The overall budget direction is right. There is a sense of paradigm shift with focus on enhancing direct taxation, penalizing the non-tax payers, and filling the exemptions holes. The medium term economic framework is overly cautious. Actual GDP growth rate could be higher than targeted and inflation could be less expected. On the other hand, tax revenue targets are a little stiff.
The medium term framework is basically what is agreed with the IMF and is presented as it is. The GDP growth is forecasted to be down from 3.3 percent this year to 2.4 percent next year. This year agriculture underperformed and based on historic trends, the performance could be better next year. This would have a positive spillover on services, and overall GDP growth could be better.
On inflation, the average is expected at 11-13 percent which seems to be higher seeing that not too many indirect taxes are imposed. The weakening of oil prices is another hope for inflation to remain downward sticky. The CPI may peak at 11-13 percent in September, and will start tapering off after it. Since inflation is overstated, interest rates are kept high in calculating the debt servicing - to grow by 46 percent to reach Rs2.9 trillion - the overall consolidated revenues were Rs2.9 trillion in FY13, just before Dar took over.
High growth in debt servicing is to be followed by 23 percent increase in FY19. To put it in perspective, the defence budget (net of pensions) was two third of debt servicing in FY18, and in two years span, the debt servicing would be 2.5 times the defence. Nonetheless, if the inflation remains low, interest rates may not increase proportionately, and debt servicing cost could be slightly less than what is budgeted.
The uphill task is to have 35-40 percent growth expected in FBR revenues. The direct taxes could well be achieved as 26 percent growth is possible. The net loss of revenues due to low individual taxes was Rs80 billion in FY19, and in FY20 the slabs are higher and better performance is expected. The crackdown on non-tax payers seems to be a serious affair now, and do not be surprised to see some criminal proceedings against tax defaulters - something unheard of in Pakistan.
The other good step taken on direct taxation is to tax easy money making. The interest payments are taxed high, especially for higher amount of income for individuals. This will offset a bit of higher debt servicing cost - higher interest rates to result in higher interest income and high tax collection. The tax on dividend on IPPs is doubled from 7.5 percent to 15 percent. That is a good omen, as IPPs are making easy money without being much taxed.
The real estate income is going to be taxed higher and the non-filers would be penalized in a bigger way, if not criminally prosecuted. On the other hand, industrialization is incentivized by lowering the duties on raw materials and intermediate goods - something Dar used as a revenue tool and his focus was to let the economy grow on trading and retailing - the vote bank of PMLN. The PTI’s vote bank is youth and that group needs employment and any step towards industrialization may create jobs.
The problem could be in achieving mammoth GST and CD collections - targeted to grow by 41 and 36 percent respectively. And that could hurt the overall tax collection target. That may challenge the primary fiscal deficit target of 0.6 percent of GDP and the room to get close to this is to axe development budget. The PSDP allocation is higher than what was expected and that may get reduced - federal PSDP increased by 40 percent. The other area of coverage is reducing the subsidies allocated for exporters on energy.
The overall fiscal deficit may remain in line with what is budgeted and after many years a realistic budget has been presented with focus on documentation and correcting the structure of tax revenues.
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