Fiscal deficit target

Finance Minister, Ishaq Dar, often boasts about the reduction in fiscal deficit during the tenure of present PML (N) government. However, it would be somewhat irritating for him to know that some analysts and think tanks don't agree with his assertions. In its 'Fact Sheet' released by the Institute of Policy Reforms on the budgetary outcome for the first quarter of FY16 on 19th November 2015, the Institute has raised a number of questions about the fiscal profile of the country. It says that revenues during the quarter have been below target by Rs 16 billion, tax revenues have fallen short by Rs 32 billion and consolidated expenditures were Rs 6 billion above the target. Non-tax revenues were somewhat higher due to a big CSF inflow. The success in managing expenditures was to be found partly in the policy of withholding releases. Defence expenditures which were projected to be higher by 12% during 2015-16 actually came down by Rs 19 billion or 11 percent. This cut was not likely to be permanent in character. Releases to the provincial governments were also withheld partially. Instead of sending Rs 367 billion to the provinces, only Rs 289 billion were released, reflecting a shortfall of Rs 78 billion. The provinces have consequently been constrained in spending and incurred a combined deficit of Rs 29 billion as against the projection of surplus of Rs 297 billion during 2015-16. Overall, if transfers for the defence establishment and the provincial governments had not been restricted, the fiscal deficit for the quarter would have been higher by as much as Rs 117 billion, resulting in a deficit of 1.5 percent of GDP rather than 1.1 percent of GDP as claimed by the Ministry of Finance. The 'Fact Sheet' has also highlighted certain other problems. Mark-up payments on debt were projected to show no growth but if the trend during the first quarter persists, these could be higher by over Rs 65 billion, FBR revenues could be below target by almost Rs 150 billion or 0.5 percent of GDP, Prime Minister's agricultural relief package could cost over Rs 100 billion and expenditures may catch up as more releases take place. Overall, there is a strong likelihood that as against the target of 4.3 percent of GDP, fiscal deficit could approach or exceed last year's level of 5.3 percent of GDP. The report has, nonetheless, underlined two successes on the fiscal front. Revenue growth of 12 percent by the FBR was reasonable in light of the fact that the nominal GDP had grown at about half this rate. Another positive feature was the sharp growth of 57 percent in PSDP spending, especially at the federal level.
Apparently, what the Think Tank of the Institute has said seems to be, more or less, true and its report can hardly be refuted. Even otherwise, most of the analysts were wondering about the claims of the government to achieve the deficit target of 1.1 percent of GDP during the first quarter of FY16 and 4.3 percent during the current fiscal year when no bold measures were implemented to raise the revenues significantly or cut the expenditures drastically. The measures to narrow the fiscal deficit to the level agreed with the IMF are also typical. Releases have been withheld and transfers to the defence establishment and provincial governments have been restricted. Prime Minister has announced a very generous agricultural relief package and debt servicing cost could be higher than projected. Obviously, an increase in non-tax revenues due to CSF inflows means that the position is not going to be sustainable. Various reviews under the EFF show that the IMF was also not satisfied with the fiscal effort. Any misstatement, manipulation or doctoring of data to show a lower budget deficit could be taken seriously by the world financial organisations and the support withheld due to such an abominable practice. In short, we need to recognise that the present level of fiscal deficit is the mother of most of the ills of the economy and its reduction to a reasonable level would be the most satisfying development towards stabilising economy. However, such a positive development is only possible when we take concrete steps to widen and deepen the tax net, bring the exempted sectors into the tax net and impose a uniform rate of taxation irrespective of the source of income and remove corruption from the system. On the expenditure side, the Prime Minister and the chief ministers need to be careful in announcing relief and other packages which were not budgeted. We need to be thankful to the Institute of Policy Reforms for creating awareness and fostering debate about the realities of the situation. If the government continues to paint a rosy picture despite weaknesses in the fiscal outcome, it will only be harming its case to mobilise higher level of revenues, reduce spending and narrow the budget deficit to the projected level.