What is the critical question this year?

The critical question this year is not whether the budget 2016-17 is pro-poor and pro-development (a standard normal government claim) or pro-growth (proposed by economists and claimed as his objective by Dar in his budget speech this year) or indeed pro-austerity (belied by the steady rise in current expenditure) but the months of its relevance?
In less than three months into next fiscal year - September - the International Monetary Fund's (IMF) 6.64 billion dollar Extended Fund Facility (EFF) would be completed and its leverage on our policy decision-making end. This is expected to have implications on the budget deficit with higher than budgeted development expenditure. This may receive a boost after the Prime Minister returns to the country in good health and, in what is by now regarded as the unlikelihood of an agreement on the terms of reference for a judicial commission to investigate the Panama papers by the parliamentary committee, he is expected to face intense political pressure. If the recent past is any indicator the Prime Minister's response would be to go into what is typically a pre-election mode defined as jalsas and announcement of impromptu and unbudgeted development programmes for specific areas as witnessed prior to his departure for London for open heart surgery. At the same time the major vote bank of the PML-N, industrialists/traders/businesses are likely to ante up pressure to take out some revenue generating budgetary measures or else risk losing their support.
The budget speech was typical of Ishaq Dar: a litany of achievements backed by unrealistic data not supported by either the international donor agencies or independent economists (Dar's claim of a growth of 4.7 percent with IMF's estimate of 4.5 percent and independent economists 3.5 to 4 percent at best) as well as laying the blame for any poor performing macro economic indicator that cannot be manipulated for example declining exports and farm output on factors external to his policies. But some disturbing data is in order, data gleaned from the budget documents: public debt was 64.8 percent in the current year's revised estimates against the budgeted 62 percent; domestic permanent debt was 473 .8 billion rupees in the revised estimates for 2015-16 and is budgeted to rise to 1.476 trillion rupees in 2016-17; savings schemes estimated at 641 billion rupees in the revised estimates for the current year are projected to decline to 577 billion rupees in 2016-17, Punjab and Khyber Pakhtunkhwa are to receive no special grants or transfers in 2016-17, and a tariff differential subsidy for agriculture tube wells in Balochistan of 600 million rupees next year - a decision opposed by donor agencies as it targets the rich.
Dar's argument that the budget 2016-17 is pro-growth due to higher electricity generation as well export promotion measures that would include zero rating for Pakistan's top five export earning industries notably textiles, carpets, leather, sports goods and surgical goods as well as reducing the export refinance rate from 3.5 percent last year to 3 percent this year may have a limited impact on growth given his continuing focus on fiscal deficit with the target of 3.8 percent for 2016-17 - from the 4.3 percent this year. The highest PSDP recipient was National Highway Authority at 188 billion rupees for road building - a sustained priority of the Prime Minister's which received 177.8 billion rupees in the current year - 18 billion rupees higher than budgeted. Power sector was second in line in terms of priority and received 120.5 billion rupees in the current year (against the budgeted 112 billion rupees) and is to receive 130 billion rupees in 2016-17. The third largest outlay in the PSDP for 2016-17 is water with 31.7 billion rupees next year.
Dar stated that unlike past governments the Sharif administration has released PSDP allocations as budgeted. However 700 billion rupees were budgeted last year and 661 billion rupees released with Special Federal Development Programme budgeted to receive 28.5 billion rupees in the current year with zero allocation; and is budgeted to receive 20 billion rupees in 2016-17 - an account which skeptics may well argue will provide Dar with fiscal space for budget 2017-18.
And sadly provinces disbursed 732 billion rupees under their PSDP - a decline of 81.4 billion rupees from what was budget. The reason: a budgeted provincial surplus of 297 billion rupees to enable Dar to show a deficit lower than is in fact the case. Dar committed that he would amend the Fiscal Responsibility and Debt Limitation Act to not only bring the federal deficit (including provincial surplus) to 60 percent in two years (unlikely given that the IMF repayment under the EFF as well as the Aid to Pakistan Consortium payments would become due in 2017) but would legislate to bring the public debt (minus provincial surplus) to 50 percent in the next 15 years (belied by his projecting a provincial surplus of 339 billion rupees in 2016-17.
Current expenditure was revised upward in the current year from the budgeted 3.48 trillion rupees to 3.59 trillion rupees - a difference that was not attributable to higher defense expenditure as in the past and defense received 775.8 billion rupees in the current year against the budgeted 781 billion rupees. Military pension releases were as budgeted at 174.2 billion rupees while civil pensions were budgeted at 56.7 billion rupees and received 61 billion rupees.
The bulk of the rise in current expenditure from what was budgeted was due to a rise in allocation for (i) mark-up due to rising reliance on debt - from 1.27 trillion rupees to 1.31 trillion rupees, (ii) subsidies from the budgeted 137.6 billion rupees to 196 billion rupees, and (iii) grants and transfers from the budgeted 409.8 billion rupees to 418 billion rupees. Defense in contrast received 775.8 billion rupees in the revised estimates while the budget amount was higher at 781 billion rupees.
FBR revenue is budgeted to rise by 15.7 percent in 2016-17 to 3.6 trillion rupees. Direct taxes are budgeted to account for 1.5 trillion rupees however with 75 percent reliance on withholding taxes with the bulk levied on goods and services or in sales tax mode a significant portion of these taxes are mislabeled. Withholding taxes are set to rise for non filers on: (i) commercial electricity bills to 12 percent from 10 percent; (ii) sale of property from 0.5 and 1 percent to 1 percent and 2 percent for filers and non-filers respectively and in case of purchase from 1 and 2 percent to 2 and 4 percent respectively for filers and non-filers; (iii) lessees of vehicles to pay 3 percent; (iv) 15 percent on dividends on mutual funds with filers paying 10 percent; (v) 5 percent on actual capital gain instead of transaction tax levied on trading commodity futures contract; (vi) minimum tax payable on turnover of 10 million rupees instead of last years 15 million rupees; and (vii) on prize bonds - from existing 15 to 20 percent.
Capital gains tax on immoveable property would be charged at a uniform rate of 10 percent by extending holding period on sale from 2 to 5 years. And super tax has been extended for another year, as already revealed by Dar in a pre-budget seminar a few weeks ago.
Indirect taxes are budgeted to generate 2 trillion rupees with 1.4 trillion rupees to be collected from sales tax which would include increase on import of mobile phones (500 to 1000 rupees to 1000 to 1500 rupees for medium and high category mobile phones), enhanced duty on cigarettes - from 23 paisa to 55 paisa per cigarettes, aerated waters from existing 10.5 percent to 11.5 percent and doubling of sales tax on poultry feed ingredients - from 5 to 10 percent. Federal excise duty of 5 percent on cement has been replaced with one rupee per kg which may have a negative impact on construction.
In non-tax revenue the government has credited 3 G license at 75 billion rupees (which assumes that the auction of 45 billion rupees due on 20 June which is in the revised estimates for the current year will not be successful), and share of surplus SBP profits is again grossly over stated at 280 billion rupees.
External loans are budgeted at 796.7 billion rupees with project loans at a low 219 billion rupees, programme loans at still lower 133.7 billion rupees and the major reliance on other aid which includes borrowing from commercial banks, sovereign bonds, sukuk, or in other words loans at commercial rates.
Dar's constant exhortation to treasury benches and to the opposition benches to express appreciation by thumping of their desks was not reflective of his insecurity but his firm though inexplicably flawed belief that he is steering the economy towards the right path. And that is the tragedy this economy will continue to be subjected to as long as he retains the Finance portfolio.