Anomalies in the Budget

The process of announcing the Federal Budget 2015-16 began with President Mamnoon Hussain's June 4 address to the joint session of the parliament wherein he rightly pointed to the sectors with potential. But his pro-regime attitude prevented him from highlighting the regime's diluted focus on these very sectors, and its failure to achieve the key fiscal and economic targets. However, the benefit of his speech was that, belatedly, the government offered tax relief and incentives to the fishery, animal husbandry, agriculture, and construction sectors - all capable of huge job-creation in a country where 3 million young boys and girls are added to the population every year. But dairy farming, and milk and fruit processing sectors were ignored yet again.
In the Economic Survey, besides the reported level of several indicators, the most contested were those of the 2014-15 GDP growth and inflation rates. To begin with, the doubt expressed widely was that, by exaggerating growth in the undocumented sectors (whose realities are largely unverifiable), GDP growth had been over-reported to cover-up the actual slow economic growth.
Consumer inflation's reported level too became suspect because the budget proposed raising the salaries of low-paid federal employees by 7.5 percent and of those in the private sector by Rs 1,000 over the current minimum of Rs 12,000 implying thereby that inflation in 2014-15 was higher than 4.6 percent, and may stay above the 6 percent promised for 2015-16.
While the promise by PTI Chairman to increase provincial employees' monthly salaries by 15 percent and the minimum in the private sector (Rs 12,000) by Rs 3,000 aims to downgrade the proposed federal tax exemptions for new businesses in the KPK, the fact is that the 7.5 percent pay rise (quickly rejected by federal employees) confirms that inflation was higher than 4.6 percent.
While some of the reasons (disruptions caused by floods, security issues, power-shortages) for not meeting key targets made sense, government claims of triggering positive trends such as increase in forex reserves and lower inflation (really?) sounded odd, since they were the result of higher external borrowing and inward remittances, and the world-wide drop in commodity prices.
The budget figures surprised many, and doubts were expressed over the accuracy of the reported fiscal deficit because it excluded the power sectors' circular debt. In his post-budget press conference, the Finance Minister insisted that his ministry had nothing to do with circular debt since its payables and receivables relate to entities under the Water and Power Ministry.
Indeed the entire circular debt is not the federation's liability but, until Ministry of Water and Power remains a federal office, debt of the state-owned power generation units and discos will form a part of federal debt. This distortion also belies the minister's promise to reduce fiscal borrowing during 2015-16, and makes unlikely the badly-needed rise in credit to the private sector.
Next year's budget proposes to hike up PSDP by Rs 175 billion over its 2014-15 year. But, despite rising debt servicing burden and Tax Reform Commission's recommendations, no credible measures may be adopted to increase revenue by expanding the tax net. The demand for approval of Rs 139 billion as Supplementary Budget for current expenditures during 2014-15, foretells the coming fiscal deficit.
The focus now is on recovering higher indirect taxes, which requires businesses to distinguish between tax return 'filers' and 'non-filers'. Tax advisors believe that this check is easy since all the 'filers' are listed on FBR's website. But when asked whether all suppliers (especially smaller ones) have installed computers in their premises and have internet access, they sound unsure.
Resorting to this option again proves that FBR cannot increase the tax net; it wants to rely on indirect taxes collected by businesses as its agents. Even if the FBR plans to do so, the workable strategy is to issue [tax] identity cards to all the return filers. FBR did initiate this effort, but to-date, such cards have been issued only to a miniscule minority of the filers.
Nevertheless, this a flawed strategy for increasing tax revenue to contain the fiscal deficit and reduce reliance on borrowing and implies that, yet again, PSDP will be slashed (the IMF-recommended remedy in that setting), and project cost increases too will become the reason for delaying high priority development projects but, it seems, not the low-priority 'motorways'.
In the water sector - critical for expanding the agriculture sector and minimising losses caused by floods - the classic examples of critical (yet long-delayed) projects are the Kachi Canal, extension of Pat Feeder Canal, and extension of the Right Bank Outfall Drain. Yet the 2015-16 PSDP has provided only Rs 31 billion for a host of such projects, although floods are likely this year.
Another worrying instance in this context has been the 'revision' of the cost of Nandipur power project from Rs 22.34 billion to Rs 57.38 billion - rise of 157 percent - and the reason given there for was PPP's prolonged obstruction of the project because PPP's "party interests" weren't being served. But didn't the cost hike of Nandipur project also serve some vested interests?
Besides security issues, power loadshedding remains the other impediment to economic growth. The budget has allocated Rs 248 billion for power sector projects that could take 3 to 8 years to become operational. But for the near future only Rs 11 billion were allocated for completing the Tarbela-IV hydro project and Rs 5 billion for upgrading the Guddu Power project.
This reflects the regime's sense of urgency and reality of its promise that by 2017-18 annual GDP growth rate will touch 7 percent. What continues to be side-lined is the modernisation/replacement of the existing power generation and transmission base to quickly plug the supply-demand gap. Instead, the regime's (minor) rating upgrade by Moody's, S&P, and Bloomberg is cited vociferously.
According to the media, the Prime Minister expressed his displeasure at the PSDP allocations for various projects. Whether it leads to a rational revision of the PSDP remains to be seen. But the unanswered question is "how will the PSDP be funded if current expenditures keep overshooting their targets, as they did in 2014-15?" Options are there, but will the government exercise them?
If the government can't expand the tax net to increase reliance on direct taxes (the fair bases) it must check theft and frauds in the federal and provincial administrations - leaks that have reached a level where, besides the annual Economic Survey, the government must also publish an annual survey of these crimes and the extent to which they were curbed.
Some of the issues justifying this demand are the yet undisclosed terms of LNG import, smuggling overlooked or assisted by the border security agencies and the Customs Department, controversial power pricing by the IPPs, ongoing flight of capital, conveniences afforded by the system for stashing away wealth abroad, and non-surrender of indirect taxes by FBR's collecting agents.
Releasing the Economic Survey, virtually a few hours before announcing the budget, is wholly unfair because it doesn't allow people to reach realistic conclusions about trends in the economy based whereon the budget can be scrutinised. Budget-making shouldn't appear a deceptive effort; it must result in a comprehensive fact-based paper whereby the in-power regime accounts for its performance.