Budget gap set to widen as key targets missed

Govt increases deficit target to 7.6% due to power subsidies, tax shortfall.

ISLAMABAD:

In what appeared to be a case of failure to stick to targets, the federal government has again revised its budget estimates and scaled up the deficit target to 7.6% of total size of economy or about Rs1.75 trillion on the back of massive power subsidies and a significant shortfall in tax revenues.

The move comes just five weeks before the close of the fiscal year and highlights bad management of the economy.

About two months earlier, the budget gap forecast was also revised after the Federal Board of Revenue did not seem to be coming even close to the tax target of Rs2.193 trillion, say sources in the Ministry of Finance.

Power subsidies are also expected to be higher than the revised estimate of Rs293 billion, they added.

The latest deficit estimate, which shows how much government expenditures exceed its income, is Rs252 billion or 1.1 percentage points higher than the first revision and Rs665 billion or 2.9 percentage points more than the original target, indicating flaws in budget-making besides negligence of executing agencies.

The widening gap is feared to fuel inflation besides leaving little credit for the private sector because of expected government borrowing from domestic banks. This will, in turn, contribute to higher unemployment in the country.

With a higher deficit this year, the incoming government will have little leeway for fiscal consolidation in the next fiscal year. Considering the current trends, next year’s realistic deficit target should be above 6.5% of GDP, resulting in similar economic conditions, say analysts.

In March this year, the finance ministry made adjustments in the budget and got it approved from the federal cabinet. The need for the second revision arose after the shortfall in revenue collection and a lack of corrective measures in the energy sector.

The biggest shock has come from the FBR which is way behind its tax target of Rs2.381 trillion. In March, the estimate was revised to Rs2.193 trillion and later to Rs2.05 trillion. Now, sources said, the new target is even lower at Rs2.018 trillion.



Political appointments in tax departments leading to massive corruption, slowdown of economic activities and ongoing infighting between top FBR officers are said to be the major reasons behind the revenue shortfall.

FBR Chairman Ansar Javed, who belongs to the Inland Revenue Service, has sidelined officials of the Customs Group and at present no serious work is underway at the FBR, said sources.

Owing to the budget-making process, transfers and postings are banned in the FBR in March every year, but this time it has not stopped. On Monday, the FBR chairman transferred two Grade 19 officers, Umar Wahid and Qasim Saeed, according to the FBR.

Apart from taxes, non-tax revenue estimate has also been brought down to Rs692 billion compared to the original target of Rs730 billion. A major setback came from the last government’s inability to auction 3G licences, which were expected to fetch Rs79 billion.

However, this was largely offset by more-than-expected receipts from the US under the Coalition Support Fund. Compared to estimates of Rs150 billion, the amount released under the fund was over Rs180 billion.

Sources believe that this year power subsidies will stay close to Rs400 billion against original target of Rs185 billion and revised estimate of Rs345 billion.

After resisting for days, the finance ministry on Monday released Rs10 billion for power subsidies. With this fresh injection, subsidies have gone above Rs325 billion and five weeks are still to go before the close of fiscal year on June 30.

Interest payments are also set to cross the target of Rs926 billion and revised estimates suggest that the figure is likely to reach close to Rs1.04 trillion.

Defence spending will exceed the budget estimate of Rs545 billion by at least Rs30 billion.

Published in The Express Tribune, May 28^th, 2013.

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