax-to-GDP ratio by 0.7%. Consequently, the target for FBR revenues
should be set at Rs 9400 billion, requiring taxation proposals of Rs 700
billion.
b.
Non-tax Revenues:
Enhancing the petroleum levy and addressing the decline in State Bank of
Pakistan (SBP) profits can yield a 20% increase in non-tax revenues, totaling
Rs 1875 billion.
c.
Overall Revenue Receipts: Gross revenue receipts of the federal government can approach Rs 11375
billion, with net receipts estimated at Rs 6015 billion, representing a growth
of 21% over the likely level in 2022-23.
d. Debt
Servicing: Given the
projected stock of government debt and incremental borrowing needs, debt
servicing is estimated at close to Rs 8000 billion, with an average interest
rate of around 17%.
e.
Expenditure Containment: To achieve a balanced budget, other heads of current expenditure,
including defense, civil administration costs, subsidies, pensions, and grants,
should be limited to a 10% increase. This allows for an Rs 800 billion combined
increase in these areas, restricting enhancements in remuneration and pensions.
Additionally, the power sector subsidy should be controlled through tariff adjustments
and efficiency improvements. The Public Sector Development Program (PSDP)
should be capped at Rs 750 billion, ensuring sufficient space for increased
expenditures on poverty alleviation programs, such as the BISP.
Conclusion:
With the
proposed targets, the federal budget deficit for 2023-24 is projected to be
close to Rs 8600 billion, while the provincial cash surplus should be at least
Rs 650 billion. This leads to a consolidated budget deficit of Rs 7980 billion,
accompanied by a small primary surplus of Rs 20 billion, achieving the goal of
a zero percent primary deficit as compared to the likely primary deficit of 1%
of GDP in 2022-23. This represents a significant improvement and addresses the
challenges posed by a large budget deficit carried forward into the new fiscal
year.
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