Finance Minister Dr Hafeez Sheikh on Friday projected a budget deficit of 4 percent of GDP in line with the recommendations made by the IMF during meetings held in Dubai (May 11-17).
Hafeez unveiled a Rs 2.767 trillion outlay in Parliament for next fiscal year - 12.3 percent higher than current year''''s outlay (budget documents consistently referred to Rs 2.767 trillion outlay - 14.2 percent higher than current year''''s outlay) with total net federal revenues projected at Rs 1529 billion.
This translates into a projected federal fiscal deficit of Rs 975 billion. Owing to higher revenue transfer to provinces through 7th NFC Award, a fiscal surplus of Rs 125 billion is expected from provinces. Overall fiscal deficit would be Rs 850 billion ie 4 percent of GDP.
Hafeez was barely audible amid deafening protest by the opposition. He had earplugs on throughout the speech like most of the PPP members but still appeared visibly unnerved as he delivered the budget speech. Gross federal revenues (tax and non-tax) have been projected at Rs 2732 billion. The FBR collection is projected at Rs 1952 billion (FBR tax to GDP ratio would remain appallingly low at 9.3 percent).
A sum of Rs 1203 billion will be transferred to the provinces under the 7th NFC Award compared to Rs 998 billion (revised) during the current financial year. Pledging to pursue tight fiscal policy to bring down inflation, reducing untargeted subsidies, providing relief to the poor through more allocation of funds to Utility Stores Corporation (though the budget documents revealed that allocation to USC will be slashed from 4.5 billion in the 2010-11 revised estimates to 2 billion next year) and to reducing borrowing from the State Bank of Pakistan, Hafeez Sheikh promised to bring 0.7 million rich people identified by Nadra into tax net in the coming three months to broaden the tax base and generate Rs 3 billion additional revenue.
The minister said that after the 7th National Finance Commission Award (NFC), tax mobilisation is also the responsibility of the provincial governments who need to take effective measures in this regard. Hafeez announced a reduction in the rate of general sales tax by 1 per cent - from existing 17 percent to 16 percent for 2011-12 - and proposed abolishment of Special Excise Duty (SED) and Regulatory Duty on 392 items out of 397 items and announced exclusion of 15 items out of total 46 items from the ambit of Federal Excise Duty (FED). The regulatory duty would be limited to luxury vehicles, cigarettes, arms ammunitions, betel nuts and sanitary ware/tiles.
The government also proposed a reduction of FED on per metric ton cement from Rs 700 to Rs 500 in the first phase and announced equal reduction of the balance of Rs 500/MT in the next two budgets; FED on beverages was reduced from existing 12 percent to 6 percent. The minister said that the revenue loss on account of the above measures would be compensated by removal of selected exemptions and zero rating under GST, revision of federal excise structure on cigarettes, improving tax compliance and revision in the rate of tax in lieu of value added tax on commercial importers from 2 percent to 3 percent.
The minister also announced 1 percent reduction in the rate of withholding tax on cash withdrawal from existing 3 percent to 2 percent. He said the government has also decided to raise the income tax-free limit from Rs 300,000 to Rs 350,000 but incomes above Rs 300,000 would continue to be subjected to filing of returns. The minister said he was happy to announce that there would be no extension in the duration of the one-off flood tax levied due to floods namely the 15 percent flood surcharge and 1.5 percent increase in SED.
The minister said the meeting of the Federal Cabinet ahead of the announcement of the budget in the National Assembly also decided to increase salaries of government employees by 15 percent and raise pensions by 15 percent to 20 percent. In addition, he said the government has also decided to increase the conveyance allowance of all government employees, civilian and armed forces - grades 1 to 15 by 12 percent. Moreover, he said all ad hoc allowances of the government employees would be merged with the basic scales of 2008 and new scales would be introduced.
The minister praising the role of the Parliament and democracy said the government inherited fragile economy in 2008 and process of stabilisation initiated subsequently was adversely impacted by rising oil prices, devastating floods and prevailing security situation all of them contributed in adding pressure on the fiscal side and led to a slowdown in growth. The government was forced to take austerity measures by slashing current and development expenditure to meet the needs of millions of flood victims. The minister also complained about political disagreement which he said has not allowed implementation of Reformed General Sales Tax (RGST) to broaden the tax base for mobilisation of resources. He also mentioned sustained challenges on fiscal side from the last 25 years and invited the political parties to forge unity to steer the country out of the crisis to achieve economic stability.
Hafeez said performance on external side was encouraging with exports and remittances showing highest growth in the history of the country by reaching the mark of $24 billion and $12 billion, respectively for the current fiscal year.