Rise in defence spending; subsidies to be cut

ISLAMABAD: The total outlay for the federal budget 2010-11 is likely to be Rs2.638 trillion and over a quarter of it would be raised by borrowing money from domestic and external sources, revealed an official of the ministry of finance.

The budget, which will be announced on Saturday, will allocate significantly higher amounts to defence spending and withdrawal of subsidies in some sectors, say officials.

The outlay of Saturday’s budget would be 6 per cent higher than the total budget of Rs2.48 trillion of the current fiscal year.

Officials say that the controversial Value-Added-Tax will be made an integral part of the budget, although the date of implementation of the tax has not been finalised.

If the implementation date is not announced, then Plan B would be to increase the sales tax rate by 1 per cent to 17 per cent and withdraw the sales tax exemptions, officials said. One per cent increase in rate would generate about Rs 31 billion additional revenue, they say.

Three-quarters of the next federal budget is likely to be allocated for current expenditures. The government was contemplating allocating Rs1.975 trillion for non-development expenditure which would be a 16 per cent increase over the budgeted current expenditure of the outgoing financial year.

For the current fiscal year, Rs 1.7 trillion were allocated for the non-development expenditure, however, finance ministry statistics show that in 9 months, Rs 1.56 trillion have been spent under this head. IMF assessments show that the current expenditure would end up near Rs 1.9 trillion by June 30, 2010.

More than four-tenths of the non-development budget would be fixed for repayment of foreign loans and servicing of domestic and external debt. On account of servicing of domestic and external debt, Rs682 billion would be allocated and over Rs215 billion has been set aside for the repayment of foreign loans, said the official.

For the current financial year, Rs132.5 billion were allocated for the repayment of the foreign loans. An amount of Rs577 billon was allocated for domestic and Rs70.5 billion for the servicing of external debt.

The official said that the defense budget for 2010-11 may be a whopping Rs442 billion, which is over one-fourth more than the allocated budget and about 20 per cent more than the revised defence budget of the outgoing fiscal year. The cost of civil administration is likely over Rs227 billion during the next fiscal year, he added.

There would be drastic cut in power sector subsidies during the next fiscal year.

For up to 50 unit power consumers, there would be a subsidy but the amount would be very nominal. For this year the government had allocated Rs10 billion for the inter disco tariff differential but the amount has surged to Rs 85 billion due to continuation of subsidies.

The National Economic Council has already approved Rs 663 billion overall development budget out of which Rs 280 billion have been allocated for the federal development budget.

With the Rs1.975 trillion non-development budget and Rs280 billion for development, federal budget outlay would come to Rs 2.255 trillion. The government also includes provincial development spending and the ERRA’s budget into federal budget outlay.

Budget deficit may be 4 per cent of Gross Domestic Product or Rs680 billion. The National Economic Council has forecast that in the coming year, the economy would grow by 4.5 per cent or its absolute size would be almost Rs17 trillion.

The government is likely to borrow over Rs136 billion from external sources to bridge the gap between its income and expenditure.

The official said that the tax collection target for the next fiscal year would be Rs1.678 trillion. There would be new taxes to the tune of Rs132 billion. The authorities have estimated Rs70 billion on account of the VAT but it was not implemented the sales tax rate would be increased to 17 per cent and the other exemptions would be withdrawn.

The government is all set to levy Capital Gains Tax on stock market transactions.

There is likelihood that the govt may exempt income from tax up to Rs250,000 per annum.

Published in the Express Tribune, June 4^th, 2010.