On budget strategy

The budget making exercise in its full swing, with two and half months remaining in the fiscal year. The thought process and steps to be taken in the budget by fresh blood in the outgoing government seems to be bold including out of box solutions

However, the efficacy of the strategy and number put forward by Abaasi and Miftah duo is hinged upon the ownership taken by the next government. There are two variables involved in it - first who is going to be at the helm of affairs next time. If it is the same team, how would the IMF (assuming inevitability) reverse some pro populous measures?

Hence, any comment on the numbers and measures presented in Budget Strategy Paper is not meaningful without adopting the white paper by next government and IMF. The official document is yet to be made; the budgetary allocations and proposals were presented to prime minister in cabinet committee which would become an official document once approved by the National Economic Council.

The good thing about the budget making process is that numbers are not thrown out of thin air as the accounts of CSF and other unlikely allocations are omitted from the non-tax revenues. Similarly, subsidies and other elements of expenditures estimations are revised upwards based on ground realities.

There is a clear departure from Dar’s budget making and even what used to be proposed by technocrats in previous PPP regime. In those years, many budget items were unrealistically estimated and were just used to show the budget more balanced on paper.

The credit goes to current administration that they are at least taking the process making professionally and bringing creditability to estimate. However, they lack legitimacy and ownership for the upcoming fiscal year. The need is for the new government to take cue from the PMLN makeshift economic managers and work on tax reforms package (amnesty scheme) and make a practice of budgeting realistic numbers.

The sources are news items based on two speeches by Miftah on Tuesday in pre-budget seminars and leaks to journalists from members of cabinet. The numbers are not adding up and they vary significantly across the news articles. Hence, the following analysis has to be taken with a pinch of salt.

The government is eyeing to control the deficit to 5.3 percent of GDP in FY19, from revised estimate of 5.5 percent of GDP (budgeted: 4.1% of GDP) in FY18, by lowering development budget. The total outlay is estimated at Rs5.23 trillion; but Miftah was quoted saying Rs5.5 trillion. Rs5.23 trillion is ten percent higher than FY18 outlay - within it the current expenditure are growing whilst the development is falling.

This sums up the story that federal government is fiscally strapped. The major share of revenues is going to provinces which is estimated at Rs2,550 billion for FY19. The FBR revenues are targeted at Rs4,435 billion.

Back of the envelope calculations compute the non tax revenues at Rs1,023 billion, by assuming Rs300 billion provincial surpluses. This makes the total federal revenue at Rs5,458 billion, after taking provincial share out, the net federal revenue comes at Rs2,907 billion.

Out of it, 41 percent goes to defence (Rs1.1 trillion +Rs100 billion for AFDP) and 55 percent goes to debt servicing. These two items pretty much sum up the revenue space available to federal government. Any additional expenditure of running government machinery, meeting pension liabilities, subsidies to power and other sectors and federal PSDP have to be financed by deficit.

The pension is soon going to be a headache for federal and provincial governments. The head is unfunded and the expense is ballooning - the pension expense revised up from Rs248 billion to Rs320 billion in FY18 and is budgeted at Rs342 billion (12% of net federal revenues). According to Hassan Khawar’s calculations, by 2050, pension expenditure would be 50 percent of federal revenues, unless the government starts making pension funds.
This is the simple (horror) story of federal budget - reducing fiscal deficit is next to impossible without compromising on development and subsidies. Development can be cut at the cost of future growth, but cutting energy sector subsidies would result in higher gas and electricity tariffs which would bring inflation and increase the cost of doing business to elude export competitiveness.