Revenue-expenditures gap: Widening budget deficit poses challenges for new govt

Government’s overspending surpasses 5.6% of national output.

ISLAMABAD:

The federal budget deficit has swelled to Rs1.286 trillion, or 5.6% of national output, in 10 months (July-April) of the current fiscal year 2012-13, making it increasingly difficult for the incoming Pakistan Muslim League-Nawaz government to do away with the expansionary fiscal policy in its first year in power, finance ministry sources say.

In April alone, the federal government spent Rs185 billion more than its income, which is equal to 0.8% of national output.

Officially, considering the old base year of 1999-00 which the Ministry of Finance insists on using, the deficit stands a little lower at 5.4% of gross domestic product (GDP).

The 10-month gap between federal income and expenditures is Rs103 billion higher than the annual ceiling of Rs1.184 trillion, or 5% of GDP, set by the parliament for the current fiscal year. The breach of the limit points to the previous government’s failures in curbing expenditures and boosting revenues.

According to sources, the overall budget deficit stood at Rs1.207 trillion or 5.3% of GDP, calculated with the new base year of 2005-06, considering Rs80 billion worth of savings by provinces.

On the revenue side, against the annual target of Rs2.381 trillion, the Federal Board of Revenue may hardly hit the Rs2 trillion mark by the end of fiscal year in June, a fact acknowledged in official correspondence of FBR officials.

In 10 months, FBR’s tax collection have reached only Rs1.485 trillion, making it nearly impossible to collect the remaining amount of Rs896 billion in the remaining two months of the year.

In the case of expenditures, total power subsidies are likely to clock in above Rs350 billion, compared to the budgetary target of Rs185 billion. So far, in 10 months, over Rs320 billion have already been doled out to the power sector under this head.

According to revised assessments, the budget deficit is likely to reach around 8% of GDP by the end of the year because of a massive revenue shortfall, surge in power subsidies and high interest payments.

With a gap this wide, the new government will not have many options for restraining the expansionary fiscal policy when it will present next year’s budget, analysts say.

A realistic budget deficit figure for next fiscal year will be around 6.5%, as the new government cannot consolidate more than 1% to 1.5% of GDP in its first year, said Dr Ashfaque Hasan Khan, dean of the Business School of the National University of Science and Technology. He said bringing down the deficit to 4% will require three to four years of continuous consolidation.

To finance a deficit of around 6.5%, the new government will have to borrow Rs1.6 trillion from the market. Officials say that given the volume of borrowings, inflationary pressures will persist and private credit will be squeezed in the next fiscal year as well.

In the first nine months (July-March), net external borrowings remained negative at Rs4.2 billion. To finance the nine-month deficit, the federal government borrowed Rs1.05 trillion from the domestic credit market, finance ministry documents reveal.

Sources say any deficit target below 6% for the next year will be unrealistic and difficult to achieve. If the new government decides to play with budgetary projections, they cautioned, it will only be repeating mistakes of the previous regime and may face similar trust deficits.

Published in The Express Tribune, May 19^th, 2013.

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