Economists weigh in on federal budget FY25

After the Pakistan Muslim League-Nawaz-led coalition government presented federal budget 2024-25 with a total outlay of Rs18.9 trillion, prominent economists have analysed the strengths and weaknesses of the financial blueprint unveiled by Prime Minister Shehbaz Sharif’s administration for the much-needed economic recovery.

No 'appetite for reforms'

Former Khyber Pakhtunkhwa (KP) finance minister Taimur Salim Jhagra, while talking to Geo News on Wednesday, said that he sensed no "appetite for reforms" in the federal budget.

He added that the incumbent government took some difficult steps due to the “pressure of the International Monetary Fund (IMF)”. He also pointed out that the federal government made some announcements in the recent budget which "lacked logic".

Commenting on the government’s decision to end GST exemptions, Jhagra questioned how inflation can be maintained at 12% when more than 40% of revenue targets will be achieved from tax and non-tax measures and the elimination of tax exemptions.

Jhagra added that he was not criticising the incumbent government’s steps for ending the tax exemptions but the “lack of logic”.

The ex-KP finance czar added that the hike in salaries of government employees from 20% to 25% from Grade 1-22 workers would give an impact of around Rs1 to R1.5 trillion to the national exchequers amid a severe fiscal situation.

He criticised that if the country is paying around Rs10 billion as interest then how was the PML-N administration justifying its step to hike the salaries of the government employees which would increase a huge financial burden on the exchequer besides soaring the expenditures of the provinces?

He, however, praised the federal government’s “disingenuously” pension reforms’ agenda announced in the federal budget which covered the new employees under the contributory pension plan as they would not be given pensions for 40 years.

Jhagra detailed that only the federal government will have to spend Rs1,000 million in terms of pensions which would soar to over Rs2,000 million on the national level after including the provincial government workers.

Efforts towards fiscal consolidation

Topline Security Chief Executive Officer (CEO) Mohammed Sohail, while commenting on the federal budget, told Geo News that the budget seems to be like the previous one as the incumbent government is making efforts towards fiscal consolidation without very “tight or expansionary” steps.

In line with the IMF guidelines, the federal government targeted a 1% primary surplus and a “modest” 3.6% GDP growth, unlike the previous governments which eyed 5-6% growth and later failed to achieve it. Sohail praised the government’s intention for a “gradual and modest” recovery of the national economy as per the IMF’s aspirations.

However, he questioned the achievability of the government’s revenue target of Rs12.9 trillion despite the announcement of several tax exemption measures including the petrol-diesel levy, hike in taxes on cement, mobile phones, non-filers, retailers and others.

Sohail said that the federal government could easily collect Rs800 to Rs1,000 million through its new taxation measures, however, it needed to be precisely calculated to achieve the remaining Rs700 to Rs800 million.

He said that the revenue targets set by the government were seemingly on the “higher side”, however, the incumbent administration would manage to meet the IMF’s 1% surplus target for Pakistan — which is around Rs1,100 to Rs1,200 million without the inclusion of 9.7% of interest — after curtailing PSDP and other expenditures like the previous government.

The Topline Security CEO expressed hopes that the government’s steps unveiled in the federal budget 2024-25 increased the chances of the country to pave the way for an IMF long-term plan which would help stabilise the currency and control inflation.

Questions on real estate FED

Former Federal Board of Revenue (FBR) chairman Shabbar Zaidi, while commenting on the federal budget in the same programme, gave remarks against the federal budget in terms of the government’s taxation measures.

He predicted that the imposition of taxes — from 40 to 45% on the sale proceeds — would hardly hit the country’s exports after lifting all exemptions. Shabbar also auspicated that the federal government will find no option other than withdrawing its decision for exporters in the coming days.

The ex-FBR chairman also questioned the legality of the imposition of federal excise duty (FED) on the real state for taxing the trade of plots as no constitutional provision allows the government to adopt such a decision.

Shabbar was of the view that the federal government should have unveiled a long-term plan for phase-wise expansion of the tax net.

'More aggressive tax policy'

Economist Maha Rahman told Geo.tv: “Despite some drawbacks, my initial reaction on this budget is that it has brought in a fresh perspective on certain aspects of the economic policy. First and foremost is the solid commitment that the tax net will be widened by taxing the non-taxed populace and not burdening the already burdened.”

“The taxes for non-filers have been visibly increased. Very welcome is the revised menu of real estate taxes. One change that I had hoped to see was increased incentive for the service sectors to file and that is still yet to be seen. I had personally hoped for a more aggressive tax policy but this is still a good start,” she analysed.

“The budget has also made allocations for digitisation and automation to improve performance and save costs. This is a welcome step as is the focus on Information Technology. But parks alone will not increase IT productivity and exports.

We need to build the right human capital and solid country-wide infrastructure that will propel this forward. Also welcome is the increase in the BISP budget by 27%, the focus on building climate resilience, bringing in climate financing, increase in budgetary allocations for SMEs, an allocation of 206 billion for building water resources and the focus on curtailing the circular debt,” said Rahman.

“On the flip side, the increase in the development budget remains unaccounted and unexplained for. We had hoped to hear of more concrete measures that will boost productivity. But we can hope for revised policies at the Federal level to complement this budget that will propel the industry forward,” she concluded.

Revenue stability and expenditure jump

Economist and analyst Sana Tawfiq emphasised the evident expectations drawn from the budget 2024-25. It highlighted the same measures which have been in discussion for the success of the IMF programme, she added.

First of all, she indicated the prosperous increase in the revenue which was targeted at Rs9.4 trillion in the previous year, however, it has jumped to Rs12.97 trillion which is nearly Rs13 trillion for the current fiscal year.

“This is a significant jump and is an over-ambitious target for the FBR to collect revenue,” she said.

In order to carry out this target, the analyst said, the government could be seen taking steps by applying taxes on the areas which are under-taxed or untaxed.

The government has also increased the taxes on non-filers as well as taken stringent measures on them, she said, adding: “Which I think is appropriate.”

She also said that apart from this, there are impacts on other segments as well. “For example, the target of PDL has been increased from 60 to 80 which will apparently impact the masses.”

Drawing a contrast between revenue target and expenditure jump following the revelation of the budget 2024-25, Tawfik highlighted a prominent economic worry.

“Expenditure has increased from Rs13 trillion last year to Rs17 trillion as of now. This is almost a 29% increase.”

The economist further said that at one point we are talking about “fiscal consolidation”, where expenses are cut down, however, the budgeted number for the expenditure is still at a higher end.

Income tax reform

"In the first part of the budget, one acknowledges the intent of the authorities to move on a number of reforms, including the personal income tax reform and trying to talk about the regulatory reforms that are needed in the country, " a senior economist and former adviser to the Ministry of Finance Dr Khaqan Hassan Najeeb told Geo.tv.

The economist said: "The two good things are that, of course, to give good food at the schools in Islamabad and then provide training for number of kids is always a welcome measure."

The former adviser, while explaining the details said: "You see that the pensions [budget] increased to 1,048 billion. You see a very minor intent on the privatisation as far as the numbers are concerned, of only rupees Rs30 billion."

"The non-tax revenue of course goes up as the petroleum levy goes up. Then there is intent on changing the personal income tax regime, with the slabs being changed. Another Rs75 billion there. Then there are the tax exemptions and concessions to be taken off the sales tax as well as the customs with another 450 billion."

The public policy adviser further stated: "A big ticket item is, of course, where the exporters are now brought into a normal tax regime. Our only concern would be if the exporters have been taken into confidence. A good measure is to have capital gains of 15% without a holding period on the property and hiking up the non-filers to 45%."

Dr Najeeb also noted: "However, once uncomfortable with the fact that there is not much done on the direct taxation of the big wholesale and retail sector of Pakistan, not much changed on the NFC and agriculture income tax, which are all areas where tax gaps exist."

He further said that in terms of the clear relief measures, The Benazir Income Support Programme (BISP) budget increased to Rs593 billion.

"We also see the number of beneficiaries go up to 10 million," he said adding the wages and pensions have also been increased.

"There is a big jump in the PSDP, which seems quite big considering it is almost doubling from the budgeted PSDP this year. One hopes that with the intent to spend on the projects which are 80% complete, we will be able to push some of the soft and hard infrastructure in the country. So one takes that as a welcome step."

But maybe at a stage where everything has to be borrowed, Najeeb added that one has to be very careful on this huge increase and maybe the whole of this spending, would not occur going forward.