Govt makes heavy interest payments

Overall budget deficit remains at Rs3.4tr or 7.1% of GDP in last fiscal year


Shahbaz Rana August 27, 2021
The tax-to-GDP ratio that was 11.4% in fiscal year 2019-20 further dropped to 11.1% instead of showing an improvement. PHOTO: FILE

ISLAMABAD:

The federal government’s spending on interest payments on debt and the defence jumped to nearly Rs4.1 trillion in the last fiscal year – which was Rs538 billion more than its net revenues, pushing the country deeper into the debt trap.

The Rs4.065 trillion spending on these two major heads consumed 85% of the tax collection by the Federal Board of Revenue (FBR). The money left after paying for interest cost and defence of the country was not sufficient to pay for other functions, revealed the fiscal operations summary for fiscal year 2020-21 ended in June. The Ministry of Finance released the summary on Thursday.

The summary showed that the overall budget deficit – the gap between income and expenditures – in the last fiscal year remained at Rs3.4 trillion or 7.1% of Gross Domestic Product. The deficit was slightly higher than the government’s target but lower than the preceding fiscal year by 1% of GDP.

However, a reason behind 7.1% of GDP budget deficit was Rs313 billion savings by the provincial governments.

The federal government borrowed Rs3.7 trillion in the last fiscal year to fund its expenditures, which has become part of its overall debt. The total revenues in the last fiscal year were equal to 14.5% of GDP – even lower than the fiscal year 2019-20.

The tax-to-GDP ratio that was 11.4% in fiscal year 2019-20 further dropped to 11.1% instead of showing an improvement. Similarly, the FBR’s tax-to-GDP ratio remained shy of 10% despite an increase in the FBR’s tax collection.

Compared to this, the total expenditures in terms of the size of the economy were equal to 19%, slightly lower than the previous fiscal year. Nearly 6% of GDP was spent on just interest payments.

The primary budget deficit – after excluding interest payments was Rs653 billion or 1.4% of GDP, which shows that there was no solution to the debt problem.

When the Pakistan Tehreek-e-Insaf government came into power three years ago the overall budget deficit was equal to Rs2.2 trillion or 6.6% of GDP. The government could not contain it due to a decision by the central bank to increase interest rates to 13.25% and missing tax collection targets every year.

Interest payments grew nearly 10% to Rs2.75 trillion and were equal to 58% of the FBR’s revenues. The defence spending remained at Rs1.32 trillion or 8.8% higher than the preceding fiscal year.

Combined expenditures on debt and defence stood at Rs4.1 trillion, which were Rs538 billion more than the net income of the federal government despite a decent growth in revenues.

The constant high bill of debt and defence once again highlights that the PTI government still lacks fiscal space for stimulating the economy and spending on human development. Finance Minister Tarin’s plan to achieve higher economic growth in this fiscal year through public sector spending may face many fiscal challenges.

Net federal receipts are calculated after excluding the share of four provinces from the gross federal receipts. Gross federal receipts stood at Rs6.3 trillion. The share of provinces in federal collection remained at Rs2.7 trillion. The four provinces get 57.5% of federal taxes as their share under the National Finance Commission (NFC) Award.

The government has showed a huge statistical discrepancy of Rs93 billion in expenditures. After adjusting this discrepancy, the overall budget deficit would shoot up to 7.3% of GDP or Rs3.5 trillion. A finance ministry official said that the discrepancy was in the provincial fiscal operations and the numbers were being reconciled.

Development spending stood at Rs667 billion, Rs17 billion more than the Rs650 billion allocations under the Public Sector Development Programme (PSDP). But these include Rs226 billion provincial development grants.

Revenues are falling short of the needs even though the government is heavily burdening the people with taxes on fuel, electricity and consumer goods.

The petroleum levy collection stood at Rs424.6 billion, up 45% or Rs131 billion in the last fiscal year.

Non-tax revenue collection increased to Rs1.5 trillion, which was almost at last year’s level. The central bank’s profit dropped to Rs651 billion, a reduction of 30% due to the overall reduction in interest rate.

The FBR’s tax collection stood at Rs4.76 trillion – higher by 19.2%.

Total federal expenditures stood at Rs7.2 trillion, which were higher by 6.2% over the same period of last fiscal year. But the current expenditures increased to Rs6.3 trillion on back of hefty interest payments.

The cost of running the civil government was Rs505 billion while the subsidies consumed another Rs425 billion in the last fiscal year.

Published in The Express Tribune, August 27th, 2021.

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