Budget 2013-14

I was not disappointed by the budget 2013-14 - not because it contained any out-of-th-box thinking or indeed any reform measures that would have changed the economy's direction in the next year, particularly with respect to the tax structure that will continue to be inequitable, unfair, and anomalous - but because I never expected any better from budget 2013-14.
I did not expect any better partly because the time period for the newly-elected Finance Minister was simply too short to formulate comprehensive reforms that this economy urgently requires, an admission that Dar was quick to acknowledge during his post-budget press briefing; but partly because Dar did a Dar which I would define as continuing with policies that are dated to about 14 years ago when Nawaz Sharif was Prime Minister and Dar the Finance Minister. Dar cited the stock market upturn as an indication of the favourable response to his budget, but he needs reminding that the Pakistani stock market upswings have been routinely used by his predecessors as proof that the economy was performing well with many analysts maintaining that manipulating our stock market is relatively easy for the handful of major stock brokers who, in return, want to remain exempt from taxes and have a lower corporate tax - both conditions that Dar's budget met. One can only suggest that Dar should review the footage from October 12, 1999 when amongst others the Lahore business community distributed sweets on Musharraf's coup and the fall of Nawaz Sharif's government.
True, the state of the economy was much better in 1999 than in 2013, with Musharraf era policies as well as PPP-led coalition policies and global recession to blame for the current economic impasse, however Dar's claims must be viewed with scepticism when he maintains that this time around he would succeed in increasing documentation (which incidentally has invariably been effectively resisted by those who would be impacted through political pressure), doubling income tax slabs (relying on existing taxpayers notably the salaried class to generate higher tax revenue instead of proactively going against those 3.7 million non-payers who have been identified through Nadra's assistance), enhancing the sales tax from 16 to 17 percent (a rise that the PML (N) had violently opposed during the past five years correctly arguing that it would be inflationary with a heavier impact on the poor relative to the rich, which Dar in his post-budget briefing inexplicably dismissed as non-inflationary), higher tax on cash withdrawals and raising the tax on savings (by 0.5 percent tax on moveable assets which implies taxing the already taxed savings). Incidentally, national savings are appallingly low in this country compelling the government towards heavier reliance on borrowings to fund investment. However, Dar explained that the 0.5 percent tax would be levied on cash and shares in excess of 10 lakh rupees, and one wonders at his naivety as it would either lead to dispersal of moveable cash to other family members to ensure less than 10 lakh each and/or capital flight.
In addition, Dar claims that his government would generate 1.6 billion dollars in 2013-14 by auctioning 3G licence and compelling Etisalat to pay the government for PTCL privatisation. While holding on brief for the poor performance of the PPP-led coalition government in the economic arena the fact remains that the former government did use its considerable clout in the UAE to compel Etisalat to clear its account but Etisalat insisted that all properties agreed in the original agreement be mutated, including those that are currently owned by the private sector. 3G licence auction was cancelled several times during the past three years due mainly to non-transparency and here Dar may succeed where the previous government failed within the next five to six months. And finally relying on Eurobonds given the state of the eurozone is simply too ridiculous to merit a comment.
Given all these measures what does Dar gain for 2013-14: a budgeted direct tax collection of 975.7 billion rupees, in contrast to the budgeted 932 billion rupees in 2012-13. Revised estimates for the current year place total tax revenue from direct taxes at 779 billion rupees and in the absence of reforms in the Federal Board of Revenue it is unclear how much of the budgeted target Dar expects the Bureau to achieve in the forthcoming year. Indirect tax collections, Dar estimates at 1622 billion rupees whereas budgeted indirect collections were 1571.5 billion rupees in the current year with only 1345 billion rupees actually collected. Inexplicably the rise in GST by one percent was effective on June 15, 2013, which has been taken up by the Supreme Court on the grounds that as the budget has not yet been passed in parliament how could the government impose a tax? In addition it is unclear what Dar expects to generate as tax revenue without first undertaking massive reforms in FBR subjected to over 500 billion rupees annual leakage. What is unfortunate is that Dar did not provide figures for various forms of direct and indirect tax collections and it is unclear how much revenue he expects from various tax proposals. For a budget this is shoddy work especially given that he could have used another week or so to firm up figures which would still have left a week or so for debate in parliament (and the passage of the budget by 30th June 2013) given that PML (N)'s overall majority in parliament leaves no room for the budget not being passed as is.
There is no doubt that there is limited flexibility in terms of current expenditure with defense and debt servicing including the principal amount due, accounting for 76 percent of total current expenditure (foreign and local debt repayment and interest accounting for 1795 billion rupees plus 627 billion rupees defence allocation out of a total current expenditure outlay of 3196 billion rupees). The comparable figure for the current year's revised estimates is 75 percent (1611 billion rupees for debt servicing and loan repayment plus 570 billion rupees for defence out of total outlay on current expenditure of 2907 billion rupees). Thus Dar actually increased the percentage on these two items by a little less than a percentage point.
Running expenditure of civil government is expected to rise to 274.6 billion rupees from the 251 billion rupees as noted for the revised estimates of the current year and this is in spite of the fact that the government did not raise salaries, and slashed subsidies from 367 billion rupees (revised estimates) to 274.6 billion rupees.
There has been much ado about the rise in development budget - from 378 billion rupees to 530 billion rupees. However, since this is the first item to be slashed in case of the inability of the government to meet its deficit target, and given the target of reduction of the deficit by 2.5 percent of GDP in the forthcoming year, it is highly unlikely that the government would be able to disburse this amount for development. And while special programmes were curtailed to 5 billion rupees as per documents, and zero as per the Finance Minister's speech yet New Development Initiative (NDI) column budgeted a whopping 115 billion rupees - more than double what Raja Pervez Ashraf spent in his constituency. Dar explains this by maintaining that NDI is for new energy and road projects though why there was a need to hide this outlay under the newly-created DFI rather than directly in the PSDP is not clarified.
There has been no amount set aside for natural and man-made disasters (including those unfortunate deaths due to law and order problems), and withdrawal of fiscal relief package to Khyber Pakhtunkhwa, Fata and Pata. With floods already affecting the lives of thousands this item would require resources.
So what was good about the budget? The loans to be provided to 50,000 youth to start business and jump start the economy, the extension of the laptop scheme to deserving students throughout the country though the PPP would be hard-pressed to support this, housing scheme for the poor, and a rise in allocation to Benazir Income Support Programme without unfortunately first ironing out its bottlenecks that were identified when PML (N) was in opposition. And of course the wish list in terms of macroeconomic targets notably the reduction in deficit by 2.5 percent of GDP in one year, an inflation of 8 percent to be achieved through a deficit reduction as well as the same old unsuccessful measures that include Jumma/Sunday bazaars and monitoring of prices of essentials. And there would be no bank secrecy act which would enable the FBR to get information on all of us and given the tax target on the already taxed one wonders how much good this will actually do in increasing revenue.
And finally what about reliance on borrowing: budgetary figures show Dar's budget is much more reliant on borrowing than the previous government: budget 2013-14 envisages 292.5 billion rupees as Domestic Permanent Debt (in contrast to the much lower current year's 87.7 billion rupees) and a rise in revised estimates of treasury bills auction from 336.78 billion rupees of the current year to 3727.9 billion rupees next year. Even if the inter-circular debt is retired in 60 days inflationary spiral and even a faster deteriorating rupee value than during the past five years may erode the quality of life further. One hopes that Nawaz Sharif will adhere to his much publicized comments to his cabinet members: make a change in three months or else face eviction. Dar's talents maybe more appropriately used as an inter-provincial coordinator as he has frequently displayed a dovish approach with political rivals; his economics is obsolete and shows a lack of vision.
Having said all this I do believe that the Nawaz Sharif government's focus on energy crisis would reduce load shedding to tolerable levels within the next one year to four years and this alone may fuel output and reduce inflation. But it would be energy and not the budget that would make the difference. And I fully supported the Finance Minister's zero increase in salaries of bureaucrats who, unlike the bulk of the labour force, witnessed a pay rise of 50 percent three years ago, and 15 percent in each subsequent year - or well in excess of inflation. Unfortunately though Dar backed off in the face of heavy criticism by opposition parties and announced a 10 percent rise by Saturday.
Next week's article would highlight two positives namely the energy policy the Finance Minister has promised and the decision to keep civil servants salary unchanged this year.