Government set to present toughest-ever 'austerity budget'

Hafeez Shaikh shares economic roadmap in Islamabad press briefing

Shahbaz Rana May 25, 2019

ISLAMABAD: [fbvideo link="]

The government has announced to give the toughest ever austerity budget, having backing of military and civilian leadership, but its ultimate success will hinge upon achieving Rs5.55 trillion tax target that will require an unprecedented annual growth rate of 36%.

While addressing a press conference on Saturday, Adviser to Prime Minister on Finance Dr Abdul Hafeez Shaikh also hinted at increasing prices of electricity, gas, petroleum products and further hike in interest rates to contain inflation due to rise in utility prices.

He said the government will no more be primary source of giving jobs and this responsibility should have to be taken over by the private sector – an indication towards imposing a ban on the government jobs.

"It will be an austerity budget and army, civilian and private institutions are on the same page. Fiscal consolidation, austerity and revenue mobilisation will be planks of new budget," added Shaikh. The adviser, who acts as de facto finance minister, would unveil the new budget on June 11 in the National Assembly.

The energy minister, special assistant to PM on information, minister of state for revenue, the Federal Board of Revenue (FBR) chairman, secretary finance and secretary information were present at the conference, highlighting the importance of the event for the government.

"Serious, sustained and structured reforms and difficult decisions will be taken in the budget and everyone will participate," Shaikh said while responding to a question whether tax concessions being enjoyed by armed forces heads and executive judiciary will be withdrawn.

When asked if the defence budget will be cut from its total current level of Rs1.7 trillion including implicit financing since military and civilian institutions are on the same page to give an austerity budget, Sheikh said: "Pakistan is located in a difficult neighbourhood and its sovereignty will be protected by giving every possible sacrifice."

He refused to divulge the details of the IMF programme until it is approved by the fund's executive board. But he said the $6 billion loan has been secured at 3.2% interest rate.

Hafeez Shaikh also announced that the tax collection target for the FBR will be Rs5.550 trillion for next fiscal year 2019-20. This will higher by 36% or Rs1.450 trillion over the expected collection of Rs4.1 trillion in the outgoing fiscal year.

The government will have to make additional tax efforts equal to 2.2% of the Gross Domestic Product (GDP) or Rs940 billion. It is not yet clear how much of it will be raised by slapping new taxes and through the enforcement measures. Due to nominal GDP growth rate of 12.5% next year (4% economic growth and 8.5% inflation), the FBR will get a bonanza of Rs512 billion.

However, the FBR Chairman Shabbar Zaidi was not confident whether this steep tax collection target can be achieved. "If rich people of Pakistan do not play their due role, we cannot live up to the expectations of the people," said Shaikh while seeking cooperation from the influential groups of the society who will be directly affected by the next tax-loaded budget.

The finance adviser said 360 companies and individuals pay 85% of the total federal taxes and remaining nearly 2 million people pay only 15% of the total taxes. He once again vowed to use data to catch the tax thieves.

"There are 50 million bank accounts in Pakistan and a sample check of 4 million accounts showed that only 10% of them were the income tax return filers," said the finance adviser.

Hafeez Shaikh said currency devaluation and increase in petroleum products prices caused inflation in Pakistan. But he made it clear that if the oil prices went up in the international market, the government would be compelled to also increase prices in the domestic market.

He also added that if because of these measures inflation went up, the interest rates would be increased to contain the inflation. He plainly said the prices of electricity and gas would go up but he did not give a date for further raising these tariffs.

"People using less than 300 electricity units monthly will be protected from the tariff hike. Similarly, 40% of the gas consumers will not be affected by the increase in prices," he added.

The adviser said the government will give Rs216 billion subsidy to protect consumers of up to 300 units from the increase in electricity prices. He said in order to protect the poor from the adverse measures being taken in the budget, the government will distribute Rs180 billion through newly introduced Ehsas Programme.

The adviser said the government sector can no more create more jobs and this responsibility has to be taken over by the private sector. Shaikh also announced to launch crackdown against Benami assets holders after June 30 – the date when ongoing tax amnesty scheme will expire.

"Next one year will be a year of stabilisation aimed at putting the economy on sustainable path of development and saving it from dangers," said the finance adviser.

Shaikh said entering the programme would send a good signal to the international community that Pakistan wishes to take its economy forward in a disciplined manner and people will find incentive to form alliances and partnerships with us.

The adviser highlighted six measures that his government wanted to take in coming weeks. Shaikh said a staff-level agreement was reached with the IMF and over the next few weeks their board will accord their approval and the programme will become operational.

He said due to the Benami law and other traditions of the past, there is a lot of money which is not part of the formal economy. A tax amnesty scheme was introduced to make all the cash, real estate and other assets — both here and abroad — part of the formal economy.

The oil facility provided by Saudi Arabia worth $3.2 billion per year for three years will become operational on July 1. The pressure on foreign exchange reserves will be reduced as a result.

He said Pakistan will also borrow an additional $2 billion to $3 billion worth of programme loans from the Asian Development Bank and the World Bank.

The new budget will reflect the government's philosophy and determination to bring Pakistan on track for stability and prosperity will be reflected in the budget. The Islamic Development Bank's deferred payment facility worth $1.2 billion will continue in the year to come.

He said the tax amnesty scheme has been given to make "dead real estate assets" a part of the economy. He warned that the deadline to avail the scheme was June 30, after which the government will take an action against individuals who did not avail the offer timely.



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