Budget FY17 limitations


WEB DESK: The Finance Ministry bureaucracy has frequently maintained that there are limitations on the capacity of any administration to manipulate the expenditure side of the budget; while revenue generation is determined by the capacity of the government to generate the budgeted tax and non-tax revenue and to plug the gap between expenditure and revenue through foreign and domestic borrowing – concessional and what is procured from multilaterals at market rates and borrowing from the domestic as well as foreign commercial banking sector.

On the expenditure side it has to be acknowledged that the government has little if any capacity to slash the demand for defence spending in any given year, a condition that is more evident during civilian governments as opposed to a military dictatorships. The reason cited maybe an ongoing operation against terrorists for example the Zarb-e-Azb which, understandably, has an overwhelming support of the general public or due to the prevalent political ground realities in this country.

In the budget for fiscal year 2015-16 total defence allocation (including military pensions) was around 27.5 percent of total current expenditure and 23 percent of total outlay. In 2012-13, total defence allocation was 24.6 percent of current expenditure (including pensions) and the rise is easily attributable to the launch of the operation Zarb-e-Azb. Debt servicing, another expenditure that the bureaucrats claim that the political government has little control over was estimated at 45.8 percent of total current expenditure (including foreign loan repayment) and 39 percent of total outlay in the current fiscal year.

However, the PML (N) government raised domestic debt from 14.3 trillion rupees (inherited in 2012-13) to 18.85 trillion rupees in December 2015 (and this in spite of the Finance Minister’s repeated claims that as procuring foreign debt was cheaper at present given the low rates of interest in the West he had changed the debt profile of the country by retiring domestic debt in favour of foreign debt). Foreign debt was 60.9 billion dollars in 2012-13 (inherited) while it rose to an alarming 68.5 billion dollars by December 2015 and to add to concerns is the fact that Dar has increased reliance on foreign debt procured from the foreign commercial banking sector and as per data released by the Economic Affairs Division the budgeted 200 million dollars under this head stood at 1.4 billion dollars by May this year.

This heavy reliance on foreign debt is a source of serious concern as Dar has failed to take account of the average annual erosion of the rupee. Current expenditure is also not manoeuvrable by politicians, or so argue the bureaucrats. In this context, it is relevant to note that in 2012-13 total current expenditure was budgeted at 2.6 trillion rupees while it was budgeted to rise to 3.48 trillion rupees in the current year – a rise of over 800 billion rupees in just three years. And this in spite of the fact that total subsidies declined from 208.5 billion rupees in 2012-13 to 137.6 billion rupees, an outcome of the International Monetary Fund programme.

The rise is mainly attributable to debt servicing/repayment (from one trillion rupees in 2012-13 to 1.59 trillion rupees budgeted in the current year), and running of civil government – from 239.8 billion rupees in 2012-13 to 326.3 billion rupees in the current year. Tax revenue generation has increased from 2.5 trillion rupees budgeted in 2012-13 to 3.4 trillion rupees in the current year’s budget; however, this required shifting some items from non-tax revenue to other taxes (notably the gas infrastructure development cess which increased from 30 billion rupees envisaged in 2012-13 to a whopping 145 billion rupees during the current year), and budgeting the auction for 3G/4G licenses for the second year in a row (at 65 billion rupees) as well as privatisation proceeds of 50 billion rupees – revenue unlikely to be met.

This accounts for inordinate delays in refunds, collection of advance tax from large taxpayers’ units which in turn leads to liquidity issues within the productive sectors and, by some accounts, partly explains the decline in exports and the low growth rate compared to other countries in the region.

The Finance Minister has also repeatedly been accused of overestimating the growth rate which implies revenue is overestimated at the time of the budget and requires borrowing from the commercial banking sector at high rates of return – both domestically and from abroad. Be that as it may, the 2016-17 budget would be the last IMF compliant budget with the last tranche release due in September this year.

It is perhaps fair to say that there would be no mini-budgets to meet the unrealistic budgetary revenue targets next fiscal year and with the administration gearing up to divert public opinion from the Panama leaks to development as well as the approaching 2018 elections development outlay is expected to witness a highly significant increase post-September and the budgeted revenue may incur a greater shortfall than in the past years given that the traditional PML-N support is the industrial/trade sector. In short, which ever government comes to power in 2018, going on another IMF programme seems very likely. -Business Recorder