Budgetary outcome 2015-16

Fiscal operations of the federal and provincial governments in the first nine months of 2015-16 have recently been made public.

They reveal that the process of stabilisation is apparently proceeding satisfactorily. The consolidated fiscal deficit is estimated at 3.4 percent of the GDP as compared to 3.6 percent in the corresponding period of last year.

It is expected, therefore, that according to the official numbers for the year as whole, the fiscal deficit will not exceed 4.3 percent of the GDP, the target agreed with the IMF.

A number of questions can be asked about the reasons for this reduction in deficit. Is it due to exceptional performance in revenue collection and/or to containment of expenditure? Are there elements in the fiscal accounts which are either not transparent or inconsistent? Tax revenues have indeed shown extraordinary growth.

Federal tax revenues, including those collected by FBR, have increased by almost 20 percent, at a time when the nominal GDP is likely to grow by less than 9 percent.

As such, FBR is likely to come close to meeting its target for 2015-16. Perhaps it is not so well known that tax revenues of the Provincial Governments, especially of Sindh and Punjab, have risen by an even faster rate of 29 percent.

Overall, the tax-to-GDP ratio may rise by over 0.6 percentage points this year. However, the unfortunate development is plummeting of non-tax revenues at the Federal level by over 25 percent. Structural problems have emerged in this source of revenues.

First, State Bank profits have fallen due to lower mark-up rates.

Second, the precipitous fall in oil prices has implied lower inflows of dividends, windfall levy and royalties from the domestic oil sector.

Third, defense receipts, especially from the Coalition Support Fund, have been almost halved.

Fourth, other receipts are large at Rs 109 billion from unspecified sources.

In the presence of fast growth in tax revenues and a big fall in non-tax revenues, total revenues have shown modest growth of 10 percent.

This implies that the overall revenue-to-GDP ratio will remain, more or less, constant in 2015-16. Next year the focus will also have to be on enhancing non-tax revenues.

Turning to FBR revenues, the area of the concern is the increasing reliance on indirect taxes.

Direct taxes have shown growth of 15 percent in the first nine months, as compared to 21 percent in the case of indirect taxes.

Consequently, one third of the increase in revenues has come from direct taxes. This is in contrast to the budget estimates for 2015-16 which project that almost half of the increase in FBR revenues will come from direct taxes.

Clearly, efforts to broad base the income tax have failed. Current expenditure of the federal and provincial governments combined has shown a relatively limited growth of 6.5 percent, less than 3 percent in real terms.

However, costs of debt servicing have shown double-digit growth when the expectation was that they would remain, more or less, constant, in 2015-16, in the presence of substantially lower mark-up rates.

This has not happened because of the `lock in` effect of a bigger stock of PIBs accumulated in 2014-15, at relatively high mark-up rates. The big surprise is the fall in defense expenditure at a time when the Zarb-e-Azb operations are ongoing.

This expenditure was provisioned to increase by over 8 percent in 2015-16. The cut back is perhaps attributable to delay in releases so as to limit the deficit in the third quarter.

A positive feature of the budgetary outcome in the first nine months is the almost 25 percent increase in the development expenditure within the PSDP, 21 percent by the federal government and 28 percent by the four provincial governments combined, especially by Balochistan and Punjab.

However, the spending is still only 41 percent of the annual budgeted size of the national PSDP. The Government has apparently agreed to a big cut in development spending of almost Rs 360 billion with the IMF for the current fiscal year.

Also, only 3 percent up to now of the releases for development spending by the Federal Government is on CPEC infrastructure projects. The official estimates of the fiscal deficit for the first nine months are 4.1 percent of the GDP at the federal level and a surplus of 0.7 percent of the GDP at the provincial level.

The total financing is Rs 1009 billion, equivalent to 3.4 percent of the GDP. There is however, a statistical discrepancy of Rs 146 billion between the above and below line estimates of the deficit.

It may be noted that this is the largest statistical discrepancy ever, 137 percent more than the level on March 2015. The Ministry of Finance must offer an explanation for such large discrepancies.

The implication otherwise is that the budgeting process is beginning to break down. There is actually strong evidence that the borrowing level to finance the federal fiscal deficit is substantially higher. According to the State Bank of Pakistan, the increase in domestic debt in the period, June 2015 to March 2016, is Rs 1206 billion.

The MoF reports this magnitude at Rs 1008 billion, implying lower level of borrowing of Rs 197 billion. If the SBP estimate is valid, then not only is the statistical discrepancy completely eliminated but also the overall fiscal deficit rises to Rs 1428 billion, equivalent to 4.8 percent of the GDP.

As such, the annual target of 4.3 percent of the GDP has already been exceeded. Consequently, the annual federal fiscal deficit may approach 6 per cent of the GDP in 2015-16, even higher than the deficit last year of 5.6 percent of the GDP.

The provincial governments combined have generated a large cash surplus of Rs 221 billion as of the 31st of March 2016. This has contributed substantially to containment of the consolidated fiscal deficit.

However, by the 13th of May 2016 the surplus has come down sharply to Rs 83 billion. This represents a decline of Rs 138 billion in six weeks. The budgetary target for the cash surplus of provincial governments as of the 30th of June 2016 is Rs 297 billion.

As such, the provinces will have to increase their cash surplus by Rs 214 billion in the six weeks after mid-May. If not, then this will raise further the consolidated fiscal deficit in 2015-16.

The revised estimates for the full twelve months of 2015-16 will be made available in the federal budget documents on the 3rd of June 2016. This will include a projection of the budgetary outcome in the fourth quarter.

In the revised estimates for 2014-15, revenue receipts were over projected by almost Rs 300 billion in the last quarter, in order to present a better picture of the budgetary situation to the parliament in terms of a higher level of development spending and lower fiscal deficit. We hope that this will not happen again this year. –Business Recorder