Budget deficit soars to Rs992b

Gap widens in Jul-Nov FY21 because of spike in debt servicing

ISLAMABAD:

The federal budget deficit soared to nearly Rs1 trillion in the first five months of current fiscal year, which was largely in line with the annual budget target due to a continued squeeze on defence and development spending and keeping some expenditures off the books.

However, the fiscal operations may soon start going off the target due to an expected shortfall in tax collection compared to the Federal Board of Revenue (FBR) target in coming months.

The federal budget deficit widened to Rs992 billion or 2.2% of gross domestic product (GDP) during the July-November period of current fiscal year, which was 5% higher than the same period of last fiscal year, according to sources in the Ministry of Finance.

Overall, the total federal government expenditures increased 14.5% to Rs2.4 trillion during the July-November period. Expenses were higher by Rs300 billion compared to the same period of last year.

Out of the increase of Rs300 billion, an additional spending of Rs244 billion was on account of debt servicing, which means other expenditures of the federal government remained almost at the same level compared to last year.

Debt servicing was the largest expenditure in the budget, which jumped 31%. During the period under review (July-November), the federal government spent Rs1.037 trillion on debt servicing. Net revenue of the federal government, after paying provincial shares, stood at Rs1.4 trillion, up 22%. However, a major increase was recorded in the non-tax revenue as the FBR’s tax collection grew only 6% - lower than the inflation rate.

For the current fiscal year, the government has set the federal budget deficit target at Rs3.43 trillion or 7.5% of GDP. The deficit in the first five months was equal to about 29% of the annual target and was in line with the estimate.

However, the trend could reverse in the coming months due to anticipated shortfall of over Rs350 billion in tax revenue, said the sources.

According to them, the government is exercising tight control over the development and defence spending, which has helped to contain the deficit despite a significant surge in the debt servicing cost.

The defence spending was lower in the first five months of the current fiscal year as compared to the same period of last year, the sources added.

Defence spending stood at Rs388 billion, which was 11% or Rs47 billion less than the same period of previous fiscal year.

The government has allocated Rs1.289 trillion for defence needs and five-month spending was equal to 30% of the annual budget target.

Development spending was higher by 1% compared to the same period of last year. Under the Public Sector Development Programme (PSDP), provisional development spending remained at Rs175 billion, or Rs2 billion more than the same period of last fiscal year.

The spending worth Rs175 billion was only 27% of the annual development budget.

After making payments for debt servicing and defence-related obligations, the net federal revenue for the July-November period was negative Rs45 billion, according to the sources.

They said the finance ministry did not fully pay electricity subsidies and a significant amount remained unpaid, which was added to the circular debt during the period under review. Had the power subsidies been fully paid, the federal budget deficit could have been close to Rs1.1 trillion.

The FBR received Rs1.71 trillion in taxes in the first five months, up Rs95 billion or 6%. Non-tax revenue receipts increased to Rs666 billion, 18% more than last year, due to better collection of petroleum levy.

The share of provinces in federal collection went down by Rs58 billion or 5.5% to Rs987 billion. The four provinces get 57.5% of federal taxes as their share under the National Finance Commission (NFC) award.

Gross federal receipts stood at Rs2.4 trillion, which increased 9% or Rs195 billion over the same period of previous year. After paying Rs987 billion to the provinces, the net federal revenue amounted to Rs1.4 trillion, which was higher by Rs253 billion. The four federating units saved Rs170 billion out of Rs987 billion, which was shown as provincial cash surplus.

Overall, the budget deficit, calculated after taking into account the provincial cash surplus, stood at Rs822 billion or 1.8% of GDP. It was 0.3-percentage-point higher than the same period of last fiscal year.

Primary balance, calculated after excluding interest payments, stood at Rs216 billion or 0.5% of GDP. It was better than the previous fiscal year.

The squeeze on development and defence spending is aimed at supporting the primary balance, which is part of the International Monetary Fund’s conditions.

Published in The Express Tribune, January 12^th, 2021.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.