There is understandably intense activity before the budget is announced in the Ministry of Finance with all the stakeholders (private as well as autonomous/public) and the tax collecting arm of the government namely the Federal Board of Revenue (FBR) engaged in proposing and finalizing tax measures to be implemented in the forthcoming fiscal year.
If a country is on the International Monetary Fund (IMF) programme, as is Pakistan, then in the event of any prior conditions the hands of the Ministry of Finance with respect to fiscal measures are tied. The timing - the budget is scheduled to be announced on 5 June and the IMF board meeting that would approve the release of the eighth tranche scheduled for 26 June - indicates that prior conditions with respect to fiscal and legal measures may have been agreed and would no doubt be part of the budget document. The IMF Mission Chief for Pakistan Harald Finger in an exclusive interview with the Business Recorder confirmed that certain fiscal measures and the removal of legal impediments to the Gas Infrastructure Development Cess (GIDC) levy have been agreed with the government as prior conditions.
Skeptics in Pakistan maintain that the relevance of our budgets even on the first day of the new fiscal year is seriously compromised as several pressures groups threaten shutter-down strikes and in the instance of the PML-N government withdrawal of political support (as happened last year with respect to enhanced documentation measures in the party's stronghold in Faisalabad). And it is failure to take a firm stand and focus on reforming the tax structure that accounts for the government relying increasingly on raising taxes on existing taxpayers and raising/widening the net of withholding taxes that are passed onto the consumers. In addition, through the practice of collecting advance tax from large tax payer units', government after government has overstated revenue for the year past thereby coming up with an unrealistic revenue estimate for the next year. The outcome especially if the government is on an IMF programme: mini budgets as evident in February this year.
Thus a critical question is not would the government be able to deliver on its commitments to the Fund on paper (in the budget) but whether it would be able to meet its targets? With respect to the revenue generation target set for the government the IMF has already got a commitment from the government to take away the power of issuing statutory regulatory orders (SROs) - grant of tax exemptions to specific sub sectors - from the FBR; however the Minister of Finance would retain the power. In this context it is relevant to note that to-date the SROs may have been issued by the FBR but are nine times out of ten negotiated between the Minister of Finance and the relevant sector/sub-sector with, understandably, a political dimension.
Reports indicate that the bulk of the SROs that are to be removed in the budget 2015-16 are either time bound (those that would have naturally expired), misplaced/misclassified, redundant or minimally utilized. No one is going to oppose the removal of such SROs; however as noted above and evident during the tenure of the past and present governments, politicians in power are particularly sensitive to opposition/criticism of various proposed tax levies that would broaden the tax base and enhance documentation from two major support groups: the industrial productive sector, as well as traders who are willing to pay withholding tax on consumption (on business/first class/ tickets etc for example) but threaten a shutter down strike if required to file returns. This implies that reforming the tax sector to make it fair, equitable and non-anomalous would, yet again, take a back seat to increasing total collections which are not backed by enhanced productivity. The difference between withholding taxes on non-filers and filers would be increased perhaps to 10 percent (instead of the current 5) and the non-filers operating in the informal economy (mainly engaged in trade sector) would absorb this and pass it onto the consumers. In addition, there is a real danger that non-filers may opt to engage in only cash transactions as a consequence. A government report indicates that indirect taxes will be raised by 15.2 percent next year.
Or in other words, improving FBR governance is not going to be the target again - a policy that is also expected to be adopted with respect to reforming the power sector as halving the circular debt in the next fiscal year is the agreed condition with the Fund - a halving that may well be achieved by higher borrowing and parking it in the Holding Company; unless the governance of relevant ministries and departments improve the circular debt would simply resurface as has already happened during the past two years. Thus in the tax and power sectors the government's focus does not appear to be on governance - the root cause of all issues.
Finance Minister Ishaq Dar has also claimed that he would eliminate the power sector subsidy for all but the life line consumers (defined as those using 50 or less units per month). This must be supported; however in the same breath, he added that the government will not allow different tariffs in different distribution companies. So what does this imply for the budget? Total subsidies in Pakistan are very high, a source of concern for donors, and in last fiscal year the revised estimates gave a total of 323 billion rupees (over 3 billion dollars) - though as has become the norm they were understated in the budget by 83 billion rupees. Inter-disco tariff differential, which Dar has stated will not be fiddled with, accounted for a total of 294 billion rupees in the subsidy section of the budget or 91 percent of total subsidies released last year. So unless Dar engages in innovative accounting and removes inter tariff differential from the subsidy section he is not going to be able to show a significant, if any, decline in subsidies in 2015-16's budget documents.
Ishaq Dar did engage in innovative accounting by shifting some items from non-tax revenue into other taxes which accounts for a dramatic decline in non-tax revenue and an increase in tax revenue. Three main items that were shifted from non tax to other taxes by the Dar-led Finance Ministry were (i) Gas Infrastructure Development Cess (expected generation for the current year 145 billion rupees), (ii) Natural Gas Development Surcharge (30 billion rupees) and (iii) petroleum levy (123 billion rupees) or a total of nearly 300 billion rupees - a very hefty amount. No wonder non tax revenue declined by 10 percent according to Dar's recent presentation to the cabinet while tax revenue increased.
Expenditure on development is only envisaged to increase by 55 billion rupees from 525 billion rupees in the current year to 580 billion rupees in 2015-16 - around 10 percent. However disturbingly this rise in allocation is attributable entirely to foreign support: in the current year reliance on foreign assistance was to the tune of 19 percent of the total PSDP or 102.2 billion rupees while next year the government's reliance is budgeted to rise to 182.7 billion rupees or a rise to 31 percent of the total PSDP (no doubt reflecting Chinese commitments). This implies that federal government commitment to PSDP would decline from 423 billion rupees in the current year to 397 billion rupees in the next year. At the same time current expenditure is forecast to rise by about 8 to 10 percent in the budget documents.
The growth orientation of the budget would be through lower interest rate but as stated in the working paper of the Ministry of Planning dated 26 May 2015 "the SBP decision to ease monetary policy has not significantly impacted the investment climate suggesting that the problem lies with other determinants of investment." The government needs to slash its own borrowing from scheduled banks (its borrowings rose from 36.6 percent thereby crowding out private sector growth), allows the exchange rate to be more realistic and does not delay refunds to at least large units exports would remain compromised and remittances would be the only silver lining in our balance of payment position. The other silver lining as far as the Finance Minister is concerned is the ability to borrow from external sources that accounts for improved foreign exchange reserves - a point of view that he has found no takers for in the general public.