ISLAMABAD: Amid mounting hostilities from all sides, the budget 2018-19 din is over. However, the budget has three striking features that impact the country’s fiscal matters.
First, there is a cut in development funds of Rs200 billion against the previous year’s allocation. The reduction could have been prompted by mounting debt repayment difficulties.
Second, it carries an amnesty scheme, which seeks only 3% and 5% tax on the declaration of hidden assets and offers 2% to those investing the declared money in dollar bonds. Third, the budget exposes the vulnerabilities in the post-18th Amendment formula for the distribution of monetary resources among provinces and the federation.
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The slashed development budget highlights the federation’s intent to stop being overly gracious in contributing to project allocations that benefit provinces more than the federation.
This is a new tendency on the part of the federation that reflects that the revenue distribution ratio of 42.5% and 57.5% set under the seventh National Finance Commission Award for the federation and provinces respectively does not allow any generosity by the centre.
Does that mean that provinces would now have to be smart enough to generate their own funds for development projects and stop wastage? I do not think provincial headquarters have any other option. Or else, the 18th Amendment would have to be revisited.
If this formula is touched at any level, there would be trouble between the federation and provinces in a country where the centre has a history of annoying provinces. How long would it take for the provinces to either play fiscally smart or they will continue to depend on federal fund releases for development projects?
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The amnesty scheme seems to be the most lucrative for those allowed investment in dollar bonds by paying 3% on assets declaration and then getting 2% on such investment, with net tax liability of only 1%.
This has been inserted really smartly into the declaration formula. Those making heftier declaration of the untaxed assets will benefit the most.
Looking from Finance Minister Miftah Ismail’s perspective, those declaring most of the untaxed assets should benefit the most from this scheme. That is the trickiest part of the FY19 budget.
Revenue distribution between the provinces and the federation has left the latter vulnerable to the extent that even if the tax revenue deposits triple in the next couple of years, its share will be less than desired. The federation will permanently depend on mark-up-loaded borrowing.
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For the repayment of loans and debt servicing, the federation will be left with two options only – cut down the PSDP contribution further or reduce non-development spending.
Islamabad has never demonstrated the tendency to cut down on the current expenditure. Whatever the reasons, its capacity to operate smartly, with less allocation for current expenditures, has never improved. It has rather opted for a consistent increase in non-development fiscal operations.
That is why borrowing, corrupt practices and frivolous budgeting have become a culture both at the finance ministry and Planning Commission. An army of bureaucrats has grown over the past two decades – ever since the PSDP grew beyond Rs500 billion a year.
This bureaucracy is relentless in getting heftier allocations through the Central Development Working Party and the Planning and Development Department and most of the money goes into the hands of contractors – of course, after large cuts for the bureaucrats.
The sick and dead projects have grown over the past two decades and in line with that the mountain of debt has increased.
From development allocation to revenue collection, bureaucracy has been occupying the most lucrative seats where political manipulation for proposing frivolous projects and plundering revenues becomes the norm.
“Public finance in Pakistan has become an impossible task for any expert in the world,” these were the words of a former World Bank expert who spoke to the writer.
Experts like Ismail can make things look not that bad but they cannot tell how to swim through the ocean of vulnerabilities. The entire fiscal format has to be revisited to reduce the impact of vulnerabilities. The FY19 budget is a warning against ignoring all these vulnerabilities.
The writer has worked with major newspapers and specialises in the analysis of public finance and geo-economics of terrorism
Published in The Express Tribune, May 28th, 2018.
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