Budget 2018/2019: Populist approach to create issues for next government

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KARACHI: Overall the budget seem a ‘popular budget’ which was expected because of the election year. It was expected that government will adopt populism practices to give short term benefits to the public.
It is clear that the populists approach in the budget to provide immediate relief to the common peoples may create issues in three different dimensions.
These included:
(1) the reduction in public revenues and allocation for public welfare projects will certainly increase the deficit financing, which will lead to excessive borrowing and expansion in money supply. In this way the burden of ‘populist measures’ will be transferred to the future. In short it is an attempt for improving short term at the cost of long term;
(2) if incoming government wants to change the budgetary measures to avoid from deficit financing, it will not be possible. Because withdrawal of funds from development of welfare projects, increase in tax rates, decrease in salaries or pensions will not be workable options for any democratic government. Such steps will defame the incoming government and no government will take such a risk;
(3) The historical highest bank borrowing (more than one trillion rupees) will create problem for the private industrial sector of the economy. Private sector will has to face liquidity crunch and ultimately it will not be good for the capital market. For repayment of the banks’ loan the incoming government has to increase its tax collection and further tax will have to be imposed. It seems that government has deliberately transferred the heavy burden on the incoming government, which is an indicator that present government is not expecting its victory in the coming elections.
Reduction in taxes including significant decline in the income tax on individuals, decline in corporate tax rates to arrive it at 25 percent in 2023, reduction in tax on dividend income by 7.5 percent, exemption of income tax on bonus shares, and gradual abolishing of super tax on financial institutions are the important measures to reduce the burden of direct taxes.
Abolishing the FBR valuation of properties for tax purposes and introducing one percent adjustable tax on the sale/ purchase value of properties is another relaxation in the direct taxes.
Exemption of sales tax on fisheries, reduction in import duties on LNG, medicines, medical equipment and computers accessories are also important measures to provide relief to middle income group peoples.
It is noted that the focus was on the reduction of taxes instead of providing the subsidies to provide relief to some segments of the economy. For instance reduction in tax liabilities on the construction of hotels to promote tourism activities, tax reduction to films’ industry to promote entertainment activities and subsidies on fertilizer to support agriculture economy etc. However, it was categorically mentioned that subsidies to agriculture sector should be provided by the provinces as agriculture is a provincial subject and tax on agriculture income is also collected by the provinces.
Like previous routine and practices in Pakistan it has been noted that supporters of ruling party has tried to portrait a rosy picture of the budgetary measures, while opposition parties have criticized the steps taken by the government. The majority of commentators, analysts and discussants refer and rely on the ‘Salient Features’ described smartly by the Ministry of Finance. Nobody tales pain to read and analyze the budgetary documents to reveal the facts between the lines.
There are several aspects in the present budget which indicate unusual drastic changes in the direction of fiscal policy. One of these measures is the plan for heavy borrowing from commercial banks to finance fiscal deficit. According to budget documents, government has planned to borrow more than one trillion rupees from commercial banks.
This heavy borrowing from commercial banks indicates the government intention to utilize public money for deficit financing. Obviously it will provide an easy option to banks to lend the public money to the government. This lending will be safest from the bankers’ point of view as it provides handsome risk free rate of return. Consequently, public savings will not be transformed into investment and industrialization in the country through ‘Banks’ Credit to Private Sector’.
This is the highest planned bank borrowing in the history of Pakistan. This magnitude of planned public borrowing form commercial banks is greater than annual borrowing by private sector in the country. The budgeted quantum of bank borrowing was Rs.228 billion in fiscal year 2014-15, Rs.283 billion in 2015-16, Rs.452 billion in 2016-17 and Rs.390 billion in 2017-18 (though actual borrowing was Rs.586 billion). However this year government has planned to borrow Rs.1015 billion from the commercial banks. This step has been taken at the time when Pakistani banks should be prepared for competition with the Chinese and other international banks in Pakistan.
This budget seems depart from the previous practices of this government. The last 5 budgets have been showing tightening through taxation measures but the present budget shows ease in taxation policy as various relief measures have been provided through softening in taxation policy.
At the same time it was noted that subsidies and funds have been provided for K-Electric, improving supply of water in Karachi, electricity for tub wells in Baluchistan etc. 10 percent increase in pensions and salaries of government employees is another important but good initiative which indicate element of ‘populism’ in budget. Based on all these initiatives it seems a ‘pro urban middle income group’ budget, which is good step and depart from the history of fiscal policies in Pakistan.
The budgetary statistics show that the direct-indirect taxes ratio (40:60) will remain constant in the next year. However, inflation will increase to 6 percent which is higher than the inflation in current and last two fiscal years. Based on the predicted growth in GDP, 13-14 percent growth in tax revenues and 6 percent rate of inflation, one can conclude that tax-to-GDP ratio will remain unchanged.
From the development planning point of view this budget is not matched with the ‘Economic Vision 2025’ prepared by the Planning Commission of Pakistan. Even it does not have consistency with the 5 years’ plan (Medium-term Development Framework). Furthermore it has not provided any solution or measure to solve the current economic issues which are being faced by the nation. It does not address the dire need of FDI, enhancement of exports, enhancing the contribution of Pakistani industrialists in CPEC related projects, reducing of poverty and unemployment on sustainable basis, improving business competitiveness, easing doing business indicators, improving economic governance, control over corruption, and achieving sustainable higher growth in GDP and its trickledown effect on lower income groups.
The targeted rate of GDP growth is 6.2 percent, while there is no disagreement that the minimum required rate of growth is 7 percent for the survival of the national economy. Any growth less than 7 percent will not provide any relief to the common people.
At less than 7 percent rate of growth there is no possibility of reduction in unemployment or poverty level. It is notable that 7 percent is historical growth rate of Pakistan’s economy.
In 1950s, 60s and 80s this was the annualized growth rate of the economy even after 2000 the country has achieved this growth rate. It is surprising that in many speeches and documents government has referred last 13 years for the comparison of this year. Last 13 years was not an exemplary period. Why 2017-18 is being compared with the last 13 years only?
(Dr. Ayub Mehar: The writer is Professor at Iqra University and former Director General of Research Department, Federation of Pakistan Chambers of Commerce and Industry)