Back to February 28
Variation between revised and final Budget numbers has grown
The government on Friday released the provisional actual numbers for government revenue for the fiscal year 2019-20. They differed greatly from the estimates used by Finance Minister Nirmala Sitharaman when she presented the Union Budget for 2020-21. The fiscal deficit in 201920 is 4.6 per cent of gross domestic product (GDP), according to the provisional actuals, as distinct from the revised estimate for 2019-20, which was 3.8 per cent. This came about because the revised estimates in the Budget severely overestimated the government’s tax revenues. Gross tax revenues were supposed to grow by 4 per cent in 2019-20 over the previous year; but the provisional actuals show that they have in fact declined, by as much as 3.4 per cent. Thus, even over the revised estimates, there has been a tax revenue shortfall of over ~1.5 trillion.
Sensible and trustworthy budgeting is impossible with such sharp revisions. Given the extraordinary difference between the Budget numbers and actuals for 2019-20 that has now been revealed, how can the latest numbers for 202021 — which project a 22 per cent increase in corporation tax, for example — be believed? The problem is that the Union Budget is now produced and presented too early in the financial year for safe projections to be made. If the experience of the last two years is to reveal anything, then it is that moving the date of the Budget from February 28 to February 1 was a mistake. This shift has required the finance ministry to estimate the full year ’s expenditure and revenue numbers a month earlier than it did previously, before there is enough data even for the advance estimates of GDP.
The shift in Budget dates has therefore caused the base numbers for the subsequent year’s revenue calculations and targets to become invalid within a month or two of the new fiscal year starting. When such errors are made, not only is the fiscal deficit off base, but the government’s borrowing programme (and thus the bond market) is affected. States, which received 14.5 per cent less in 2019-20 than they did in 2018-19, struggle to manage their revenue and expenditure plans if the Union keeps on getting it wrong. This year’s Budget projections are basically invalid not just because of the impact of the pandemic, but because the provisional actuals reveal that the starting base is so low that the 2020-21 projections will likely be missed by a wide margin. If the projections have gone so wrong three years in a row, surely something must change if the Budget process is to retain its integrity.
The argument for shifting the Budget date forward is easy to understand: Government departments were bunching spending in the last quarter, and it was presumed that an earlier Budget would allow them instead to spend right away. Yet, revenue shortfalls of this degree merely ensure that the same departments are forced into spending cuts in the last quarter. The benefits are therefore unclear. In addition, Parliament’s schedule itself has been thrown out of gear — the break after the winter session is not long enough, and the Budget session is split into two. Clearly the experiment is not working, and from next year the Budget must again be presented on February 28.