Another deficit-laden budget

Reigning in inflation at less than 12% with central bank’s interest rates have been slashed by 1.5 percentage points

A difficult budget in difficult times promises to focus on fiscal consolidation in an attempt to contain soaring deficits. The trajectory of figures makes it a baffling case of optimism when the chips are down, and as growth is forecasted at 3.6%. The intention, however, is to rein in inflation at less than 12%, a gigantic task as the central bank’s interest rates have been slashed by 1.5 percentage points, and the price spiral presently hovers at 30%. The Rs18,877 billion budget has come up with an exceptional allocation of Rs1,500 billion for PSDP, at a time when the same was lingering at less than Rs800 billion last year. Likewise, a proposal to raise salaries of the government employees by 25% from grade 1 to 16, a 15% increase in pensions, along with an enhancement in petroleum levy from Rs60 to Rs80 will keep the lower and middle strata on the edges.

As is the case, Rs2,122 billion has been set aside for defence, 17.6% higher than last year, and Rs1,014 billion for pensions after a staggering allocation of Rs9,775 billion for debt-serving. That hardly leaves behind anything with the government for education, health and social mobility. That was squarely admitted by the finance wizard, in his budget speech, as he said depleted forex reserves, now at less than $9 billion, a 40% depreciation of the rupee and stagnant economic growth have pushed citizens below the poverty line. To further compound the equation is a special allocation of Rs1,363 billion as subsidies for the power sector, an aspect that will be contested and floored by the lenders. Last but not least is the tax collection expenditure proposed at Rs12,970 billion with a surprising projected receipts of only Rs30 billion in privatisation proceeds.

This budget apparently is a window-dressing to oblige the IMF as the government intends to do a long-time borrowing of more than $8 billion to the tune of exhausting its SDR limits. In lieu, the budget promises to ensure stability by efficient use of public money, introducing indispensable reforms in the taxation machinery, reduce current account deficit and mobilise the private sector to stimulate growth. That is easier said than done. But the good point is that the budget has retained the slab of taxation for salaried class at Rs600,000, opted for progressive taxation for higher income sections and encouraged tax compliance with a capital gains tax fixed at 15% for filers and up to 45% for non-filers. This, nonetheless, is an innovative strategy to enhance revenue and also to digitise the economy.

The proposed layout has enhanced the GST on textile retail sector from 15% to 18% and also raised FED on cement to Rs3 from Rs2 per kg. A generous allocation of Rs79 billion for the IT sector, with incentives for importing plant and machinery for the solar panel industry, will bring in dividends in the energy sector, which is why Rs4 billion for e-bikes and Rs2 billion for energy saving fans have been allocated.

Notwithstanding a budget deficit estimated at 6.9% of GDP, as the Economic Survey had painted a dismal performance of the economy last year, a 10% allocation has been made for the development of ex-FATA, along with Rs244 billion for the social sector development countrywide. The budget proposition hinges on good faith to attract foreign investment and strike a renewed deal with IMF, and in doing so it will have to test the rough waters at home in terms of inflationary revulsion and slow growth in a jaundiced environment of political instability.