No austerity measures: Rs1.7 trillion deficit budget unveiled

Major incentives for industries, some relief for the common man.

ISLAMABAD:

Dotted with incentives for industrialists and some relief for the common man, the federal government on Tuesday unveiled a budget of Rs3.936 trillion for fiscal year 2014-15 with deficit standing at Rs1.711 trillion that will be bridged through fresh borrowing.

Reading his 74-page budget speech in the National Assembly, Finance Minister Ishaq Dar clearly had two important audiences in mind – the International Monetary Fund (IMF) and the business community.

For the IMF, the message was that the government would stick to fiscal consolidation for the second year running while for the business community there were a lot of things to cheer about.

Against net income of Rs2.225 trillion, the finance minister claimed that the expenditure of Rs3.936 trillion was only 2% higher than this year’s revised outlay of Rs3.844 trillion. However, the expenses were 9.6% or Rs345 billion more than the current year’s original figure of Rs3.591 trillion.

The budget deficit – difference between income and expenditure – would be Rs1.711 trillion or 5.9% of gross domestic product (GDP), Dar said. To fill this gap, the government will borrow Rs914 billion from domestic sources, Rs508 billion from external sources and Rs289 billion will be saved by four provinces from their budgets.

With provincial savings, the overall deficit will come down to 4.9% of GDP or Rs1.422 trillion.



Except for uproar for brief moments from MNA Jamshed Dasti – first over the privatisation plan and then against the NA speaker’s decision not to give break for prayers, Dar went on uninterrupted amid occasional desk-thumping by treasury benches.

He did not announce austerity measures and avoided populist policies, except for pleasing its traditional vote bank – the industrialists.

He announced 10% increase in salaries as ad hoc allowance as well as 10% rise in pensions. He did not announce creation of new public sector jobs. “The private sector has to create jobs,” he said.

Dar vowed that reduction in budget deficit and increase in tax revenues would be the top-most priorities of the government. “Deficit will be reduced through better tax collection and restricted expenditures.”

Efforts to control expenditures will be entirely focused on subsidies, which have been brought down to Rs203 billion for the next fiscal year compared to revised Rs323 billion in the outgoing year.

A major subsidy cut will come in the shape of lower allocation for the power sector, the IMF’s pet hate.

Dar announced that Rs231 billion worth of new taxes in an effort to increase tax collection to Rs2.81 trillion, a rise of over Rs535 billion over the previous year’s target.

Most of the new taxes were slapped on existing taxpayers with no new sector coming into the net. The government is heavily banking on withholding tax to step up revenue collection next year.

With the new taxes, tens of hundreds of items will become expensive, particularly cars, cigarettes and imported goods including leather and garments.

Incentives

The minister announced that the government would set up Export-Import Bank of Pakistan with a paid-up capital of Rs100 billion that would offer loans to exporters at reduced interest rates.

Under the Export Refinance Facility, financing will be offered at a lower rate of 7.4%. Under the Long-term Finance Facility, loans will be provided at a reduced rate of 9% for three to ten years.

Dar also unveiled a special textile package that would give duty rebate to exporters in the range of 1% to 4%. In the value-added textile sector, exporters will get three to ten-year financing at a concessionary rate of 9%.

A Rs4.4 billion new vocational training package to train 120,000 workers in the textile chain has been prepared.

In the biggest bonanza under the guise of facilitating foreign direct investment, Dar said corporate income tax would be slashed from 33% to 20% for bringing investment in manufacturing, construction and housing sectors.

For stock investors, capital gains tax was kept at a reduced level at 12.5% for short-term sales, which was supposed to be 17.5%.

The government would bear half of the losses against loans offered to small farmers and extended the crop insurance scheme to cover 25 acres of land from the current 12.5 acres.

Number crunching

On the expenditure side, the single biggest chunk, estimated at Rs1.325 trillion, or a third of the budget will once again be swallowed by interest payment on national debt.

Overall defence spending will constitute 28.2% of the budget and may well cross Rs1.1 trillion for the first time in the country’s history. Only the defence budget for next year is Rs700 billion.

Running the civilian side of the federal government is expected to cost Rs290.7 billion, the development budget will cost Rs525 billion and pensions, civilian and military expenses will cost Rs215 billion.

Social safety

Recipients of the Benazir Income Support Programme will see their allowance increase 25% to Rs1,500 per month with total amount allocated for the programme at Rs118 billion.

Dar said a task force would be constituted to review existing social safety net projects aimed at avoiding overlapping. A tax reform commission will also be set up for revamping the tax system.

He claimed that the government had vigorously pursued a six-point agenda announced in the last budget to speed up the pace of economic growth. Economic liberalisation would continue next year as well with further expansion of the privatisation programme.

Dar underlined the determination to undertake new power projects and cut back on subsidies.

The government will be completing work on new highways, particularly on the Pak-China Economic Corridor. A plan to connect the Gwadar Port with the northern border with China was also announced. The government would establish Kashmir Railways Company to have rail link between Islamabad, Murree and Muzaffarabad.

Highlights

An amount of Rs6 billion allocated for PM’s low-income housing scheme

Advance withholding tax on marriage centres being reduced to 5%

It is proposed to reduce tax liability of disabled persons having income up to Rs1 million by 50%

A 10% increase in pension will be given to all retired federal government employees

Water sector investment of Rs42 billion for projects in various parts of the country

Nothing substantial announced for either PIA or Pakistan Steel Mills

Capital Gains Tax of 12.5% for securities held up to a year, 10% for those held between 12 to 24 months

BISP increased to Rs118 billion from Rs75 billion last year

Rs205 billion allocated for power sector projects including Neelum-Jhelum and Diamer-Bhasha hydropower projects

 

Published in The Express Tribune, June 4^th, 2014.