Revised Budget

The recently released IMFs country report on Pakistan has shown a glimpse of the revised federal budget for the ongoing year which economic managers presented to the Fund in their latest visit to Washington. The revenue measures behind the revised targets, however, are subject to the approval of parliament and the consent of federating units and federation.
Unless the parliament approves these changes including the bill on reformed GST, the Fund will not release its next tranche. The details of these changes have not come on surface yet - details such as whether the GST rate will be 15 or 17 percent, what exemptions are going to be removed in the bill and so on and so forth.
Its a lengthy process even if everything goes the right way, albeit chances are low, the process of parliaments approval, presentation to the Fund and the funds approval from its board would not take anything less than two months.
Moreover, expenditure estimates are preliminary and subject to change after the release of Damage and Need Assessment report currently being prepared by the multilateral agencies, and hence revenues or the deficit will have to be adjusted accordingly. This might add a few more weeks to the process.
Nonetheless, total revenues are targeted to increase by Rs197 billion (1.15% of GDP) with two-thirds coming from the tax revenues and the rest to be generated through non-tax revenues.
FBR targets are revised upward by Rs22 billion. The proposal to impose a one-time 10 percent income tax surcharge, according to the IMF report, is likely to generate 0.4 percent of GDP, which is roughly equal to an increase of Rs78 billion in direct taxes in the revised budget.
Whereas indirect tax is envisaged to increase by Rs50 billion to Rs1,171 billion, backward calculations imply that the federal governments share of indirect tax is targeted to reduce by Rs50 billion, owing to the slowdown in economic activities. On the other hand provincial and other federal contributions might add to the tune of Rs100 billion. In the absence of relevant details yet unreleased, one might speculate that this amount will be generated from GST on services and other surcharges.
To keep the consolidated fiscal deficit at the same level of 4 percent of GDP or Rs685 billions, revenue targets are matched to an inevitable increase in expenditures owing to floods. The consolidated current expenditure is computed by backward calculations at Rs2,696 billion - an increase of Rs264 billion from the original budget. The subsidies are almost kept at the same level.
The PSDP is envisaged to decline by a mere Rs73 billion with an almost equal reduction in the provincial as well as the federal share. The financing mix remains the same with a slight increase of Rs28 billion in external grants that are anticipated to be financed by IMFs special assistance or other flood related grants.
The above mentioned math might seem complicated as its not possible to compute the provincial and federal share in revenues and expenditure based on the numbers published in the IMF report. However, the text of the report suggests that provinces are going to review their budget. And instead of slight deficits targeted in original provincial budgets, the provinces will show a combined surplus of 0.6 percent of GDP in the revised budget.
This will reduce the pre-flood budget deficit to 4.4 percent of GDP. With a one-time income surcharge, the reformed GST and non-tax revenues net-off the increase in expenditure will further reduce it by 0.4 percent of GDP to take the fiscal deficit at the originally budgeted level.
On paper this seems like a clean and clear plan to overcome the havoc sent by the floods on the fiscal position. But history suggests a rather bleak picture. The fiscal indiscipline is visible by 1.8 percent of GDP slippage in last years deficit, one percent slippage in this years target right at the onset of budget and delay in tax policy and power sector reforms.
Although the multilaterals stick, floods and politically weak position of the current regime is forcing the government to expedite the much-needed reforms, the efficacy of implementation of all these plans are not much anticipated by senior economists and past policy makers.

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Consolidated revised budget presented to IMF 2010-11

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Rs (bn)                  Original   Revised Variation

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Revenues                   2,410      2,607       197

Tax rev                    1,779      1,907       128

FBR rev                    1,667      1,689        22

Direct taxes                 658        736        78

Indirect taxes             1,121      1,171        50

Non Tax rev                  632        700        68

Expenditure                3,095      3,292       197

Current Expenditure        2,432      2,696       264

subsidies                    127        132         5

PSDP                         663        590       -73

Federal                      290        250       -40

Provincial                   373        340       -33

Budget Deficit               685        685         0

External financing           185        213        28

Domestic financing           500        472       -28

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Source: IMF country report, MoF, BR Research