The results of fiscal operations by the federal and provincial governments have been released recently. In the first nine months, July to March, of the current fiscal year the consolidated fiscal deficit has been recorded at 3.1 percent of the GDP. This compares with 4.4 percent of the GDP in the corresponding period of last year. It appears that we are on track to restrict the fiscal deficit in 2012-13 to 5.8 percent of the GDP, a target agreed with the IMF.
Overall, compared to the deficit of 8 percent of the GDP in 2013-14, there will be a downward adjustment of over 2 percent of the GDP. This must be recognised as a major achievement by the five governments. However, the question arises as to how such a large fiscal deficit reduction is being achieved? FBR revenues, in fact, are below target and there is likely to be a shortfall of almost Rs 225 billion in relation to the budgetary target of Rs 2,475 billion. This ought to have put pressure on achieving the deficit target. But developments in non-tax revenues and on the expenditure front have more than compensated.
Federal non-tax revenues have shown buoyancy, with a growth rate approaching 20 percent. State Bank profits in three quarters have already exceeded the annual target; public sector enterprises have suddenly become more profitable and paid out large dividends to the government; the gas sector has yielded larger revenues following the imposition of the Gas Infrastructure Development Cess; money has been withdrawn from the Universal Service Fund of PTA; two quarterly instalments of the CSF money have been received and so on.
The ingenuity lies in the way that the 'gift' from a friendly country of Rs 150 billion has not been revealed, but has yet contributed to deficit reduction. Normally, this should have been shown as part of foreign grants in non-tax revenues. Instead, the subterfuge that has been adopted is to include it in 'Statistical Discrepancy'. This is shown at negative Rs 171 billion. It is tempting to conclude that this represents a breakdown in the accounting systems of the Federal Government, as it is the largest absolute magnitude of discrepancy ever. But, actually Rs 150 billion in the so-called 'statistical discrepancy' item is the inflow of the 'gift'. It is not clear why the Government has been reluctant to explicitly highlight this gift.
The other major factor contributing to deficit reduction is a huge cutback in PSDP/ADP releases both by the federal and provincial governments of over Rs 450 billion in the first nine months, in relation to the targets set at the time of presentation of the budgets. This is equivalent to a massive 53 percent reduction. It is likely that total development spending on projects as a percentage of the GDP in 2013-14 is likely to be the lowest in the history of the country, since 1971.
This raises the question of the quality of fiscal adjustment. First, almost 0.6 percent of the GDP reduction is due to a once-and-for-all inflow of a large foreign grant and not due to higher tax revenues. In fact, the tax-to-GDP ratio will rise by only 0.2 percent this year. Second, the national PSDP has been cut back by 1.7 percent of the GDP. In the absence of these two factors, the overall deficit would have already crossed 5.4 percent of the GDP by end-March 2014.
There are important lessons from this years' experience for budget making in 2014-15. First, tax revenues are unlikely to show very high growth rates when the economy is not growing fast. Apparently, in an understanding with the IMF, the FBR revenue target has been set at Rs 2,800 billion for 2014-15. This implies a growth rate of over 24 percent. Achieving this growth will require oppressive new taxation and jeopardise the prospects for economic revival.
Second, the practice of setting ambitious targets for the size of the development programme, both by the federal and provincial governments, must be avoided. There is need for sharper prioritisation and for larger allocations for completion of on-going projects. Big cutbacks during a year must be avoided. The real challenge will be to bring the consolidated fiscal deficit to below 5 percent of the GDP in 2014-15, while simultaneously providing a stimulus for economic revival and relief to the people. We wish the Government all success in its efforts.
(The writer is former finance minister)