The fiscal royal mess

The PMLN government left the economy on a messy note. The fiscal deficit target has been missed by whopping 2.5 percent of GDP (Rs860bn) in FY18 from targeted 4.1 percent of GDP to take it to 6.6 percent of GDP. In absolute terms, the deficit stood at Rs2.26 trillion ($18bn),

In FY17, the deficit was targeted at 3.8 percent of GDP while the actual number came at 5.8 percent of GDP. The slippage of 2-2.5 percent from targeted numbers in the last two years of PMLN regime largely explains the widening of current account deficit and the external crisis the economy faces today.

This is nothing new; the same pattern is visible in the previous two regimes. In Musharraf’s era, fiscal deficit slipped from 4.1 percent in FY07 to 7.31 percent in FY08 while the PPP government which was not able to lower the deficit at decent level in any year of its term, broke all the records in its all year to take the deficit to 8.2 percent in FY13.

The story is simple; every successive government tried to win the hearts of the voters by generous spending and tax breaks close to elections. The real economic change ‘Naya Pakistan’ can bring, to move away from the lavish spending close to elections which brings economy at the verge of collapse and every new government has to knock the door of IMF for a bailout. The story is no different for PTI to start with; let’s see what real change they can bring by 2023.

The fiscal numbers of FY18 have a dismal tale to tell. There is not much wrong with federal tax revenue collection which grew by 11.5 percent in FY18 to reach Rs4,065 billion and the tax collection reached 13 percent of GDP in FY18 versus 12.5 percent of GDP in FY17.

The single biggest contributor in tax revenues is sales tax which grew by 12.7 percent in FY18 to stand at Rs1,491 billion. The number is almost same as total direct tax collection which stood at Rs1,536 billion in FY18. The toll exhibited a growth of 14.7 percent in FY18.

However, given the tax reliefs by the outgoing government in FY18 amid the plans of phasing out super tax and lowering corporate income tax in stage manner, the growth of direct taxes will shave off in FY19 unless more people come in the tax net. If there is no change in announced relaxation in budget, there is a fair chance that sales tax collection will cross overall direct tax numbers in FY19.

The PTI manifesto contains pro poor policies aimed at bridging the inequalities between the rich and the poor. If the government works on these principles, they will have to lower the GST and enhance direct tax collection. The Finance Minister Asad Umar has hinted that he is not happy with a few steps announced in the last budget and a mini-budget may be in the offing.

The other challenge is to curb the growth in expenditure. The total federal expenditure increased by 11 percent in FY18 which is not much and the symbolic austerity would not considerably dent the high expenditure base. The interest and principal payment of debt grew by 11 percent to Rs1499 billion while the defence expenditure for the first time crossed trillion rupees mark in FY18.

The real gain for symbolic expenditure can be derived from behavioural economics. It can help in bridging the trust deficit between the tax payer and the state; and seeing the baboos inflicted in pain due to austerity may incentivize people to pay taxes.

Only time will tell how effective measures are introduced in curbing fiscal deficit. Expect some amendment in announced budget and cut in development spending along with rationalization of gas and electricity tariffs. Gaining the trust of tax payers is a long shot, otherwise.