Brace Yourself

Brace yourself


The News,Wednesday, June 04, 2014
From Print Edition


5 0 0 0


At least on paper, budget speeches seldom highlight the proverbial ‘bad news.’ They are crafted
to highlight the achievements, ambitious new targets and shiny vision of the government – which
often downplays economic challenges and sugar coats tough measures aimed at boosting
revenues or cutting subsidies, which hit the common man. Therefore, like every budget speech,
Finance Minister Ishaq Dar had only good news to share with the nation as he unveiled the
proposed 2014-15 (July-June) budget before parliament on Tuesday. In his more than two-hour-
long high-speed rendition, Dar issued a good health card for the economy, claiming that in just
one-year of PML-N rule, it has been put on the path of recovery and growth. The key economic
indicators indeed look encouraging. The GDP growth, which remained pegged at 3.0 percent on
an average in the last five years of the PPP rule, crossed the 4.0 percent-mark in the current fiscal
year, though missing the 4.4 percent target. For the next fiscal year, the government is eyeing it
at 5.1 percent and 7.0 percent by FY 2016-17. Inflation, which averaged an unprecedented 13
percent under the PPP rule, was recorded at 8.5 percent in fiscal year 2013-14 and the
government intends to keep it in single digit the next year.

The government also managed to bridle the fiscal deficit – known as the mother of all troubles
for an economy – in its first year in the office at an estimated 5.8 percent compared with the
highs of 8.8 percent the preceding year. For 2014-15, the government aims to contain fiscal
deficit at 4.9 percent, which will be no less than a feat. The finance minister also boasted about
the strengthening of the rupee against the dollar, a rise in foreign exchange reserves – which the
government wants to increase to $20 billion in the medium term – measures taken to end the
crippling energy crisis and cleaning up of more than Rs500 billion worth of circular debt during
the past one year. At least these macro numbers paint a rosy picture about the performance of the
PML-N government that presented its second budget with an outlay of Rs3.96 trillion for the
next fiscal year compared with Rs3.591 trillion this year.

However, the devil lies in the detail. The government has set a grand revenue collection target of
Rs3.129 trillion that includes the FBR component of Rs2.810 trillion. The other tax measures
aim to raise Rs319 billion. But given the current year’s poor revenue collection performance, it
seems a mammoth target. Although FBR tax collection registered a 16 percent rise this year, it
fell way too short of its original target of Rs2.475 trillion. The government had revised the target
downward to Rs2.275 trillion, but by the looks of things even this appears unattainable as in the
first 10 months of the current fiscal, the FBR has collected only Rs1.744 trillion. For the next
fiscal year, the government aims to boost revenue collection by a series of measures in which it
seems to bank heavily on the withholding tax and the oppressive indirect taxation that will take
their toll on the common man. However, measures such as slapping a fixed tax of 5.0 percent on
small retailers through electricity bills and trying to bring the big ones, including those
associated with big foreign chains, into the tax net by imposing 17 percent general sales tax
remain a small step in the right direction. The removal of tax exemptions enjoyed by large
trading houses and the imposition of 5.0 percent regulatory duty on luxury items – aimed at
curbing imports – are some of the other measures Dar has proposed to increase revenues.
Nevertheless, the bitter fact is that the rich have again escaped direct taxation with a mere slap on
the wrist. Measures such as new taxes on first and club class air travellers, or transactions of
plots and registration of cars is nothing but a small price to pay for concealing their actual
incomes.

The entire philosophy of collecting an advance tax on electricity bills to real-estate transactions
goes against the grain of the much propagated efforts of expanding the number of direct
taxpayers. The much-talked about, but never implemented, agriculture tax has landed in the lap
of the provincial governments after the 18th Amendment. Whether the federal government will
push the provinces to move in this direction remains a big question. The budget speech also gave
details of Prime Minister Nawaz Sharif’s trademark big infrastructure development projects –
construction of new glitzy motorways, mass transit systems, overhaul of railways, building of
new dams and the power generation projects. The government believes spending on development
projects will surely ignite growth. However, critics and political rivals are likely to challenge the
government’s set of priorities, which overwhelmingly appear to be focused on certain select
regions. The government has earmarked Rs525 billion under the Public Sector Development
Programme and another Rs162 billion for other development projects. It plans to mobilise
another Rs120 billion through foreign lending. The PML-N government needs to focus on
equitable distribution of the development funds and aim to direct them also on projects in
underdeveloped areas. As usual, debt servicing at Rs1.325 trillion will eat up a big chunk of
resources in the next fiscal year, but given Pakistan’s penchant for the ‘begging bowl’, it has
become one big necessary evil needed to keep our economy afloat at least in the near to mid-
term. A major step the government plans to take in the next fiscal year is slashing down subsidies
to Rs203 billion from Rs323 billion in the current fiscal. This means that people should get ready
for a sharp increase in power tariffs. Overall, the proposed budget aims to trigger growth and
investment. But to achieve this goal, apart from the numbers game, the government would need
to focus on achieving political stability and getting rid of terrorism and extremism – indeed a tall
order. The one-liner for the budget would be: Let the poor stew in their juices.