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Budget, tax targets and fiscal deficit

Dr. Ikramul Haq

In document titled, Federal Budget 2021-22: Budget in Brief, released with federal budget for fiscal year (FY) 2021-22 on June 11, 2021, the collection target of Federal Board of Revenue (FBR) is fixed at Rs. 5829 billion for the next FY. The current FY target was fixed at Rs. 4963 billion, but later revised twice to Rs. 4717 billion. The expected collection as per Federal Budget 2021-22: Annual Budget Statementwill be Rs. 4691 billion. It is a serious matter. It not only reflects adversely about our fiscal management but also is detrimental for provinces that prepared their budgets based on projection given by the federal government of their share in tax collection under the 7th National Commission Award (NFC). The over-fixation of tax targets of FBR and later downward revision resulting into lesser distribution, as promised in the budget, to the provinces has become a permanent feature that is highly undesirable. It means imprudent budgeting and lack of transparency in fiscal matters.

The total net revenues (tax and non-tax) estimated in Federal Budget 2021-22: Annual Budget Statementfor budget 2021-22 are Rs. 4497 billion against the total estimated expenditure of Rs. 8487 billion, which means fiscal deficit of Rs. 3990 billion. What makes the situation more painful is the fact that for bridging this gap, the federal government has forecast surplus of Rs. 570 billion from the provinces. In other words, they are incentivised not to spend money available under the 7th NFC Award in the most difficult days when millions need help from the provincial governments due to heavy financial toll of three waves of Covid-19 endemic. The other sources of meeting the huge fiscal deficit are: net external financing of Rs. 1246 billion; net internal financing of Rs. 2492 billion and privatization proceeds of Rs. 252 billion.

The expenditure side tells the real story of fiscal challenges faced by Pakistan, which are evident from the official figures released. Out of total current expenditure of Rs. 7523 billion, the debt servicing alone is Rs, 3060 billion whereas defence (excluding pension of Rs. 360 billion) is Rs. 1370 billion. In other words, the federal government after meeting these two expenditures will be left only with Rs. 67 billion. It confirms beyond that only entire federal public sector development (PSDP) expenditure of Rs. 900 billion but current expenditure to the extent of Rs. 7456 billion will be met from borrowing.

The loans for long term development programmes, if executed on time and aimed at adding to our sustainable growth, increase in GDP, income and employment generation, are desirable. However, as the above facts show, the PTI Government will be borrowing huge amount of Rs. 7456 billion to meet budget deficit that is arising out of total revenue minus total current expenses, excluding outlay for the development programmes that are usually cut or remain unutilized or delayed adding more cost and resultant more borrowing, leading to greater debt servicing that will cross the mark of Rs. 3 trillion as per Federal Budget 2021-22: Budget in Brief  and Annual Budget Statement.

The fiscal deficit in FY 2021-22 is estimated at Rs. 3990 billion, nearly Rs. 4 trillion (Table 2, page 7 of Federal Budget 2021-22: Budget in Brief). Even the primary deficit is of Rs. 360 billion[see Table 3, page 8 of Federal Budget 2021-22: Budget in Brief] in the next FY is estimated. The link to see all these figures is: http://www.finance.gov.pk/budget/Budget_2021_22/6_Budget_in_Brief_English_2021_22.pdf

It is obvious from the above that the rosy picture painted on TV talk shows, interviews and Press briefings by the fourth Finance Minister of the coalition Government of the Pakistan Tehreek-i-Insaf (PTI) are not based on any facts, rather the same speak otherwise. It is against the norms of democracy to hide the facts from the public. There is no truth in the claims of the coalition Government of the Pakistan Tehreek-i-Insaf (PTI) that it has achieved fiscal consolidation.              

The failure to tap actual tax potential by the federal government is highly problematic for the provincial governments. Dismal performance byFBR, it will not be able to collect Rs. 8 trillion in the coming two years and it will adversely affect the provinces, as they are overwhelmingly dependent on their shares under NFC Award.

Fixing of unachievable tax target for FBR is continuation of the past legacy of ill-directed, illogical, regressive and unfair taxes causing a dampening effect on the industrial and business growth whereas in the aftermath of negative economic impact of Covid-19 epidemic, Pakistan needs to do just the opposite. Sole stress on fixing ambitious revenue targets, without evaluating its impact on already troubled economy will certainly further destroy trade and industry. Majority of the measures announced in Finance Bill 2021 amounts to over-taxing the economy that is in deep recession. It is the worst one can think of, let alone justifying it on any grounds! The analysis of the same will be made in the next week column or when the Finance Bill 2021 is passed as it is subject to changes after debate. The Opposition parties instead of rejecting and just criticising the budget and Finance Bill 2021 must present better proposals (shadow budgets) as is the established norm of Westminster parliament form of government, we supposedly follow.  


The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE)

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