Budget to focus on strict fiscal discipline

Published: June 9, 2019


KARACHI: The budget for fiscal year 2019-20, which is due to be presented on June 11, is not one that will boost economic growth, however, it is more likely to be a budget focused on curtailing the twin deficits; fiscal and current account.

More importantly, the government would make sure to implement the International Monetary Fund’s (IMF) prior conditions through the budgetary measures to win the final approval from the fund’s executive board for a 39-month-long loan programme worth $6 billion.

In a nutshell, the PTI government is set to present a tax-laden budget in an attempt to achieve the ambitious tax revenue collection target of Rs5.55 trillion – over 40% higher than the collection expected in the outgoing fiscal year 2019.

It will be done through revising upward several taxes like general sales tax (GST) on a number of products and cutting development expenditure to narrow down fiscal deficit to 6% of gross domestic product (GDP) in FY20 compared to the expected historic high of 7-7.5% in the current fiscal year 2018-19.

Secondly, the government would continue to provide some of the incentives to export-oriented sectors, like textiles, in the shape of providing cheaper power and gas utilities and subsidised loans to attract higher foreign currency inflows and make imports further expensive in an attempt to further narrow down current account deficit in FY20.

The budgetary measures to narrow down the twin deficits under the IMF conditions would at first further slowdown the economic growth in FY20, but would expectedly help revive the sustainable economic growth from FY21 onwards.

Ahead of elections: Pakistan restricts deficit, sparking hopes of fiscal discipline

“FY20 budget will address tough economic conditions to revive economic growth that is to restrict the twin deficits and target stringent revenue goals via increase in GST, higher taxes on salaried class and enhanced documentation of the economy,” AHL Research said in a report on ‘Pakistan Budget Preview – A Bitter Pill.’

Furthermore, approval of the IMF programme is subject to some prior conditions, which will also be addressed in the budget; these include reducing the primary deficit to 0.6% of GDP, led primarily by augmenting tax collection to an ambitious Rs5.5 trillion, it said.

“This budget will focus on fiscal discipline, which will involve an ambitious tax revenue target and curtailment of expenses,” Topline Research stated in its report on ‘FY20 Budget Preview – Tax Laden Budget’.

“Budget FY19-20 will most likely be presented on the terms and conditions of IMF to bring the economy back on the right track,” it said.

AHL Research said the budget is also expected to promote exports to increase foreign currency inflow, generate employment and economic growth.

The budget would also discourage imports to reduce pressure on foreign currency reserves through increasing customs duty on all imports; eliminating exemption on bringing one mobile phone per annum; providing incentives for import substitution of oil seeds to reduce reliance on imported edible oil, and increasing spending on agricultural research to increase cotton production, while improving the quality, it said.

Measures to increase revenue

The government does not have a lot of options to increase the FBR tax revenue to Rs5.55 trillion. “We do not rule out the possibility that the government might increase the corporate tax rate by 1% or introduce something similar to super tax, in order to overcome the possible shortfall of Rs95 billion,” it said.

Besides, the government is contemplating reversing the benefit provided to salaried tax payers extended by the previous government to earn revenue of Rs100 billion.

Moreover, the government is evaluating withdrawing the zero rated status for five exporting sectors, which is expected to yield Rs80 billion.

Whereas increase in GST on sugar (5% presently) and fertiliser (2% currently) to 17% is expected to yield another Rs9 billion in FY20.

Lastly, increase in overall GST to 18% is expected to result in increase in revenue by Rs100 billion.

The Supreme Court has already restored the stay over revenue collection from usage of mobile phones, thereby, unlocking additional Rs90 billion worth revenues for the government.

Topline Research added that in order to bring the fiscal deficit to 5.5-6.0%, the government will likely cut development expenditure to Rs1.2-1.3 trillion from FY20 budget amount of Rs1.8 trillion.

Relief measures

In terms of relief measures, the government has already proposed to allocate higher subsidies, up by Rs50 billion to Rs216 billion for power consumers of below 300 units, it said.

Further, under social safety programme like Ehsas and Benazir Income Support Program (BISP), an additional amount of Rs80 billion is likely to be allocated.

The government may also allocate over Rs50 billion for issuance of new or renewal of health cards to be distributed across the country.

Published in The Express Tribune, June 9th, 2019.

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