Budget 21-22: the resource puzzle

The federal budget for this year was widely appreciated for its pro-growth focus, but at the same time was also questioned for its underlying assumptions. The pro-growth measures include an ambitious development outlay, Kamyab Pakistan programme, reduction in taxes and duties, incentives for investors, etc. While these would inevitably benefit the businesses and citizens, they would also cost money, either as direct expenditure or as foregone revenues and hence the ability of the government to finance these measures would be critically important.

At present, the consolidated fiscal deficit is forecasted to be Rs3.4 trillion or 6.3% of GDP, but any shortfall in resources could seriously jeopardise the fiscal equation. A closer look on the resource side of the budget 2021-22 reveals a number of fiscal risks that the government must remain conscious of.

Firstly, the FBR revenue target of Rs5.8 trillion reflects a 23% increase over last year. The government’s own revenue forecast suggests that without any additional policy or administrative measures, it could only collect Rs5.3 trillion on the back of inflation and expected GDP growth. This leaves an additional Rs500+ billion, or even more if the GDP growth lags behind the target, which must be collected through new measures.

The government is aiming to generate half of this amount through new policy measures such as taxing the e-commerce portals, removing sales tax exemptions, etc, while the other half would come from administrative measures, such as expanded POS coverage, better use of technology and expanding the tax net. The expected revenue gains from these measures, especially after discounting the already withdrawn policy measures, however, are expected to be far lesser, implying that FBR could face a gap of Rs300 to 400 billion.

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Then comes the target of Rs610 billion for Petroleum Development Levy (PDL). Last year, the national petrol and diesel sales were around 18 billion liters. With 5% growth, this could reach nearly 19 billion liters. If the government charges a maximum of Rs30 per liter on account of PDL, it would lead to Rs570 billion collection for the entire year. But as of now the PDL is hovering around Rs4 per liter. Barring any significant reduction in global oil prices, it would be hard for the government to add another Rs26 per liter to the price of petrol. Any devaluation in rupee could make it even more difficult. Therefore, there could be a potential shortfall of as much as Rs200 to 250 billion in PDL collection.

There is also some uncertainty on the financing side, especially in estimated provincial budget surpluses (Rs570 billion) and proceeds from privatisation (Rs252 billion). As of now, Punjab is the only province that has provisioned to generate a surplus of Rs100 billion. Even that is contingent upon FBR meeting its revenue target. A shortfall of Rs400 billion in FBR revenues could mean a reduction of nearly Rs228 billion in the divisible pool and a shortfall of Rs110+ billion in Punjab’s share, which could eat up the estimated surplus. Lastly, given the last two years’ track record, the estimate of proceeds from privatisation also seems quite ambitious.

All in all, the federal government could run short of Rs1.3+ trillion and no amount of PSDP cuts could bridge this gap. This means that even with increased borrowing, which would further drive up the debt-to-GDP ratio, the consolidated fiscal deficit could be as high as 8% of GDP. It is therefore important for the government to keep track of these significant fiscal risks and re-evaluate its budget strategy if some of these risks start materialising.

Published in The Express Tribune, August 3^rd, 2021.

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