Budget 2022-23 and the IMF programme

There are any number of ways in which a budget can be characterized. Terms, such as, pro-poor, investors’ friendly, growth oriented or stabilisation are some such characterisations. Given the economic conditions, the only term relevant for consideration is whether the budget 2022-23 is consistent with the International Monetary Fund (IMF) requirements to complete the 7th Review and revive the stalled program. After a very brief description of the budget, we would examine its consistency with Fund requirements.

Total revenues are projected at Rs 9 trillion with FBR taxes estimated at 7 trillion. The share of provinces is estimated at Rs 4 trillion, leaving a net revenue of Rs 5 trillion. Against this, a total expenditure of Rs 9.5 trillion is budgeted. This means the fiscal deficit (federal) would be Rs 4.6 trillion or 6.9% of GDP, which would be funded from external borrowings of Rs 1.7 trillion (37% of deficit), domestic borrowings (TBs-PIBs) of Rs 2.8 trillion (61% of deficit) and a meager flow of privatization proceeds of less than Rs 100 billion (2% of deficit). The overall deficit would be Rs 3.8 trillion with provincial surplus pitched at Rs 800 billion or 5.7% of GDP. Besides, the NEC has approved a growth target of 5% and inflation target of 11.5%.

It is also important to examine how the Budget 21-22 has fared compared to the Revised Estimates 2021-22. Briefly, against an overall revenue target of Rs 8 trillion, the revised estimate is Rs 7.3 trillion, a shortfall of around Rs.700 billion. On the current expenditure side, against a budget of Rs 7.5 trillion, revised estimate is Rs 8.5 trillion, an over-run of Rs 1 trillion. Development expenditure was budgeted at Rs 900 billion while the revised estimates is Rs 550 billion, a saving of Rs 330 billion.

The excess in federal deficit thus works out as Rs 1,350 billion, which was budgeted at nearly Rs 4 trillion. Thus the revised deficit is Rs 5,340 billion close to what was stated by finance minister on taking his office. This amounts nearly to 8% of GDP. We need one more number, namely the provincial surplus. This was budgeted at Rs 575 billion and the revised number is unchanged. As percentage of GDP, provincial surplus is 0.8%, so the overall fiscal deficit is 7.2%

We would like to make one comment on the revised number. Mark-up on debt has witnessed a less than Rs 100 billion increase in revised estimates compared to the budget. This appears out of line with the speed with which interest rates have increased from 7.25% in September to 13.75% in May. The effect of rate changes is missing and hence the actual may be quite higher.

We now turn to our main objective. First, let’s look at the deficit target. In the projections made by the IMF as part of the 6th Review, the nominal deficit was set at Rs 2,722 billion, which is 4.5% of GDP, which is assumed at about Rs 62 trillion. If we use the re-based GDP of Rs 67 trillion this would be 4%. On the face of it, the deficit target appears significantly at variance with what the IMF would have asked.

Second, on the revenue side there are also significant deviations. On FBR revenues, we see an increase from 6 trillion to Rs 7 trillion which is a 16.7% growth. This is only slightly higher than the nominal GDP growth of 16.5% (inflation 11.5% and growth 5%). Since the number includes fresh tax measures also, there seems to no buoyancy in the overall tax collection and the new measures would hardly suffice to raise the overall tax-to-GDP ratio.

Third, the personal income tax (PIT) reform has been a standing demand from the IMF. Justifiably, many in the government opposed it as it would have more than doubled the tax burden for higher income groups while lowering the burden on low income groups. What is astounding is to witness a change in PIT fundamentally opposed to the IMF demand. Number of slabs have been reduced as per Fund requirement but in every single slab, tax burden for all taxpayers has been lowered, with a total cost of Rs 47 billion close to 40% of what was collected under PIT. Potentially, this would be a big stickler.

Fourth, the government has again raised the taxable limit to Rs 1.2 million. This was done in 2018 but partially reversed by the succeeding government to Rs 600,000. This would not have much revenue loss but it would create a major distortion by significantly reducing the number of taxpayers paying any meaningful tax. As much as one-third of taxpayers file NIL tax returns, after paying a token tax of Rs 1000 or Rs 2000, a provision specifically made to facilitate those excluded not to become non-filers.

Fifth, the estimate of Rs 750 billion in Petroleum Levy (PL) is quite ambitious. Against Rs.600 billion budgeted last year, government could mobilize only Rs.135 billion. Apart from IMF’s apprehensions on the target, government would be taking upon itself a humongous target to raise petroleum prices through levy when it has found it difficult to recover the actual cost. Even today both petrol and diesel are sold at Rs 26/liter and Rs 20/liter, respectively, less than actual price with virtually no GST and PL.

Sixth, the tax measure to bring idle assets in the form of immovable property is quite novel. In an ingenious fashion the government has planned to impose a tax based on the notion of “deemed rental income” on fair market value of the property and subjecting it to 1% income tax. There are serious issues with this proposal. First, it runs into jurisdictional issues of the competent authority for taxing immovable property, which has been declared a provincial subject in the constitution. Second, the measure amounts to reintroducing, in a truncated fashion, the wealth tax, without having the cover of law, as the erstwhile wealth tax law was repealed in 1999. Undoubtedly, the measure would face serious legal challenges.

Evidently, the budget appears to be falling short of the requirements which the Fund would be insisting on. People had presumed that Fund was worried about petroleum subsidies and beyond that there were no deal breakers as much of it was signed off by the outgoing government and then reaffirmed in Doha. But the fact that the staff level agreement was not reached, the deal still remain uncertain. Going back on budget proposals after negotiations would be embarrassing for the government while the uncertainty about the future of the program would continue to bedevil the economy.

Copyright Business Recorder, 2022