Budgetary outcome in 1HFY21

The Federal Budget for 2020-21 which was presented to the National Assembly contains some moderately ambiguous targets. Federal Board of Revenue (FBR) revenues are expected to grow by 24 percent from Rs 3998 billion in 2019-20 to Rs 4963 billion. However, non-tax revenues are projected to be lower by 10 percent, in view of the big fall likely in the SBP profits.

The Budget also envisions a modest growth in Federal expenditure of below 5 percent. Rightly so, the rise in current expenditure is expected to be limited to 4 percent while the projected increase in development spending is over 15 percent. The latter increase is expected to facilitate the revival process in the economy.

Overall, the bottom line is that the consolidated fiscal deficit is to be contained to Rs 3195 billion, equivalent to 7 percent of the projected GDP in 2020-21. The Federal deficit is projected at Rs 3437 billion, while the Provincial Governments are expected to generate a combined cash surplus of Rs 242 billion. If achieved, this will imply a reduction in the absolute size of the consolidated deficit of over 5 percent and success in bringing down the fiscal deficit from 8.1 percent of the GDP in 2019-20 to 7 percent of the GDP this year.

The question is if the budgetary process in the first six months of 2020-21 is consistent with the achievement of annual targets mentioned above? If so, there will be less pressure to either raise taxes or cut expenditure as Pakistan re-enters the IMF Programme.

We take a look first at the performance of FBR revenues. The overall growth rate in the first six months is close to 6 percent. Direct and indirect taxes respectively have both shown the same growth rate of 6 percent. This growth has been achieved on top of the high growth rate of 17 percent achieved in the first six months of 2019-20.

Apparently, there is a big shortfall with respect to the annual targeted growth of 24 percent. However, from February 2020 to June 2020, FBR revenues plummeted sharply by over 12 percent. Therefore, given this low base, FBR may be able to achieve much higher growth rate in the second half of 2020-21. If this happens then FBR revenues will approach Rs 4500 billion, implying a shortfall in relation to the annual target of just over Rs 460 billion, equivalent to 1 percent of the GDP.

Non-tax revenues have shown a marginal decline of 2 percent in the first six months. This is fortunately less than the anticipated fall in the Budget of almost 10 percent. The primary reason for the better performance is the near doubling of revenues from the Petroleum Levy.

Total Federal expenditure in the first six months has shown a growth rate of 9 percent, including the statistical discrepancy in accounting for expenditure of Rs 107 billion. If this is mostly on the current side then the growth rate in current expenditure is almost 11 percent, significantly above the target growth rate for the year of 4 percent.

Debt servicing has increased by over 15 percent. This is a reflection of the ‘lock-in’ effect of the issuance of Pakistan Investment Bonds at high interest rates during the last two years. However, there is need to recognize the efforts of the military establishment to achieve economy in defense spending. Consequently, defense expenditure has been reduced in relation to the level last year by 4 percent, although the Budget has accommodated an increase of 6 percent. This containment in defense spending has contributed significantly to restricting the growth in current expenditure.

The disappointment with the budgetary outcome in the first six months is the big fall in PSDP and other development expenditure of over 14 percent. Such spending was anticipated to promote the revival process and an increase of over 15 percent had been provided for in the budget. Faced with higher current expenditure, the Ministry of Finance (MoF) has adopted the conventional practice of cutting back on development spending.

The first half of the year has closed with a consolidated budget deficit of 2.5 percent of the GDP as compared to 2.3 percent in the corresponding period of last year. The federal deficit is 3.1 percent of the GDP while the Provincial Governments have generated a combined cash surplus of 0.6 percent of the GDP. The good news is that there is a primary surplus of 0.7 percent of the GDP in the first six months.

Given the above trends, what is the likely outcome for the full year of 2020-21? As indicated above, there is the prospect of a shortfall in FBR revenues of up to 1 percent of the GDP while non-tax revenues could be higher by 0.5 percent of the GDP in relation to the budgetary target. Based on a continued cutback in development spending, total Federal expenditure may not exceed the targeted level by more than 0.5 percent of the GDP. Consequently, the likely outcome is a consolidated deficit of close to 8 percent of the GDP, above the targeted level by 1 percent of the GDP. However, it will be virtually at the same level as last year.

This divergence should be considered acceptable given that the economy has had to contend with a second outbreak of COVID-19. The IMF, therefore, ought to accept the divergence from the targeted level and not ask for any more steps in the remainder of the financial year.

The expectation is that by June the COVID-19 spread would have been fully contained, especially after the widespread use of vaccines. Therefore, the Federal and Provincial budgets for 2021-22 should target for implementation of wide-ranging tax reforms achieving thereby a significant reduction in the consolidated fiscal deficit and stabilization of the Public Debt to GDP ratio.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021