Budget – Mirch Masala

 Budget – Mirch Masala

https://nation.com.pk/16-Jun-2020/budget-mirch-masala

The budget estimates of 2020-21 are out. It is a kind of festival in Pakistan. Every year announcement of budget creates panic in the economy and its players. Stock market behaved vaguely one week before and after the budget. Majority remains unhappy and few have positive opinions. These opinions also depend on the loyalty with the sitting government. The opposing party always opposes to it and give their own interventions. These interventions show the priorities of each political party sitting in the parliament. Nevertheless, the masses do not see these priorities while voting for their candidate in elections. Choice of vote is dependent on several other important factors.

Time has changed. A few decades ago, when centralisation and nationalisation were the main policies, the budget had extreme importance. The degree of centralisation and nationalisation has declined now. Privatisation was started in late eighties and it never stopped after that. Eventually, centralisation was partially killed by the 18th amendment in 2010. Nonetheless, Federal government is having numerous problems in doing several tasks after that. Nevertheless, the system needs to be rationalized. The power needs to be devolved at the lowest level to get maximum benefits. Hence, the provincial budget has more importance than the federal budget. Interestingly, 75 per cent of the SDG targets come under the provincial domain.

NFC gives approximately 58 per cent of the tax revenues to the provinces. In this budget, Rs2874b will be given out to provinces out of Rs4963b. The royalties on gas are not included in this amount. The rest of the tax revenues are Rs2089b.

Here is an interesting facts-based story; Federal government has Rs2089 billion from rest of the tax revenues. Debt servicing for this year is Rs2946 billion i.e., deficit starts by Rs857 billion; defence expenditures estimates are Rs1289 billion; deficit increases to Rs2146 billion. Adding civil and military pensions of Rs480 billion moves the deficit to Rs2626 billion. While adding Federal PSDP of Rs650 billion increases the deficit to Rs3276 billion. Besides these bigger heads several other heads contribute significantly to the budget deficit. There is no doubt that all the above-mentioned expenditures are essential. Although the deficit is reduced using non-tax revenues, i.e., Rs1109 billion and Rs100 billion privatisation proceeds, nevertheless, the deficit is still Rs3427 billion.

These numbers are just estimated numbers which are calculated using several assumptions and the impact of change in policies in the budget. However, I believe that the tax target of Rs4963 billion is achievable. FBR claims that they lost Rs500 billion in the last quarter of 2019-20 due to the pandemic. Improvement in economy, higher industrial growth than previous year, no major shocks to revenue collection, and 6.5 per cent increase in inflation may help in achieving the estimated tax revenues.

Besides the essential numbers mentioned above, everyone was looking at incentives that government will announce. Industrialists are waiting for subsidies and other incentives, exporters are looking for rebates and decrease in custom duties, traders are looking for relaxation in tax payments, pensioners and government employees are waiting for pension and salary increase and a common person is hunting for his piece from it. Every year all the media channels ask the experts about how the budget is if the government can achieve the announced numbers is it industrialists/exporters friendly budget or common person friendly budget etc.

This year everyone was thinking that it will be a COVID budget. However, majority of the expenditures under the COVID must be allocated in the provincial budgets. Before looking at those numbers any statement will be premature. It is noteworthy to mention that the stimulus packages in the wake of COVID-19 has already been announced by the Government including the 3 months defer payments on electricity bill, Rs144b Ehsaas emergency cash program, special financing rate for industries, special electricity rates for industries etc. Therefore, what is new in the current budget speech; few tax reliefs, regulatory exemptions, no increase in salaries and pensions and explanation of economic downturn due to COVID-19.

It is not a relief budget; it is not an economic revival budget but a survival budget that needs to be presented “by law” in front of the entire parliament. No one knows that when this pandemic is going to end. Thus, we may see changes in the announced budget when the picture of pandemic becomes clearer.

Therefore, we may see rollover budgets, one may call it mini budgets. It is a test for Government to mitigate the adverse impacts on the economy by keeping the economy in the right direction. Otherwise, the industries and services sector may not re-hire employees and the unemployment rate will increase and may go to double digits.

Among several announcements, a very important announcement was that inflation will come down to 6.5 per cent . Interest rates are already reduced by 5.25 per cent within 2 months after the pandemic. There is a chance to reduce it further by 100 basis points in the next two announcements. This implies that due to global economic meltdown, there won’t be much demand for our exports. As well as the domestic demand may not pick up quickly to raise the inflation. If all of this is true then inflation may remain around 6.5 per cent with an increase in unemployment, underemployment and overall economic activities.

Consequently, we may say that stimulus package for COVID-19 affectees (before budget), few exemptions and relaxations for businesses, spending to mitigate impact of COVID-19, and containing budget deficit are the main advantages of the budget. Surely, we may call it a “survival budget”.

Budget, to me is a mere accounting exercise. The agenda for reforms and important policy matters must be discussed in the parliament and the parliament must approve or disapprove of it whenever it is required. It must be very similar to other laws which are approved and disapproved at the parliament in their regular sessions.

The current crisis is an opportunity for the government to change the business as usual behaviour. This can be done through discussions with the relevant stakeholders. Ministry of Planning, Development and Special Initiative along with all the other ministries and institutes like PIDE can be very helpful in developing the reforms program. We must not waste this opportunity.