The budget for 2022-23 is reminiscent of the unrealism of Miftah Ismail’s 2018-19 budget presented on 27 April 2017 (with accounting discrepancies including projecting a revenue rise of 13.4 percent that was not matched by Federal Board of Revenue’s fact sheet) — a budget that followed the placement of two landmines on 8 April 2018 notably the amnesty scheme that did not do any favours to a country desirous of getting out of the Financial Action Task Force’s grey list (not possible if the seventh review success is an overarching objective) and income tax reforms specific to immoveable property, a provincial subject.
The most concerning accounting discrepancy in the budget for 2022-23 is the use of the rupee-dollar parity of 183.
One drastic monetary policy to strengthen the rupee has failed to-date. The 13.75 percent discount rate, more than double the rate prevalent in most regional countries, has made the cost of capital prohibitively high for the productive sectors as well as the government that has budgeted bank borrowing of 1172 billion rupees (including issuance of Eurobonds/Sukuk) against 681 billion rupees budgeted for the current year. Though the government has budgeted a raise in the differential tax on low advance to deposit ratio of banks on income attributable to all investments including treasury bills yet this is projected to net the government only an additional 25 billion rupees.
It is also expected that the discount rate may be raised further by at least another 100 basis points when next the Monetary Policy Committee meets, scheduled for 7 July, which would further increase the cost of borrowing for the private and public sectors. It is relevant to keep in mind that each rupee-dollar parity loss raises the budgeted mark-up by 100,000 rupees hence the 3950 billion rupees budgeted as mark-up for next year is already understated by over 1.8 billion rupees.
On the fiscal side the government finally withdrew the 28 February relief package (that Ismail has ad nauseum linked to a landmine left by the previous prime minister Imran Khan) which as per the budget document amounted to 250 billion rupees, and is budgeted at zero next year.
However, the government has budgeted 750 billion rupees as petroleum levy, an indirect tax whose incidence on the poor is to be minimized through an additional 2000 rupees to households with income less than 40,000 rupees per month — an amount that is budgeted at 25 billion rupees while the subsidy to the LNG sector for providing gas at lower rates to industry has been earmarked at 40 billion rupees.
One would assume that Ismail would defend this incentive to industry, overly represented by the elite, as fuelling growth as well as generating employment opportunities. Needless to add the Pakistani poor have yet to witness any trickle-down effect of an increase in wealth though the 2 percent poverty alleviation tax expected to generate 38 billion rupees from high income earnings (earning above 300 million rupees) must be welcomed.
And of course much is being made of increasing the monthly cash disbursements to Benazir Income Support Programme (BISP) beneficiaries by 2000 rupees which would account for at least 16 billion rupees out of the 100 billion rupees budgeted raise in BISP allocation - far outpacing any increase made in any one year by the Khan administration. It is thought that the remaining higher allocation of around 84 billion rupees maybe ear-marked for more targeted subsidies as well though BISP remains silent.
The budget presupposes that growth will be 5 percent and inflation would average around 11.5 percent next year, a pipedream at best if the contractionary monetary and fiscal policies insisted on by the Fund are implemented. It needs reminding that in 2019-20 the then economic team leaders raised the discount rate to 13.25 percent (lower than the current rate by 0.5 percent), eroded the rupee dollar parity by over 5 percent in six months while it has already eroded by over 10 percent from the 183 rupees to the dollar parity used in the budget, and agreed to an extremely unrealistic tax target – policy decisions that led to the projection of only 1.5 percent growth and 13 percent inflation.
The budget renamed some earlier tax proposals relating to immoveable property that were struck down by the courts (as land is a provincial subject): (i) tax on deemed income at the rate of 5 percent of value of the property to generate 30 billion rupees; and (ii) capital value tax on foreign immoveable properties of Pakistani residents to generate 8 billion rupees (Nawaz Sharif and Dar’s sons own considerable property abroad but are non-resident Pakistanis and pay taxes in the UK, another condition in the budget that disturbingly exempts them from payment of any taxes on their properties abroad). These taxes total 38 billion rupees or around 12 percent of net envisaged increase in income taxes.
Retailers would pay a fixed tax, to generate 30 billion rupees, with a dedicated return form that is not going to be as detailed as that filed by the salaried class – a flawed policy which no self-respecting administration should support.
The budget also envisages a rise in sales tax collections, an indirect tax, from 2506 billion rupees budgeted for the current year to 3076 billion rupees for next year – with only 60 billion rupees accounted for as net revenue impact of increasing taxes on commercial importers of raw materials, tax rate on banks, increase differential on low advance to deposit ratio of banks on income attributable to all investments including treasury bills.
The rest would be generated one would assume through the budgeted 5 percent growth rate – a target that is totally unrealistic given that the seventh review prior conditions have clearly not been met in the budget with respect to either: (i) expenditure (raised to a whopping 9.5 trillion rupees against revised estimates of 8.69 trillion rupees this year with no subsector/recipient witnessing any decline and instead raising salaries and pensions by 15 percent) and reducing subsidies to 699 billion rupees against the revised estimates of 1.51 trillion rupees (which would be a challenge if the Russia-Ukraine war does not end soon); or (ii) revenue rise from 7004 billion rupees and 2000 billion rupees non tax revenue is subject to the implementation of all proposals which presents a serious challenge.
Salaries and pensions have been raised though Ismail was at pains to mention in his speech that a fund has been established for the purpose — a fund budgeted at a measly 5 billion rupees while pensions have been earmarked 530 billion rupees.
The budgeted deficit for last year has been revised upward to 7.1 percent (against the budgeted negative 6.3 percent) while it is projected at negative 4.9 percent for next year — a target which can only be met if the budgeted expenditure priorities are massively downgraded (one would assume that the 727 billion rupee Public Sector Development Programme will be slashed by 200 to 250 billion rupees if not more after consultations with the Fund though perhaps it will never be announced), but then again subsidies are unlikely to be contained as earmarked in the budget (especially as inflation continues unabated – the Sensitive Price Index is already more than the worrying level of 20 percent), and borrowing costs would rise not only if the seventh review is further delayed, a possibility if the government fails to convince the Fund that it will make unannounced adjustments in expenditure and make up any revenue shortfall with alternate sources, thereby keeping the emphasis on revenue collection rather than on reforming the existing inequitable and unfair taxation system.
Copyright Business Recorder, 2022
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