A budget for stabilisation

After giving two mini-budgets since last August, the PTI government finally got a chance to present its full budget to the National Assembly on Tuesday. Surprisingly, the opposition’s conduct was fairly cooperative during much of the speech but then turned into rowdiness once the speech was almost completed. How the relationship between the treasury and opposition benches will play out in the remaining part of the budget session remains to be seen. We would underline that a cooperative atmosphere is necessary for the difficult times the country is passing through.

Before we review the new budget let us point out the key economic challenges that were to be addressed and see how far the budget has succeeded in laying a foundation for their resolution. First, there will be a record budget deficit, highest in many years. Both revenues and expenditures have missed their targets. On the revenue side, it seems the year will record the most dismal collection performance in the country’s history. Optimistically, the actual collections would be Rs3900 billion compared to the target of about Rs4400 billion, missing the target by a massive Rs500 billion and perhaps recording negative growth.

Second, the expenditure over-runs are significant, particularly in debt servicing – despite a major cut in the development expenditure. Third, a massive build-up of borrowings from the SBP has distorted the profile of public debt and contributed to rising inflation, besides constantly violating the relevant provisions of laws. Fourth, there is a menacing rise in circular debt in the power sector, and it is also rearing its head in the gas sector. Together, they are a major threat to fiscal stability. Finally, the cut in development expenditure has been a major reason behind low growth, so its protection is critical for ensuring moderate growth.

Viewed in this background, the budget, on the face of it, has indeed addressed some of the bigger challenges. The understanding reached with the IMF is largely reflected in the budget estimates. The main highlights include a primary fiscal deficit of 0.6 percent of GDP (or Rs245 billion). It is a measure of how precarious the economic conditions have become that the actual fiscal deficit budgeted at 7.1 percent compared to the revised deficit of 7.2 percent for the current year. If we subtract 0.6 from 7.1, we have 6.5 percent as the interest payments budgeted during the year. Last year, interest payments were 5.2 percent and in 2017-18 they were 4.4 percent. Clearly, an explosive debt accumulation was building which needed to be checked. The focus on primary deficit would help reverse this trend. From nearly 2 percent this year, it is budgeted to come down to 0.6 percent next year and would turn into surplus afterward – a condition that would ensure debt sustainability. The phenomenal increase in interest payments is the result of high interest rate, which was increased by nearly 600 pbs during the year.

The biggest reduction in primary deficit is coming from taxation, which is billed at Rs5550 billion compared to the revised estimate of Rs4150 billion (which is an over-estimate), an increase of about 32 percent (which would be 42 percent if the base is Rs3900 billion as mentioned above). What is laudable is that new tax measures are not dependent on increase in the tax rate of existing taxes, particularly such as increase in GST rate or maximum rate of income tax, which many had apprehended.

A number of measures are base-enhancing – though in many cases the rate of taxes has been increased where room existed. The removal of restriction on non-filers buying vehicles and property beyond a certain value is a very positive step. However, the focus of the tax policy should be to eliminate this distinction after some time by making effective use of information supplied by non-filers and encouraging them to become filers.

The expenditure side has limited flexibility in the short-run. The most significant is the freezing of the defence budget at last year’s level, which has easily saved at least Rs110 billion. The reduction of Rs30 billion by the civil government is also a good step. Development expenditure is pitched at Rs700 billion compared to the revised estimate of Rs500 billion for the current year. This is still below the spending level that the country had seen a few years ago, but given the massive cut applied during the year, it is a good beginning and more needs to be done in the next few years as fiscal space becomes available.

The government has also announced that it will stop additions in the circular debt within two years. Sizable allocations have been made for social protection, including BISP and other Ehsaas programmes, which would be helpful in partially mitigating the burden of adjustment on the poorest segments of the population.

The most significant development is the financing of deficit of Rs3137 billion. The largest share of financing will come from external sources budgeted at Rs1829 billion. This increased access to foreign resources would be made possible by continued adherence to the Fund programme. From domestic sources, the major financing will come from non-bank sources budgeted at Rs983 billion (of which Rs883 billion comes from national savings schemes and Rs150 billion from privatization proceeds). From the banking sources only Rs339 billion has been budgeted, all of which would come from commercial banks and none from the central bank. This is a major reform effort, as in the last three years, the government had accessed SBP financing without any restraint, leading to a huge build-up of SBP borrowings of Rs8.6 trillion until mid-May 2019 from Rs1400 billion on June 30, 2016.

The budget is a good statement of the economic policy the government plans to adopt to steer the economy away from stormy waters to placid shores. However, this is only a statement at the moment. Putting it into action would be a formidable task. We see a few risks that need to be mitigated. First, there may be slippages if the tax collection is not tightly supervised. In case there are revenue slippages, expenditures have to be further curtailed – otherwise, we may face the possibility of derailment of the programme. Second, committed policy actions at specified dates often become a victim of adverse political calculus. The resolve to implement the programme has to be preserved, for in such an eventuality programmes are usually aborted.

Finally, as we have been stressing all along, the success of this programme depends crucially on continued ownership and communication with the concerned stakeholders. They have been weak and need considerable strengthening.

The writer is a former finance secretary. Email: waqarmkn@gmail.com