Wednesday, 15 June 2011

All the best to the Government: budget 2011-12

Annual budget 2011-12 of Rs.2.767 Trillion was announced few days ago. It is 14.2 percent higher than last year budget. It is adjust to inflation rate (14.1 percent) is an immature statement right now. But there is nothing wrong if they have done it accordingly. If we divide the current budget estimates by the inflation rate to make those values comparable to previous year, it is interesting to note that increase in total expenditures by 0.5 percent only.
By looking at the last three years, tax revenues were always more in the budget estimates and expenditures are always less in budget estimates. At least government is consistent in these estimates J LOL. In 2008-09 ratio of budget estimates to revised estimates of tax expenditures was 0.94 and same was the last year. However, it was 0.99 in 2009-10, which was good. If we go into further bifurcation, direct taxes are always short of target and in 2009-10 indirect taxes increased its target mainly due to revenues from sales tax.
Current expenditures always increase it’s budget estimates and on the contrary development expenditures always less than the budget estimates. However, total expenditure always increase the budget estimates.
There is another interesting point noticed from the last three years that ratio of direct tax to total tax has decreased and indirect tax has increased even though the FBR has special emphasis on increasing direct taxes.
Few challenges which are addressed in the budget are
·        Containing of Fiscal Deficit.
·        Reducing Inflation.
·        Overcoming energy shortage.
·        Increasing investments.
·        Creating employment.
·        Reducing Public Debt.
We’ll take these challenges one-by-one. As far as containing fiscal deficit is concerned, two things are important, reducing expenditures and increasing revenues. However, there is no major policy announced which shows that Government is interested in lowering expenditures and raising revenues. Increase in tax revenues is ambiguous after announcement of decrease in Sales tax rate by one percent and increase the lower limit of income tax. Moreover increase in PSDP program to $300 Billions which is 53% more than the revised estimates 2010-11 and 15 percent raise in the salaries does not tell us decline in expenditures. Furthermore every year we collect less revenues that we expected and spend more what we thought. Thus, it is extremely impossible to achieve the target of 4 percent fiscal deficit. All the best to the Government.
Reducing Inflation and Creating Employment has a trade-off. We are having double digit inflation and to decrease current inflation we need to increase interest rate, which means contracting money supply be lowering credit creation and thus reduction in investment and lesser employment opportunities. But of course there are different ways to do this other than standard textbook materials. Again All the best to the Government.
Overcoming energy shortage is one of the major issues inside Pakistan. Rs.115 billion which include Rs.32.5 billion through budget is allocated for power generation by WAPDA. These will be hydel projects. Rs. 22 billion are also allocated to Pakistan Atomic Energy Commission to produce energy from nuclear source. However, how much energy they can produce and when it is available to people is a serious concern. All the Best to the Government.
Reducing public debt is a difficult task in the presence of fiscal deficit. If we consider fiscal deficit to be 4 percent of GDP, Government may need to borrow which increases public debt again unless we repay more than what we are borrowing and we pay debt servicing as well. All the best to the Government.
In short we are surrounded by several problems such as terrorism, high inflation, high unemployment, low investment, low growth, low education, low health facilities, bad governance etc. We need to fix these one by one. If we want to fix them jointly even then we need to do it gradually (Apart from terrorism; eradication of terrorism in the most important among others). It’s time that we realize that we need to take singles and doubles instead of hitting fours and big sixes. Instead of starting huge projects and borrow money from World Bank and other financial institutions, we can start small projects with our own money. If we can we should depend less on the foreign aid.

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