Next fiscal year: Budget deficit target likely to be tamped down

Govt seeks to reduce budget gap by withdrawing tax exemptions.

ISLAMABAD:

The federal government is going to set a lower budget deficit target at 4.9% of the total size of the economy or Rs1.5 trillion for the next financial year after indications that it may achieve this year’s goal on the back of squeezing development spending.

The budget deficit – gap between national income and expenditure – is being worked out under a broader budgetary framework for the next fiscal year 2014-15, according to sources in the Ministry of Finance.

In absolute terms, the government wants to introduce Rs260 billion worth of fiscal consolidation and a significant chunk would come through withdrawal of sales tax exemptions. Due to rigidity of expenditures, there will not be enough space to cut expenses but the subsidies.

For the current fiscal year, parliament had approved budget deficit of 6.3% of GDP or Rs1.65 trillion. However, under the three-year Extended Fund Facility worth $6.7 billion, the International Monetary Fund (IMF) introduced a tight fiscal policy and slashed the deficit target to 5.8%, half a percentage point or Rs130 billion less than that approved by parliament.

The IMF has asked Pakistan to lower its deficit to 3.5% to 4% during the loan period. The Ministry of Finance is contemplating reducing it by 0.9% from the current year’s level to 4.9% for the next fiscal year, beginning July, according to ministry sources.

In the last year of the IMF programme (2015-16), the ministry intends to further reduce the gap by 0.9% to 4%.

Sources said the government had not yet discussed next year’s budget with the IMF. According to a tentative plan, they will start discussions by the end of April.

In the first half of the current fiscal year, the government managed to restrict the budget deficit to 2.2%, mainly because of a big cut in development spending. However, it was facing problems in achieving the Rs2.475 trillion tax target, which could undermine efforts to cut the deficit to 5.8%.

Similarly, for the next fiscal year, the government has proposed Rs506 billion for the federal development budget, 6.3% less than Rs540 billion for the current year.

However, according to independent economists, over-emphasis on fiscal consolidation is likely to hurt economic growth in the long term. They argue that austerity should be eschewed for the sake of growth, but their advice is contrary to the IMF prescription.

In order to review budgetary targets for the next fiscal year, a meeting was also held in the Ministry of Finance on Saturday. Finance Minister Ishaq Dar chaired the meeting and reviewed implementation of the Medium Term Budgetary Framework (MTBF), said an official statement.

The three-year Medium Term Macro-economic Framework 2013-16 has been strictly followed and benchmark commitments are being focused, according to the statement. Detailed discussions focused on result-based monitoring and a draft Public Finance Act.

“We have to follow performance-based budgeting and closely monitor growth and Public Sector Development Programme,” Dar said, adding planning, budgeting and accountability should go hand in hand.

The minister emphasised that transparency should reflect at every step of the economic reforms introduced by the government. “We must ensure that wasteful expenditures are cut and allocations for social protection for the poor and needy are disbursed.”

He said the fiscal deficit target of 4% in three years was sacrosanct and for this purpose it was essential to keep the ministries within fiscal limits.

Published in The Express Tribune, March 2^nd, 2014.

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