Last year’s budget


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As I have grown older, and hopefully wiser, my fascination for the common Pakistani’s passionate preoccupation and curiosity with the annual budget exercise has grown exponentially. Predominantly because, over time it has become abundantly clear that, barring a few, in fact very few, Pakistanis are generally clueless ab initio about the exigency of the budget and its utility. In a nutshell, the budget essentially is the government predicting what it will be able to snatch from its hapless subjects, referred to as taxes, coupled with what it will be able to borrow from lenders, domestic and international, against its ability to snatch more in the future from its subjects, and how will it enjoy these spoils.

Trying to predict the future, however, is generally an utter waste of time and effort, and considering that our government’s historic track record over decades about predicting the future is nothing to write home about, it would be ill advisable to carry out an analysis of what will never be; Que ne sera ne sera. On the other hand, we all know that hindsight is 20/20 and that the best practise in the public sector globally, inclusive of the infamous international organisation dealing in finance, about any future economic forecast is to take last year’s numbers, insert formulas on an excel sheet and click enter; accordingly our energies will perhaps be better utilised in trying to study the Revised 2016-17 numbers, included in the Federal Budget 2017-18- Budget in Brief (the Brief).

However, before moving on, a common sense clarification for all my countrymen worried about how much more they will have to pay in taxes next year. Taxes, Dear Readers, are a zero sum game; governments all across the world, especially in democracies, take from its common citizens the fruits of their hard labour and give it to the rich in the form of monopoly rights or contracts for supply. The proof of this common sense, but perhaps aptly articulated statement, lies in the colossal increase in income inequality across the globe over the last few decades, unquestionably in the oldest democracy of the world which in fact coined the term “One percent”; the rich get richer and the poor get poorest. Even in Pakistan’s case, last year’s indirect tax revenues were 63% of total revenue receipts; and while the Brief does not provided the relevant details, on a ball park estimate basis, inclusive of withholding taxes, which are in reality indirect taxes posing as direct, this ratio could be around or above 85%. Indirect taxes are regressive, which means that the poor and the rich are equally impacted by them.

According to the Brief, the government plans to spend 5% more in the coming year compared with what it spent last year, which in substance translates into an equivalent increase in cost of living of the common Pakistani next year in the form of taxes alone. Considering that inflation is expected to go up as well, my guess is that disposable incomes of the middle and lower classes may suffer a negative impact of around 10%. I am aware that the pundits will challenge this common sense conclusion; however I take comfort in knowing that even they cannot predict the future, and that in this case, history is on my side! Time will deliver the final judgement in due course.

The second most eye catching number in the “Summary of Estimates for 2016-17” included in the brief is Bank Borrowings of Rs 741 billion. According to the data available on the State Bank of Pakistan (SBP) website, the increase in Central Government Debt since 30June 2016 till 31 March 2017 stands at Rs 1.2 trillion; optimism aside, the expectation is that this number would have increased further by May 2017. Diving into the details included in the Brief and adding Bank Borrowings; Permanent Debt, Prize Bonds and Treasury bill included in capital receipts; and project loans, programme loans, other aid from commercial banks and others included in external resources, total borrowings jump to Rs 1.98 trillion. As pointed out at the beginning, central government debt can only be paid through future taxes. According to the SBP, at 31 March 2017 Central Government Debt stood at a towering Rs 20.25 trillion; someday, and that day will come sooner or later, we will have to tighten our belts to cough up this money.

The popular view, if you talk to your fellow countrymen about this ever increasing debt, is that the lenders are fully aware that Pakistan can never pay this debt and hence there is nothing to worry about. Ignorance is not bliss in this case, and I at the outset apologise for bursting this utopian bubble in which my fellow countrymen feel secure in; in my defence I am of the view that it is far better to prepare for the future, compared with burying your head in the sand. Once again a detailed review of the Brief, and adding mark-up payments and foreign loan repayment included in Current Expenditure, plus Disbursements and “Government Bai-Maujjal Ijara Sukuk” included in Net Capital Receipts, result in the realization that total debt servicing payments for last year stood at Rs 2.2 trillion. Dear Readers, we have to, and we are paying our debt!

This amount is 85% of combined net revenue receipts of the Federal Government after giving the provinces their share under the National Finance Commission (NFC) Award. The leftover balance is not even sufficient to meet 40% of Defence expenditure which, inclusive of military pensions, crossed a trillion last year. In fact the remaining amount of capital receipts and revenue from external sources are not sufficient to completely meet the leftover defence outlay. No point going into history any further, everyone can probably draw their own conclusions.

Since I am not a supporter of GDP, I see no point in discussing the various ratios and benchmarks associated with that particular indicator. Except that if we actually believe that there exists a sizeable informal economy in the country, then notwithstanding the debate on whether GDP is useful or not, any analysis limited to the documented economy arguably is an exercise in futility.

Notwithstanding all of the above, I am an optimist and sincerely believe that Pakistan is blessed with ample resources to sustain economic shocks from time to time. I also subscribe to Keynesian school of thought, a theory of total spending in the economy (called aggregate demand) and its effects on output and inflation, which perhaps is what the current Government seems to be pursuing. The strategy to borrow and spend on infrastructure demands prudence; to prevent pitfalls, projects need to be selected carefully and monitored proactively. Going forward the debt can only be paid through productive investments; the party ends when the spending ends. Ultimately, a lot depends on the benefits Pakistan can derive from the CPEC.

(The writer is a chartered accountant based in Islamabad. Email: