Widening deficit

Notably, most additional revenue is from import-related sources, and non-tax revenue is actually down by about 17%

The federal deficit for the first half of the current fiscal year has gone up almost 30% despite increased revenue and an extreme cut in development spending. More significantly, it has also increased in terms of share of GDP, rising from 3.1% last year to 3.3% in the current year. Meanwhile, new policies to increase tax revenues, even if successful, may not make a significant dent in the deficit because a large amount of that revenue also has to be transferred to the provinces. To illustrate, revenues worth Rs1.7 trillion, of a total of Rs3.68 trillion, to date have been transferred to the provinces, leaving the federal government with just Rs1.95 trillion. Tax revenue may also be hit by policies to control rising imports, which have caused inflation, devaluation, and a record current account deficit. Notably, most of the additional revenue is from import-related sources, and non-tax revenue is actually down by about 17%.

It should also be noted that the federal deficit is usually higher in the second half of the fiscal year due to increased spending in the final months of the year. That would imply that the deficit — currently Rs1.8 trillion — is likely to cross the Rs4 billion annual target. In fact, the total spending of Rs3.75 trillion was almost twice the government’s net revenue. The main contributor to the spike was increased spending under current expenditure heads, accounting for 92% of all government spending. Also of concern is the fact that 40% of current expenditure, or 72% of total revenue, was on loan interest payments.

Defence spending, which has also increased, accounted for over a quarter of all government revenues.

There is also concern that much of the revenue gained through the mini-budget might be lost due to the SBP decision to raise interest rate. A 1% change in interest rate is said to impact government revenue by about Rs150 billion, meaning that returning the interest rate to the lower pre-hike levels could cut the deficit by over Rs400 billion. But with this unlikely, it remains to be seen what, if anything, will be done to narrow the gap.

Published in The Express Tribune, January 22^nd, 2022.

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