Emerging Picture of Federal Budget for FY2019/2020

Muhammad Arif

We are at the end of May 2019. It is almost the end of holly Ramadan for this year. But with the arrival of Eid on 5^th June, Federal Budget is due to be out on 10^th or 11^th of June 2019 with economic survey one day before giving a right or wrong picture of Pakistan economy. In Pakistan with poverty looking everywhere Federal Budget always appear like a horror film. This year technocrats of PTI are going to present this horror film. Let us see what it may contain with some proposals to make it somewhat in favor of this country.

For FY 2019 the budget outlay was Rs 6 trillion so arriving budget would be in the range of Rs 6.5 trillion. The provincial share would be likely around Rs 3 trillion. Overall expenditure equals to current and development expenditure that equates with total outlay. Here one cannot do much about current expenditures but cuts would come on Development expenditure.

So after giving share of Provincial governments, with remaining the government would have to proceed against payments of markup on domestic and external debt, foreign loans repayments with defense expenditure. Last year the defense budget was in the range of Rs 1.1 trillion. Running of Civil government was Rs 463 billion with payment of pension on Rs 342 billion (For defense Rs 260 billion and for Civil Rs 82 billion. For subsidies Rs 200 billion were proposed.

So as stated the federal and four provincial governments in 2019 have already proposed nearly Rs1.6 trillion for development spending for the next fiscal year, which is lower by Rs227 billion or nearly 13 per cent. Government states that federal PSDP will be used only to fund projects of national importance and added that the federal PSDP cannot be seen with the lens of province-wise allocations. Nearly Rs350 billion will be arranged from foreign lenders to finance the country’s development needs.

For 2019/20 the government has envisioned a subdued economic outlook with gross domestic product forecast to grow by 4pc. This year the GDP growth would remain within 3.5%. Hence the development program would come under a virtual freeze i.e. at the level of last year with Rs 675 billion.

For income the government looks set to reverse tax concessions extended by the PML-N government to benefit high-earning salaried and non-salaried individuals substantially more than the middle-class workforce. “We are considering reverting back to the income tax brackets applicable in the tax year 2017,” says government officials

Instead of enjoying zero tax, a nominal tax of Rs1, 000 for individuals in income brackets ranging from Rs400, 001 to Rs800, 000 and Rs2, 000 for individuals in income brackets ranging from Rs800, 001 to Rs1.2m would come in to play.

According to officials all these proposals regarding slab-wise tax rates and exemptions threshold are under consideration and a final decision will be taken by the cabinet. It is also being proposed that effective enforcement of proposed measures will help to raise extra Rs2bn from sugar and steel sectors in the year 2019-20. This drastic reduction in tax liability perpetuates the regressive character of the taxation regime in Pakistan and is against the global tax system. It must be understood that earlier reforms were also not just reducing tax slabs, but surrendering Rs90bn in taxes to high earners in the country.

Another proposal is also under consideration to decrease corporate income tax rates for small corporations. It is also under consideration to increase turnover tax for loss making companies to 1.25pc in the budget 2019-20. According to the officials there is also a proposal to phase out exemption in corporate income tax and in the personal income tax of non-salaried individuals and AoPs starting from 50 exemptions and gradually reducing the number to 45, 35 and 15 over the next three years. Three specific proposals are also on the table for review with phase wise reduction in BMR tax credit from 10pc to zero per cent under section 65B of the Income Tax Ordinance 2001 over a period of three years. Currently, the cost of this exemption is estimated at Rs88bn. Another proposal in consideration is to eliminate zero tax rating on export oriented industries to raise Rs 1500-1800 billion.

The elimination of profit on non-profit organizations under section 100C is also under consideration that would save around Rs7bn per annum. It has also been proposed to withdraw the tax exemptions given on new industrial undertaking and for those in the existing industries, the officials say. However it is also difficult for government to withdraw the concessions from industrial sector.

This year the Federal Board of Revenue (FBR) has collected Rs3.58 trillion during the first nine months of the current fiscal year of 2018/19. However it is still short of revenue target for the FY 2019.

This year Measures for Broadening the Tax Base would not be there as legislation to get tax from Services (Leaving aside corporate side), Agriculture, Whole sale and retail has not been done. New FBR chief is talking of Simplification of Tax Procedures but how it would be done is not yet clear. Further how they go for Reducing the Cost of Doing Business is not yet clear and Finally the issue of Resolving the Circular Debt Crisis touching about Rs 1.4 trillion also seems impossible as Pakistan creates 60% of its electricity by using oil and at this point we see no other alternative.

Pakistan’s total debt and liabilities has skyrocketed to Rs35.094 trillion till end March 2019 and government has to repay markup and face value of external debt to the tune of around $ 2 billion so it would bring immense pressure on budget.

In the first nine months (July-March) period of the current fiscal year the total debt and liabilities went up by Rs6 trillion, increasing from Rs28.879 trillion in June 2018 to Rs35.094 trillion till end March 2019. The total debt and liabilities in percentage of GDP have touched 91.2 per cent. The external debt and liabilities have crossed $105 billion mark till end March 2019. The country’s external debt and liabilities (EDL) has gone up to $105.841 billion from $95 billion during the first nine months of the current fiscal year of 2018/19, posing serious challenges on debt servicing in months and years to come. The EDL increased $10 billion under the tenure of the incumbent regime.

The disbursement of foreign loans has so far remained slow during the current fiscal year, but the reliance on foreign debts is on the rise owing to external account gap. Current account deficit, however, narrowed 30 per cent from $19 billion in the last fiscal year, and it is projected to fall to $12.5 billion till June-end.  The country also owes debt to Paris Club ($11.3 billion), multilateral and other donors ($27 billion) and international bonds such as Eurobond and sukuk ($12 billion). The country has also obtained commercial loans to the tune of $8.8 billion and a short-term loan of less than one year stood at $1.1 billion. The outstanding loan of the International Monetary Fund (IMF) stood at $5.765 billion. Pakistan and the IMF have recently struck a staff level agreement for a fresh bailout package of $6 billion that would pave the way for resumption of policy loans from the World Bank and the Asian Development Bank.

The country’s nine-month total fiscal deficit stands at Rs1.922 trillion. It was Rs1.48tr in the same period last year. So it would surpass Rs 2 trillion on end June 2019.

Currently Defense and debt servicing remain as fastest growing expenditure items. Defense spending picked up pace sharply in the third quarter, coming in at 2pc of GDP in nine months, while there is no precedent for defense spending going beyond 1.9pc of GDP even for the full year, in the past 11 years. For the full period running from July to March, defense spending rose by 24.1pc from last year, coming at Rs774.8bn compared to Rs623.8bn in the same period last year.

Current expenditure on the other hand amounted to 12.5pc of GDP in nine months that was the highest since 2008-09. Last year current expenditure was reported at 11.8pc of GDP that was also the highest in a decade. In absolute numbers, the current expenditure amounted to Rs4.798 trillion compared to Rs4.075 trillion last year.

Finally good news is that like previous year 10% increase in pay and pensions with 10% adhoc allowance and increase in utility allowance ranging from 3000-30000 for government employees are in consideration.