Fiscal optimism

The number-fudging (or at least overstating) game continues in fiscal accounts. The fiscal deficit target for FY17 is revised up from budgeted 3.8 percent to 4.2 percent while the nine-month deficit stood at 3.9 percent. Lady luck is not with Dar; initial targets were set by assuming GDP at Rs33.5 trillion but the revised GDP numbers came down to Rs31.8 trillion, thanks to lower-than-targeted inflation.

Thus, 9MFY17 deficit inched up from 3.7 to 3.9 percent of GDP on mere downward revision in GDP estimates. But the authorities kept a blind eye to ground realities by estimating meager 0.3 percent of deficit in the last quarter. The average deficit in the 4Q for FY14-16 stood at 1.65 percent. How on earth can Dar bring deficit to 0.3 percent in 4QFY17?

He at best could book some of the expenses of FY17 in FY18; but what about the optimistic target of 4.1 percent of GDP for FY18 with 40 percent growth in federal development budget? BR Research’s hunch is that Dar might pass some of FY17’s expenses in FY18, and a chunk of FY18 in FY19 – since Dar has already hinted that he might announce next year’s budget before leaving fiscal management for interim government. And the way he cleverly passed on circular debt clearance in his first budget (FY14) to the previous government (FY13), he may repeat the exercise in reverse order by passing part of FY18 budget deficit to the next government (FY19).

What is the fun in doing all this jugglery? Why does the practice of setting too optimistic targets in every budget by successive governments continue? Why can we not be realistic? This is altogether a separate debate; as parliamentarians should take the budget-making exercise more seriously. Let’s delve into the nitty-gritty of the budget components.

The main culprits hide in the overambitious targets of fiscal revenues. The tax revenues were targeted at Rs3.96 trillion for FY17, which are revised down by 3.3 percent to Rs3.83 trillion (12% of GDP). The growth for FY18 is set at 13.2 percent to reach Rs4.33 trillion (12.1% of GDP). Within it, FBR taxes were chasing a growth of 16.4 percent to Rs3.6 trillion in FY17; after achieving a mere 7.5 percent growth in 9MFY17, the target is revised down to Rs3.52 trillion.

This implies FBR needs 25 percent growth in tax revenues in the last quarter which is a near impossibility. This can explain the desperation of FBR by sending all kinds of demand notices around and by not releasing any form of refunds. The main problem is in direct taxes, which were estimated to grow by 30.7 percent in FY17; however, the growth is limited to 12.4 percent in 9MFY17. The revised target of Rs1.38 trillion needs 23 percent tax growth in the last quarter.

The economy is growing at a good pace, but this might not be enough for the sales tax targets to meet. The toll grew by merely 0.4 percent in 9MFY17. Since the target is not revised much, FBR is required to achieve 27 percent growth in the last quarter. Only Dar could tell how this would be attained. The only good performer is custom duties, which are growing with the toll of imports. In case of excise duties, targets are not stiff seeing the performance in nine months; but too high incidence on tobacco has lowered the opportunity cost of smuggling and illicit domestic trade.

The gaps are even wider in non-tax revenues –in 9MFY17 the toll is receded by 10 percent. The ministry is required to raise Rs510 billion in the last quarter to meet revised targets, which is implying a growth of whopping 97 percent in the last quarter on year-on-year basis. The CSF flows are shy and there are no signs of allocated 3G/4G license to be issued. Are we expecting some gift from manna in the holy month?

The performance on the expenditure is not that bad in this year so far. However, targeted growth of 2.3 percent in FY18 is doubtful as the fiscal deficit is slipping and debt servicing cost ought to be higher. Any depreciation in currency or tightening in monetary policy can adversely affect the debt-servicing cost. The MoF is expecting debt-servicing growth to remain flat in FY18 – really?

The government is expecting subsidies to be thinned by 18 percent in FY18. Mind you, there is nothing in budget on promised textile package and none is budgeted for fertilizer subsidy. There are around 10,000MW coming into the grid by next budget; and in days close to elections, the government would try its best to minimize load shedding. In the process, circular debt ought to grow and so is the case of power subsidies. In short, subsidies might be much higher than budgeted.

Development expenditure as expected in election years is budgeted at 40 percent higher than revised FY17 numbers, while the provinces’ PSDP is expected to grow by 35 percent. It’s irrational to expect provinces to cut down the development to show high surplus.

In the end, government would have two options in FY18 – either to cut development budget or let the fiscal deficit slip substantially. Wait; there is also Dar’s way of juggling numbers; as he might transfer some expenses in FY19 to pass the buck to the next government.