Budgetary outcome in 2023-24

The statistics on the outcome of fiscal operations by the federal and provincial governments in 2023-24 were released recently by the federal ministry of finance. The overall outcome indicates a degree of success in achieving a modicum of fiscal stabilization.

The consolidated budget deficit of the five governments stands at 6.8% of the GDP. This is only 0.3% above the targeted level for the year. There is also a significant primary surplus of 0.9% of the GDP. This is even higher than the targeted surplus set at the start of the year of 0.4%.

The budgetary outcome in 2023-24 is also better than the corresponding outcomes in the previous five years, from 2018-19 to 2022-23. During these years the budget deficit consistently exceeded 7% of the GDP. It was even higher than 8% of the GDP in 2019-20 and approached 9% of the GDP in 2018-19. Further, in none of these years was there a primary surplus. In fact, there were primary deficits above 3% of the GDP in 2021-22 and 2018-19.

There is a need to identify how after five years the budget deficit was brought down to below 7% of the GDP and a significant primary surplus generated. This has not only restricted the increase in the public debt to GDP ratio but also enabled greater control of the current account deficit in the balance of payments through the management of aggregate demand in the economy.

The first contributory factor to the lower budget deficit is the spectacular growth in federal revenues. They have increased by as much as 39.2%. This is one of the highest-ever growth rates. FBR revenues have grown by almost 30% and the shortfall in relation to the annual target is only Rs 104 billion. Non-tax revenues have shown an extremely high growth rate of 78.4%. The consequence is that, after transfers to the provincial governments, federal net revenues have still increased by 52.4% in 2023-24.

Within FBR revenues, the positive development is the faster growth in income tax revenues of 38.5%, higher than that of overall revenues. Consequently, the share of income tax in FBR revenues has risen to almost 49%. This has made the tax structure more progressive.

Provincial tax revenues have shown more modest growth of just over 19%. Overall, the national tax-to-GDP ratio has risen for the first time after 2017-18 and now stands at 9.5% of the GDP.

Turning to the expenditure side, there are significant deviations from the original budgetary targets. Current expenditure has shown a high growth rate of over 31% and exceeded the budget estimate by Rs 729 billion.

However, almost 76% of the increase in federal current expenditure is due to higher outlay of as much as Rs 857 billion on debt servicing, due to the persistence of extremely high interest rates. There have also been significant spillovers in grants, pensions and costs of running of the civil government. Fortunately, the magnitude of subsidies remained below the budget level, despite the pressure to contain the size of the circular debt in the power sector.

There is the persistence of an accounting problem. The various expenditures reported apparently have a negative statistical discrepancy of Rs 281 billion. A similar magnitude of Rs 246 billion was reported in 2022-23. However, there was a positive discrepancy of Rs 116 billion in 2021-22. There is clearly a need for more careful management of the cash flow of expenditures.

There is one area of failure in terms of controlling the growth of current expenditures which are directly incurred by the various Divisions. This is the cost of running the civil government. It has exceeded the budgeted level of Rs 634 billion by as much as Rs 150 billion. Second, the outlay on pensions has been higher by Rs 142 billion, in relation to the budgeted level of Rs 666 billion.

Similarly, the provincial governments have used the fiscal space created by the almost 25% growth in federal transfers to rapidly expand current expenditure. For the four governments combined the reported growth rate in current spending is almost 22%, despite no revision in salary scales or pensions.

There have been negative consequences of the profligate current spending. It has used much of the space created by the rapid growth in revenues and transfers. First; the actual PSDP related development expenditure by the Federal government has been cut back by Rs 263 billion, from the targeted level of Rs 950 billion. The budgeted level was already low at only 0.8% of the GDP.

Development spending at the federal level has plummeted from over 1.7% of the GDP in 2017-18. Currently, the throw-forward of development projects cost is over Rs 9 trillion. The low annual level of spending implies that on average fifteen years will be required to complete the projects. Infrastructure constraints will limit the prospects for faster economic growth.

Second, the Provincial governments have not achieved the targeted cash surplus, despite the exceptional growth in transfers. There is a shortfall of Rs 82 billion in relation to the budgeted level of Rs 600 billion.

Overall, while there is need to recognize the exceptional growth in federal revenues of 40% in 2023-24 and success in restricting the budget deficit to below 7% of the GDP, fiscal policy must focus on much higher development spending, to be facilitated by much more economy in and control over current expenditure.

The provincial governments must also make a bigger contribution to sustained fiscal stabilization by generating larger cash surpluses.

The ongoing financial year promises to be very challenging. The most critical determinant of success in fiscal management will be the achievement of the 40% target growth in FBR revenues. The outcome in the first month, July is worrying.

FBR revenues have increased by 22.5% only. This increases the possibility of mini-budgets.

Copyright Business Recorder, 2024