The Federal Budget 2014-15 that the Finance Minister will present before the parliament today, will set a new tradition - presenting the budget on a working day and with inadequate consultation with the stakeholders, ie, the country's chambers of commerce and industry. This doesn't foretell the budget being welcomed, which the PML-N should be striving for in the present political scenario.
The fact that the Economic Survey was released just a day before announcement of the budget, and the levels of economic indicators it disclosed were based mostly on data of the last nine months, reduced their utility for gauging the validity of the budget proposals. What further blurs the scenario is that federal ministers have quoted differing figures of the budgeted outlay in various sectors. The finance minister doesn't realise that almost none of the budgetary targets set by him last year were met. It is true that the PML-N inherited an economy in total mess, but the undue hurry shown by it in announcing the budget for 2013-14 is as much to blame for these failures. This year, not interacting with the stakeholders could lead to the same disappointing results.
To begin with, tax collection target of Rs 2.81 trillion (25 percent higher than the likely recovery in 2013-14) is optimistic because GDP growth is targeted at the same level (5.1 percent) as last year. Given the fact that many SROs offering subsidies and tax relief (reportedly, Rs 70 billion) to business and industry will be withdrawn, GDP growth may not be as high as 5.1 percent.
Achieving GDP growth close to 5.1 percent seems unlikely also because of the low growth being recorded everywhere including China and South Korea. Pakistan could maintain its 2014-15 growth rate only if it's industrial sector operates, at least, at break-even level. But that is unlikely because the power sector will keep performing far below the required level.
Another disturbing factor is the rise in external debt. After coming into power, the PML-N regime has added $52.6 billion to this burden via borrowings from the IMF, the World Bank (through its Country Partnership Strategy), China, and sale of Euro bonds. That's not all; doubts are being expressed about the fairness of the costs of the projects to be funded out of external debt.
At present, annual debt servicing burden is $5 billion; it will double after acquisition of fresh debt. What no one in the government seems bothered about is the fact that unless these projects contribute real efficiency to the economy, it would be near impossible to generate the required repayment capacity, which could lead to Pakistan defaulting on its repayment commitments.
Domestic resource shortfall is Pakistan's lasting reality because, besides continued inadequate reach of the bank networks, periods during which savers earned a real positive rate of return (ie exceeding consumer inflation) were rare. Governments never tried to convince business and industry that credit can't become cheaper unless they help bring down inflation.
Such a rise in debt servicing implies cutting the annual trade deficit from $18 billion to $9 billion, which is possible if annual exports rise by $5 billion and import substitution reduces imports by $4 billion. But a large part of the industrial base is now outdated and a huge chunk of Pakistan's exports are no longer competitive. As for import substitution, sadly, it was never encouraged.
The focus now is on large projects in the power and transport sectors, not so on revamping the existing generation base of the power sector, which could be undertaken with far less external debt burden, and quickly too. Corruption and system flaws that cause the power sector's circular debt to rise to hundreds of billions of rupees still haven't been remedied.
The government also plans to sell its stakes in ABL, HBL, UBL and OGDC to raise resources. Selling these stakes implies losing annual income inflows, but disinvestment can be justified if the entire sale proceeds are invested in infrastructure. But what seems likely is that they may end up funding the power sector's circular debt for a year - a wholly inappropriate use thereof.
Austerity in current expenditure and prudence in capital expenditure, which should have been the priority, are being sidelined in the name of a "progressive" strategy to plug Pakistan's huge infrastructure gaps. Do we need hugely expensive new highways or is rapidly repairing the existing highway networks the solution? Did Chinese technology improve the performance of the railways?
High overall public expenditure is causing the fiscal deficit to expand and forcing the government to increase tax rates, with inadequate concern for the impact wrongly focused taxation could have on economic growth, inflation, poverty, and the resultant social chaos. What has yet to be addressed meaningfully is the expansion of the tax net, which is the real but ignored remedy.
While the government plans to bring tax evaders into the net, and tax them at double the rates applicable to taxpayers, the effort won't deliver the desired results. Reason: the incapacity of the FBR for this exercise, as proved by its earlier effort to net 10,000 tax evaders. The success of the planned 'netting' of 100,000 tax evaders in 2014-15 therefore seems unlikely.
Over the past decades, the FBR wasn't able to tax the huge retail sector (now over 3.4 million entities) despite their being clearly visible entities. Instead, it relied on increasing the tax burden on honest taxpayers, which steadily eroded business and investor sentiment. Until the FBR significantly enhances its investigative and enforcement capacities, tax net can't be increased.
To contain the tendency for under-paying taxes, the FBR proposes that, instead of filing unaudited tax returns every month, business entities will now be required to file returns every quarter, but duly certified as authentic by a chartered accounting firm. The proposal makes sense, but do we have enough chartered accountants who can deliver on this expectation.
Not only that, will the accountants accept personal responsibility for any misreporting by the taxpayers, as desired by the FBR? Nowhere in the world do accountants accept such responsibility. Unless the chartered accountants' fraternity has agreed with the Ministry of Finance to offer their services on such risky terms, it is unrealistic to assume that this strategy would deliver.
The coming budget will be yet another exercise in building peoples' hopes that won't materialise. The continuing tragedy is that the politicians refuse to accept is that their credibility is now at its lowest level. If democracy is to be saved - the objective all politicians claim to strive for - budget-making must become a visibly realistic exercise wherein only achievable promises are made.
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