Budget destined for revision

The budget 2018-19's applicability due from 1 July 2018 is likely to be even shorter than the tenure of the few hours' old Finance Minister Miftah Ismail who presented the budget in parliament and who is mandated to leave office latest by 30 May.
The reason: data for the current year is for only eight months (July-February) which is not only being challenged by independent economists because of its flagrant lack of rationalization but also because it encompasses a time period too short to make an accurate or meaningful projection for the remaining four months. And it is this data which would be the basis for supplementary grants as well as budget 2018-19 projections - expenditure (current and development), revenue (tax and non-tax) and borrowing sources (domestic or external). Thus projections in the budget documents 2018-19 may be seen as mere numbers with little relevance to reality, even less so than in previous years.
Be that as it may, the list of tax relief measures extended in the budget for next fiscal year that will rightly be viewed as pre-poll rigging by other political parties is rather exhaustive and includes: relief on income tax already announced by Prime Minister Shahid Khaqan Abbasi, the super tax to be phased out with one percent decline each year, the reduction in corporate tax rates from 30 percent to 25 percent by 2023 with a one percent reduction each year, tax reduced on undistributed profits from 7.5 percent to 5 percent and the condition of distributing 40 percent after tax profits to be reduced to 20 percent, reduction of rate of tax on dividends issued to unit holders of real estate investment trust from 12.5 percent to 7.5 percent, reduced rate of withholding tax on bank transactions on non-filers from 0.6 to 0.4 percent (a better option would have been to reduce the rate on filers), threshold of tax deduction enhanced to 30,000 rupees on payment of services and 75000 rupees on payment for goods, extension of tax credits till 2021 for establishing new industries, purchase of machinery, expansion and BMR, exemption to deep conversion refineries, exemption from sales tax for dairy, livestock and agriculture and computer parts.
What however requires an urgent explanation from Ismail is the fact that while the budget projects a 13.4 percent rise in revenue next year yet the net revenue effect given the incentives (negative 184.4 billion rupees) and additional tax measures (positive 93.3 billion rupees) as calculated by the Federal Board of Revenue (FBR) is negative 91 billion rupees so from where does he envisage higher revenue?
Another source of concern for opposition parliamentarians as a form of pre-poll rigging would be the rise in inter-disco tariff differential for Wapda/Pepco - from 57.5 billion rupees in the revised estimates for the current year to 105 billion rupees in the budget 2018-19 while K-Electric would receive 15 billion rupees as tariff differential next year as opposed to 33.4 billion rupees in the revised estimates of the current fiscal year.
FBR taxes are projected to rise from 3.9 trillion rupees in the revised estimates of 2017-18 to 4.43 trillion rupees with, as has become the norm, the largest projected rise from indirect taxes whose incidence on the poor is greater than on the rich - to the tune of 328 billion rupees while direct taxes (consisting mainly of withholding taxes in the sales tax mode) are projected to rise by 172 billion rupees in the forthcoming fiscal year compared to the revised estimates of the current year.
Petroleum levy is expected to generate 179 billion rupees by the end of the current year and is budgeted to generate 300 billion rupees next year. Total tax revenue is projected to rise from 4.1 trillion rupees as per the revised estimates to 4.88 trillion rupees next year which is a rise of 18 percent - again unlikely in an election year.
The picture presented for non-tax revenue appears realistic however the reliance on showing State Bank of Pakistan profits at 280 billion rupees as revenue reflects a continuation of Ismail's predecessor Dar's innovative accounting. And non-tax revenue is projected to decline from 845 billion rupees in the revised estimates to 771.8 billion rupees in 2018-19.
The budget documents project a deficit of 4.9 percent premised on provincial surplus of 285.6 billion rupees, an amount unlikely to be substantiated, if at all, till after the elections as all four provincial governments, including Punjab, have indicated that they would present four month budgets belying Ismail's claim that the budget was necessary to enable provinces to ascertain their share from the divisible pool, the major source of their revenue.
Current expenditure for the current year, as per the budget documents, was 14 percent higher than budgeted (budgeted amount 3.76 trillion rupees with revised estimates at 4.298 trillion rupees) with mark-up on domestic and foreign debt payment rising by 12 percent (from budgeted 1.36 trillion rupees to revised estimates of 1.5 trillion rupees). The budget for 2018-19 projects current expenditure at 4.78 trillion rupees - unrealistic at only 11 percent higher than the revised estimates with projection of debt repayment rise of only 6 percent.
External loans are budgeted at 1 trillion rupees in 2018-19 with around 70 percent projected to be generated from what is euphemistically termed as other aid but which in reality is borrowing at a higher cost than available from multilaterals and bilaterals. Thus 351 billion rupees would be borrowed from commercial banks (at high rates of return with low amortization period), 234 billion rupees from issuing sukuk bonds (though the rate of return can not be predetermined but is unlikely to be less than 6.75 percent) and borrowing 117 billion rupees from the Islamic Development Bank. Project loans are expected to decline to 290 billion dollars, from 312 billion dollars as per the revised estimates of the current year, and programme loans or budget support is not expected to be more than 88 billion rupees.
The International Monetary Fund's March 2018 assessment was that "the elevated current account deficit and rising external debt service in part driven by CPEC related outflows (loan repayments and profit repatriation) are expected to lead to higher external financing needs, which are expected to rise from 21.5 billion dollars (7.1 percent of GDP in 2016-17) to around 45 billion dollars by 2022-23 (9.9 percent of GDP)."
Defence expenditure is projected to rise by 10 percent in comparison to the revised estimates of the current year (from 999 billion rupees to 11. trillion rupees) envisaging a decline in administration (from 3.2 billion rupees as per the revised estimates to 2.3 billion rupees) with operating expenses rising by only 2.69 billion rupees though the largest increase was inexplicably in employee related expenses of 59 billion rupees. Military sources claim that the rise is mainly attributable to the ongoing work on fencing along the Pak-Afghan border.
The Public Sector Development Programme (PSDP) for the current year is projected to receive negative 3.3 percent allocations in comparison to the year before with disbursements projected till 30 June 2018. However 100 billion rupees has been kept aside reportedly for spending by the next elected government. This is a rather pathetic attempt to try to engage other political parties in the budget exercise and a far better option would have been to engage all national parties prior to presenting this budget.
Inexplicably clean drinking water for all would receive no funding in next year's budget though Benazir Income Support Programme was allocated 124 billion rupees as opposed to 121 billion rupees budgeted last year. Prime Minister's Initiative (with the incumbent leaving office well before the start of next fiscal year) would receive 10 billion rupees, and credit guarantee scheme would receive 100 million rupees - a much lauded scheme last year with one billion rupees budgeted for it however not a single penny was disbursed under this.
To conclude, the argument put forth by Ismail and the Prime Minister that the next government can present its own budget understates the amount of money spent on formulating budgets with some estimating it as high as 30 million rupees.
Correction: This newspaper had erroneously carried a dated file of an analysis by this writer that she had written about the Budget 2017-18, not Budget 2018-19, in its yesterday's issue due to a computer glitch. The error is regretted.