The Punjab budget

Dr Ayesha Ghaus Pasha, the newly-appointed Punjab Finance Minister, made history by being the first woman to present the provincial budget. Unfortunately though there was little change in heavy reliance on the federal divisible pool for finances, to the tune of 78 percent in 2014-15 and 77.6 percent in 2015-16, and the expected rise of 11.8 percent in revenue receipts in 2015-16 was attributed almost entirely to higher collections under the provincial consolidated fund. These collections are premised on the federal growth rate of 5.5 percent next year and it is relevant to note that the federal government has consistently over-estimated growth and therefore revenue for the past two years. In 2014-15, the federal government budgeted 1581 billion rupees collections under the head of divisible pool taxes and the revised estimates as noted in the budget documents 2015-16 fell short by 104 billion rupees.
The Punjab government envisaged a rise in its own revenue collections by 46.3 billion rupees - from the revised estimates of the outgoing year of 114.2 billion rupees to 160.5 billion rupees in 2015-16. The major contributor to this rise is envisaged to be sales tax on services - from the revised estimates of 46.3 billion rupees in 2014-15 to 72 billion rupees in 2015-16. Capital value tax on immovable property is projected to generate double what was generated in the revised estimates for the current year - 8.8 billion rupees against 4.6 billion rupees in the current year and entertainment tax is also projected to generate double the revenue from the revised estimates of the current year - 13.7 billion rupees against 7 billion rupees. However the Finance Minister acknowledged that in spite of improvement in provincial tax collections from 0.4 percent of GDP in fiscal year 2011 to 0.7 percent in fiscal year 2014 "it still remains weak" and one must fully support the establishment of a Tax Reform Unit (TRI) that would be fully operational in the forthcoming fiscal year. One would hope that, unlike the National Tax Reform Commission, the recommendations made by TRI are taken on board while formulating tax proposals next year.
Tax on luxury houses was budgeted to generate 500 million rupees this year however only 14 million was collected under this head while 825 million rupees target has been set for 2015-16 under this head which appears to be an extremely optimistic figure premised on this year's performance.
The constitutional provision barring the federal government and allowing provinces to tax farm income, a long standing demand of economists, is budgeted to generate 2300 million rupees in 2015-16 as opposed to the budgeted amount of 2018.9 million rupees in the outgoing fiscal year though actual collections were less than half - 1000 million rupees. If enforcement remains poor in the next fiscal year, attributed to the political clout of the majority of rich absentee landlords in the country's provincial and national assemblies, then this sector would remain grossly under taxed relative to the salaried class. To issue more than 40,000 notices with the objective of improving collections under this head are unlikely to bear fruit given the resistance to this tax by the rich and influential people.
Development expenditure was budgeted at 345 billion rupees in 2014-15 but was reduced to 290 billion rupees in the executive summary budget at a glance table. However the trend in Annual Development Programme (ADP) graph revealed that in the revised estimates for the outgoing year 268 billion rupees were allocated, a decline attributed to external factors including failure of the federal government to realise its budgeted divisible pool due to lower growth rate than budgeted and floods. Downsizing the ADP rather than current expenditure is reminiscent of the federal budget that accords a higher priority to current expenditure relative to ADP. However, of concern is the figure released for utilisation which was 235 billion rupees with the projected utilisation of 240 billion rupees by the end of June this year - a shortfall of 28 billion rupees from the data noted in the graph and 50 billion rupees lower than the figure cited in the executive summary.
In the forthcoming fiscal year the government has earmarked 400 billion rupees for ADP and this would be premised on three factors: (i) the achievement of revenue targets by the federal government to enable it to release the budgeted amount to provinces - an achievement that is suspect given that the Centre has never met its revenue targets ever, (ii) favourable weather conditions that do not compel the government to undertake support for natural calamities say floods, and (iii) the utilisation rate improves considerably.
Major components of the ADP 2015-16 must be fully supported. It targets an allocation of 310.2 billion rupees for education (including current and development outlay with the latter accounting for 55.5 billion rupees) and 116 billion rupees for health (with 30.7 billion rupees under ADP). Irrigation would be allocated 35 billion rupees and energy 31 billion rupees (with the energy sector targeted to receive 258 billion rupees which would be supplemented by Chinese investment inflows). Clean drinking water project for southern Punjab has been allocated 70 billion rupees while women development would receive only 3.8 billion rupees.
What is perhaps a challenge to accept in the Punjab budget is its overwhelming support for data released in the federal budget including claims of 4.2 percent GDP growth and foreign exchange reserves of 16.6 billion dollars (out of which only 12 billion rupees are held by the State Bank - enough for only three months of imports) and a decline in the rate of inflation attributed to government policies and not to the decline in the international prices of oil. Additionally, the growth rate for Punjab at 8 percent seems to be quite a stretch as well especially given the fact that investment in infrastructure is partly dependent on resources released under the divisible pool, partly dependent on Chinese investment which may face delays based on low absorption capacity and partly on demands on allocated expenditure due to say a natural calamity.