Fiscal policy, especially the FBR is going to be in tough spot with reference to ongoing negotiation with the IMF. The FBR revenue targets are reported to be Rs100 billion short from the revised numbers of Rs1.2 trillion in Jul-Oct 2018. The first quarter deficit is expected to be around 1.5 percent of GDP which probably would be the highest first quarter deficit since 1QFY11- eludes the revised full year target of 5.2 percent.
The IMF would surely take a stern notice of such an exception and may ask for additional revenues and expenditure measures to reduce the deficit. There is nothing much that can be done in terms of reducing federal development expenditure which has already been slashed by Rs225 billion or 28 percent.
Nothing much can be done from extracting surpluses from provinces either, which are targeted at Rs286 billion; and in an effort to do so, the provincial governments have to significantly cut their respective development expenditure. The impact of lower development spending is visibly slowing down the economy and government cannot take it further down as the step could be counterproductive.
How much can the government cut from current expenditure - according to PTI finance team calculations, the expenditures are to be overrun by Rs250 billion from budgeted amount. At best, the government can cut some of the non-salaried current expenditure which is estimated at around Rs800 billion - at 10 percent, saving can be achieved to the tune of Rs80 billion.
The IMF may ask for new revenue measures to bridge the shortfall. In days of currency depreciation, the FBR revenues usually move up, but that might not be the case this year, as the economic slowdown is having its burnt on the FBR revenue targets.
For instance, the GST on petroleum products is supposed to yield more but the lower diesel consumption is nullifying the impact, and the decline in tax revenues is even more pronounced as the government is not passing full impact of price hike on consumers (For details read: ‘Tax loss on petroleum’ published today).
The finance ministry has to work on reducing tax exemption whose potential loss to taxes were estimated at Rs540 billion. In his mini budget speech, Asad Umar implied that tax exemption is to reduce by Rs350billion. It's a big number and is hard to cut down. The finance ministry has to come up with a blue print on how to go around reducing the exemptions. With four months already gone, not much can be yielded through this step this fiscal year.
It's almost certain that if we enter into an IMF programme, the federal government has to announce some new taxes, as it takes time to find new avenues or to cut down exemptions.
Concurrently, the government is talking about separation of FBR policy from enforcement arm through coming with a policy board. The subject will be covered holistically in this column soon, but by doing so, a few steps of cutting taxes on sectors where the existing burden is too high or on abolishing a few taxes, whose adverse impact is affecting economy at large.
The government has intended to bring sane fiscal policies aligned with long term economic growth and plans. But at the same time, it has to cut down deficit significantly which requires additional taxation on low hanging fruits. It's a tough task to keep a delicate balance.
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