Budget or adjustment

Federal Finance Minister Asad Umar after assuming charge reiterated the widespread belief that the budget for 2018-19 was extremely unrealistic. It may be recalled that the budget was presented on 26 April 2018 by the Abbasi-led government, almost six weeks prior to the usual presentation in the first week of June when revenue projections for the remaining fiscal year that ends on 30 June are more realistic. Additionally, with elections around the corner, the PML-N government engaged in pre-poll rigging through a budget that provided tax incentives to the salaried as well as other pressure groups (accounting for a 91 billion rupee revenue loss as per the Federal Board of Revenue) while attempting to gain public support through a 50 billion rupee increase in the Public Sector Development Programme (with 230 billion rupees unrealistically declared as self-financing by corporations/authorities which, in turn, required over a trillion rupees in budgetary support as per the March 2018 International Monetary Fund report) and a 27 billion rupee increase in subsidies in comparison to the revised estimates for the year before. In short, had the PML-N government returned to power the April budget would have had to be massively revised in any case.
With the Pakistan Tehreek-e-Insaf (PTI) in power at the centre, there is a general perception that the new budget or a readjustment of the old budget, both requiring approval from parliament, would bear an indelible stamp of the party's priorities. This perception is flawed to the extent that given what the party has inherited, an unsustainable budget deficit and a current account deficit with dwindling foreign exchange reserves, what is urgently required is fire fighting measures and not a set of policies/measures that would lay the groundwork for achieving the party's economic agenda. In other words, the vision of Prime Minister Imran Khan to deal with poverty and reduce unemployment through building 5 million houses and promoting tourism through developing four resorts a year may have to take a back seat to an effort to reduce government expenditure and raise revenue while ensuring that the dwindling reserves are strengthened enough to meet three months of imports.
Imran's focus on austerity in government spending in his maiden address to the nation soon after he took over the reins of power must be seen as an attempt to reduce government expenditure. His statement that he felt ashamed of former government's spending crores of rupees on foreign tours ostensibly to lure foreign investors (without any visible success) and on running lavish households at the taxpayers' expense (inclusive of an entire fleet of cars made available to different office holders), must be appreciated as it is the right first step. However, this measure is too little to plug the massive budgetary gap that has been left by his predecessors and there is an urgent need for a significant reduction in allocations to major stakeholders.
Pakistan cannot reduce the mark-up on foreign loans and payment of principal as and when due, (with the previous government raising external debt by a whopping 30 billion dollars in five years) unless of course it begins negotiations for deferral with major creditors around the world. The PTI government can however begin to make some major revenue revisions immediately by expanding the tax base, not achieved by the former administration, instead of by taxing existing taxpayers. Work must begin on formulating a tax structure that is fair, equitable and non-anomalous, immediately and there are several studies gathering dust in the Ministry and FBR on what precise measures to take to achieve this. Given our long porous borders, the government would be well advised to carefully look at the impact of any proposed change in taxes on productive sectors on smuggling. A tax that makes our products more expensive relative to our neighbours would simply fuel smuggling of that particular item into the country while a lower tax relative to our neighbours would promote smuggling to our neighbours that may lead to domestic shortages. However, the tax system must be adjusted as soon as the cabinet takes a decision in support of any particular tax. For starters, the FBR could send notices to those with lavish houses who are non-filers.
Imran Khan has stated that the government would proactively seek to bring billions of dollars of corruption money held abroad by Pakistani nationals. This may require strengthening relations with foreign countries particularly the UK which has acknowledged that it has been a haven for stashing illegal wealth by foreigners which led to the passage of an unexplained wealth order in February this year.
And finally, there is also a need for the government to promote exports but here the focus must not be entirely on raising existing exports but to expand the export base to non-traditional items as well which is a medium-term objective. Refund payments, estimated at over 150 billion rupees, would go a long way in raising exports, but the budget deficit would rise as a consequence and therefore there is a need to assess the pros and cons of the amount of refunds that may be released.