Budget 2016-17

Several requests to the treasury benches and to members of the opposition for applause by Finance Minister Ishaq Dar during his budget speech reaffirmed his critics’ assessment of his desire to expand his circle of admirers from the Prime Minister and his immediate family to members of parliament.

Dar’s supporters, including those mandated to follow his lead by the Prime Minister, as has become the norm showed little interest in the budget speech but did dutifully thump their desks when so directed.

The small numbers attending from the opposition benches were exhorted by Dar to show appreciation because of the farm package but they remained singularly unmoved.

The question is does the budget 2016-17 merit any support from the treasury benches, members of the opposition, the general public or independent economists?

Dar’s own favourable assessment of budgetary proposals consists of three broad measures: package to exporters, farm package and assistance to the vulnerable. The package given to exporters (given the decline in exports this year) was urgently needed and included acceptance of their long standing demand of zero-rating for five major export sectors – textiles, carpets, leather, surgical goods, and sports goods – which would include purchase of raw materials, intermediate goods, and energy and a decline in export refinance mark-up from 3.5 to 3 percent.

There is no doubt that these measures would promote exports, however, what was extremely disturbing was Dar’s display of lack of knowledge of basic economic theory yet another year which dictates that exports are also a function of the exchange rate – a stronger currency acting as a disincentive to foreign buyers.

Instead he boasted during the speech that the currency remained strong and fell from 99 rupees to the dollar to 104.7 rupees to the dollar this Friday during the Sharif administration.

To restate the International Monetary Fund’s (IMF) data the rupee is overvalued from between 5 to 20 percent with independent economists’ maintaining that the over valuation is closer to 20 percent.

After announcing the farm package Dar turned to the opposition members with large farm holdings for appreciation. And at the risk of sounding too cynical the obvious reason would have to be that most of these measures are likely to benefit the rich landlords sitting in the country’s assemblies as opposed to small farmers – an assessment equally applicable on the 600 million rupee subsidy to Balochistan tube wells that has long been opposed by all donor agencies on the grounds that it benefits the rich Baloch farmers only.

The farm package included a reduction in price of urea Fertilizer (from 1800 rupees per bag to 1400 rupees per bag) and DAP (from 2800 rupees per bag to 2750 rupees per bag) with the federal and provincial government to dish out 18 billion rupees and 10 billion rupees respectively as subsidy.

Trolling the budget documents to find where Dar parked this subsidy item failed to reveal this mystery – it is not in the subsidy sector or in the grants and transfers section.

Enhancement in agriculture sector credit from 336 billion rupees to 600 billion rupees would, if past precedence is anything to go by, be hijacked by the rich landlords in spite of the budget’s decision to reduce mark-up by 2 percent for farm loans as well as sharing of risk of non-payment by the small farmers up to 50 percent of the financing especially if the collateral requirements require a guarantor.

Concessional electricity tariff for farm tube wells, lower customs for dairy, livestock and poultry sectors (though the tax on poultry feed tax has been raised) and exemption of sales tax on pesticides and silos are measures designed to promote farm output but again subsistence and even small farmers are unlikely to benefit.

The same would apply to fish farming promotion measures like reduction of custom duty on import of fish feed and on food processing cool chain storage and related capital goods.

Poverty alleviation allocations that prompted Dar to direct the treasury benches to show appreciation included a rise from 102 to 115 billion rupees for the Benazir Income Support Programme, a 2 billion rupee rise in allocation for the Baitul Mal and the Prime Minister’s Youth Business Loans to receive 20 billion rupees in the current year (one billion rupees or so lower than the revised estimates for the current year).

Would these measures be enough to reduce the number of vulnerable? These are insignificant amounts given the total budget outlay of 4394.7 billion rupees as well as a population of more than 180 million with no current available data on poverty with the census long overdue.

In addition, Public Sector Development Programme (PSDP) is budgeted to receive 1.67 trillion rupees – with federal PSDP at 800 billion and provincial at 875 billion rupees but given Dar’s reliance on borrowing as well as on a provincial surplus budgeted at 339 billion rupees for 2016-17 to meet federal deficit targets – up from this year’s total of 297 billion rupees – it is doubtful if the provinces would have met their budgeted social sector expenditure given their shortfall in terms of disbursements in the current year of 81 billion rupees.

Dar maintained that he would support amendment to the Fiscal Responsibility and Debt Limitation Act that would ensure that the 60 percent limit is achieved in the next two years however public debt in the outgoing year was 64.8 percent of GDP against the budgeted 62 percent and is budgeted at 61.4 percent for 2016-17 which is unlikely to be achieved given that domestic permanent debt at 473.8 billion rupees in the revised estimates for 2015-16 is budgeted to rise to 1.476 trillion rupees in 2016-17 and with repayments to IMF and Aid to Pakistan consortium due from 2017.

Current expenditure is to rise from the revised estimate of 3.59 trillion rupees (up from the budgeted 3.48 trillion rupees) in the current year to 3.84 trillion rupees in 2016-17.

And the main item responsible for this rise is the increase in mark-up as it was in the current year: mark-up payments were budgeted at 1.279 trillion rupees in the current year and the revised estimate was 1.315 trillion rupees with the unrealistic understated amount of 1.36 trillion rupees budgeted for next fiscal year given the much higher reliance on borrowing from the foreign commercial sector – from 190 billion rupees this year to 443.8 billion rupees in 2016-17 (minus 47.6 billion rupees budgeted to be procured from Islamic Development Bank) that would include sovereign bond and sukuk issues at rates well above the market rate given that previously 8.5, 7.5 and 6.5 percent rates were applied for Eurobonds for 10 and 5 years and sukuk respectively.

One has learnt to expect from the Dar-led ministry blatant data fudging and relocating items in expenditure as well as revenue collection heads to show better performance than is in fact the case.

However Haroon Akhtar Khan, a straight shooter and appointed after much political negotiations as the Prime Minister’s advisor on tax matters, did disappoint considerably as he simply toed the Dar line in enhancing withholding taxes on consumer items/services which are in the sales tax mode and therefore not appropriate to be put under direct tax collections.

The budget envisages 1.53 trillion rupees from direct taxes with the share of withholding taxes close to 75 percent of the total.

Haroon Akhtar Khan also failed to recommend appropriate measures to deal with billions of dollars by Pakistani residents stashed legally as well as illegally abroad and focused on taxing the already taxed which effectively was the general public including the recipients of support from BISP and Baitul Mal. Sales tax is budgeted to generate 1.43 trillion rupees whose incidence is greater on the poor relative to the rich (from 1.2 trillion rupees in the revised estimates of 2015-16).

To put it facetiously, one wonders what changed his views from his pre-advisor days when he would suggest massive reforms in the Federal Board of Revenue that would increase its capacity instead of relying on withholding agents to collect taxes.

The tax net, contrary to what is maintained by Dar-Haroon Akhtar Khan duo, will not broaden and with a 15.3 percent budgeted rise in tax collections in 2016-17 growth would be stifled (budgeted at the optimistic rate of 5.7 percent), given the continuing focus on deficit reduction – budgeted at 3.8 percent for 2016-17 as opposed to 4.3 percent achieved in the current year.

To conclude, Dar once again exhorted the opposition not to play politics on economics but to agree on a charter of economy – a demand bordering on the ridiculous for the simple reason that while the economic objectives of all parties are the same yet the way to achieving these objectives differ markedly giving each political party its unique support base.

Source: Business Recorder