The Federal Budget presented by Finance Minister Syed Naveed Qamar seems to have completely failed to grasp the magnitude of the economic crisis facing the country and does not offer a credible stabilisation programme to arrest further erosion of macro-economic stability.
The tilt towards indirect taxes as compared to direct taxes is a reversal of earlier announcement by Qamar's predecessor, Finance Minister Ishaq Dar, the burden of adjustment would be placed on higher income strata for cross-subsidisation of poorer income segments having lower ability to share the tax load.
Unless we put the ongoing judicial crisis behind us by the end of June, there is very little of starting the automatic periodic adjustment in consumer fuel prices in accordance with fluctuations in international oil market and reach a parity between domestic and international prices by the end December 2008. As for accumulated arrears, on this account, it will take a couple of years to clear.
The budget does not fully address the fiscal, balance of payments, food and energy crises. Fiscal deficit at 4.7 percent for FY09 is way too high. According to the Planning Commission, there was an operational shortfall of Rs 50 billion in last year's PSDP of Rs 470 billion. In 2009 the operational short fall is estimated at Rs 77 billion. Then why are we blowing the trumpet with a high figure of Rs 540 billion?
The Minister has announced a freeze on capital expenditure and a cosmetic cut in PM house expenses. Is this enough? Keeping the total current expenditure at the present level will be a great challenge. Last year the current expenditure budgeted at Rs 1056 billion over shot by 50 percent to Rs 1516.3 billion. There needs to be a substantial cut of at least 20 to 25 percent.
This would only be possible if the size of the government is cut from 45 plus ministries to 15 or less. For this purpose we will be required to remove from Islamabad ministries responsible for subjects on the concurrent list. Public sector corporations running in the red need to be sold for pittance, if necessary, to strategic buyers or are closed down.
Even on the resource side, it would be a real uphill task to collect a tax revenue of Rs 1.25 trillion in the face of cost push inflation due to wage price-hike and efforts to reduce aggregate demand in the economy. These two opposing forces will result in the reduction of operating margins in trade and industry.
Seventy percent of our direct tax comes from telecom, banking and oil and gas sectors. Telecom has already hit a plateau, banking spreads are under pressure due to a floor of 5 percent on deposits, NPLs are on the rise, consumer portfolio is shrinking and the profitability of banks is set to be lower than in 2007.
Oil and gas companies cash flows are hit by the circular debt in excess of Rs 200 billion. Where is extra meat for raising direct tax collection to Rs 496 billion from Rs 388.3 billion collected this year? Sales Tax target of Rs 170 billion is also rather ambitious.
With food registering a 30 percent price rise, oil and gas bill eroding the disposable income of individuals, sales of goods and services are bound to come down and not go up. Irrespective of one percent hike in GST, the business volume will be eroding.
Even customs duties and GST collected at ports, get stunted due to the tight monetary policy pursued by SBP. The only silver lining is strengthening of the rupee against the dollar because of unpopular but badly needed moves of the central bank.
With inflation expected to be closer to 17 percent and not 11-12 percent estimated by mandarins in Islamabad, for FY09, the 20 percent hike in basic pay is the least that could be done for the fixed income class. There are no more battle hardened troops in the government to say 'no' to the political leadership at the helm - that the money is not there, sir, to fund the popularity contest. Budget 2008-09 at best can be described as 'wishy-washy' which did not heading-on too many toes. That is why it is accepted without much noise.
The only people happy are the brokers on Karachi Stock Exchange and those who continue operate outside the tax net and live on cash transactions in services, real estate and as money lenders in agriculture.
Better water management, obtaining higher output of fruits, vegetables and other agri produce through establishing 'cold chains' and having better storage and grain handling are laudable and is much needed. Generating a higher agriculture exportable surplus is the only bailable option. Who will provide the leadership for this is the missing link?