Finance Bill 2021 presented on June 11, along with the budget by the fourth finance minister of the PTI government can never achieve the sustainable growth he claims.

The International Monetary Fund (IMF) wants the government to collect nearly Rs 6 trillion for the year 2021-22. Finance Minister Shaukat Tarin’s claim that we are “close” to the IMF demand is correct. The real challenge is not on the revenue side, it is on the expenditure side.

The Federal Board of Revenue (FBR) has shown satisfactory performance during the past year but even then funds are not enough to meet the current expenditure, what to speak of funding a development outlay of Rs 900 billion proposed by the government. The simple calculation from the facts provided in Federal Budget 2021-22: Budget in Brief and Federal Budget 2021-22: Annual Budget Statement, expose the claims of fiscal consolidation. These are narrated below:

The total current expenditure is Rs 7,523 billion

Debt servicing alone is Rs 3,060 billion

Defence, excluding military pensions of Rs 360 billion, is Rs 1,370 billion.

The federal government is thus left only with Rs 67 billion. This means that not only the Rs 900 billion public sector development programme (PSDP) but also the Rs 7,456 billion will be met from borrowings. What is the position of fiscal deficit? The following are official figures:

Total net revenues (tax and non-tax) of the federal government after transfers to the provinces under the 7th National Finance Commission (NFC) Award and other direct grants for FY 2021-22 is Rs 4,497 billion.

Total expenditure (current and developmental) is Rs 8,487 billion.

Fiscal deficit is Rs 3,990 billion.

The picture is crystal clear: more borrowing, nearly Rs 4 trillion, is needed in the FY 2021-22. It is surprising that the federal government has forecast a Rs 570 billion surplus from the provinces. In these testing times, when the overwhelming majority of the population is in dire need of financial support from the provinces, the federal government has the incentive to spend nothing on necessary provincial development programmes, what to speak of helping the poor. How can it be justified for the federal government after transferring funds under the 7th NFC Award to ask the provinces to show surplus? How can it be justified for them to oblige?

The provinces must spend the revenues – tax or non-tax - to restore the economy reeling under pressure from Covid-19 and move towards growth. The federal government has blatantly violated Article 160 of the Constitution to keep fiscal deficit within the limit agreed with the IMF. What makes the situation even more painful is the fact that oppressive taxes – including a 17 percent sales tax – are proposed from July 1 on items including wheat, flour and sugar. The levy on petroleum products will lead to an enormous cost for all sectors.

Farmers use diesel oil for tractors that are also used for transportation. High food inflation, rising food security and cost-push inflation in the end will result in slowing of growth. Taxes are meant to be spent on the welfare of the masses and not to be kept in the kitty by provinces in the most difficult days when millions of people are jobless. Why should provinces show a surplus when millions need financial help to mitigate the heavy financial toll of three waves of Covid-19 pandemic?

The budget is anti-growth, anti-poor and inflation-prone. Besides relying on the Rs 570 billion ‘surplus’ from the provinces, the fiscal deficit will be met through:

net external financing of Rs 1,246 billion;

net internal financing of Rs 2,492 billion; and

privatisation proceeds of Rs 252 billion.

The first and the last estimates are mere expectations.

There is nothing in the Finance Bill about raising revenues by lowering tax rates and broadening the base. With a meagre growth of below 4 percent in the current fiscal year and the hope to achieve 5 percent in the coming year, one cannot improve tax-to-GDP ratio to meet even half the projected fiscal deficit of Rs 3,990 billion (it can go further up once the FBR fails to achieve its target of Rs 5,829 billion for the FY 2021-22.

Even statistics like growth rate and per capita income are manipulated to paint a rosy picture. Even the primary deficit estimate for FY 2021-22 is Rs 360 billion.

“The provisional GDP growth rate for FY 2021 is estimated to be 3.94 percent against the targetted growth of 2.1 percent through the policy initiatives undertaken during FY 2020-21”.

Reality check: See the comparison between Pakistan and Bangladesh by none other than by the State Bank of Pakistan in its first and the third quarterly review: The State of Pakistan’s Economy for fiscal year 2021-22. Bangladesh, facing the same challenges as we do, is going to grow by 6.8 percent by the end of June 2021. Even with manipulation of the base and other gimmicks, we will reach 3.94 percent at best.

The per capita income figure, we all know is taken using the population according to the 2017 census. What a mockery!

All said and done, the official document is an eye-opener. Here is a summary of tax expenditure 2021:

“Tax Expenditure Report 2021 for federal taxes, based on data pertaining to FY 2019-20, amounted to an estimated Rs 1,314.27 billion. Tax expenditure in sales tax amounted highest at Rs 578.46 billion (44 percent of the total), while expenditure in income tax amounted to Rs 448.05 billion (34 percent), and in Customs, to Rs 287.77 billion (22 percent). During the fiscal year 2019-20, FBR’s tax collection was Rs 3,997.4 billion. Hence, tax expenditure to total collection ratio came to about 33 percent. The tax expenditure to GDP ratio stood at around 3.2 percent.”

A majority of the measures announced in Finance Bill 2021 amount to over-taxing an economy that is in deep recession with huge tax benefits for vested interests. The burden has been shifted to the salaried class by taxing their medical facility/allowance.

The writers, lawyers and  partners in Huzaima, Ikram & Ijaz, are adjunct faculty at Lahore University of Management   Sciences (LUMS), members of the Advisory Board and visiting senior fellows of Pakistan Institute of Development Economics (PIDE)