The last budget
THE outgoing government presented its fifth and last budget on June 1, 2012. Since the year 2012-13 was an election year, the intention of the government was totally inconsistent with the presented budgetary numbers. Reckless spending to ‘win’ elections was the only intention of the government. The finance team was asked simply to put suitable numbers on the revenue side to arrive at a reasonable budget deficit number, which would be acceptable to the IMF.
I wrote numerous articles on last year’s budget explaining that Budget 2012-13 was a non-serious document and prepared in a casual manner with fragile numbers. It was clear that this budget would die its natural death within a few months of being made public. My position was vindicated when finance officials announced the death of the budget. In so doing, the officials, the minister and the ministry lost their credibility within and outside the country.
How non-serious the budget makers were can be seen from the following facts. The Federal Board of Revenue (FBR) was targeted to collect Rs2381 billion in 2012-13 from the actual collection of Rs1881 billion in the previous year – a growth of 26.6 percent. On September 25, 2012, I wrote that the “FBR is not likely to collect beyond Rs2150 billion in 2012-13.” Since then much water has gone under the bridge and the working environment has deteriorated significantly in the FBR. My current projection suggests that the FBR will face an uphill task even to collect Rs200 billion.
During the first eight months of the year (July-February) the FBR has collected Rs1160 billion as against Rs1110 billion in the corresponding period of last year, thus registering a dismal growth of 4.5 percent. In order to collect Rs2000 billion, the FBR needs to collect Rs840 billion during the remaining four months (March-June) as against Rs771 billion in the same period last year.
In other words, FBR tax collection must grow by 9.0 percent during March-June. Can this be possible during the transition to a new government? It is therefore safe to suggest that the revenue shortfall from the original target is likely to be Rs400 billion. On the non-tax revenue side, the government expected to receive Rs79 billion through the sale of 3G licenses. Since this is not going to materialise, the total revenue shortfall is likely to reach Rs479 billion. On the expenditure side, the major slippage is likely to originate from the power sector subsidy. The government had targeted the power sector subsidy to Wapda/Pepco and KESC to the extent of Rs185 million in budget 2012-13.
Within eight months of the fiscal year the government has already doled out Rs235 billion, and there are indications that this may reach close to Rs400 billion by the end of the year, amounting to an overspending of at least Rs215 billion.
On external inflows to finance fiscal deficit, the budget makers put Rs46.5 billion under the heading of Eurobond and Rs74.4 billion under the receipts from Etisalat. Inflows from these two sources have found their places in every budget over the last five years without any success. The budget designers knew very well that these flows would not be realised even this year and yet added these to the budget as a routine matter. Therefore, external flows worth Rs121 billion are not likely to be available to finance fiscal deficit.
With total slippages under the above listed items amounting Rs815 billion or 3.5 percent of GDP, the current year fiscal deficit is expected to be 8.5 percent of GDP or Rs2002 billion. In all these calculations, I have not added the impact of the financial tsunami that deluged Pakistan in late February and lasted till March 16. The bailout package of PIA; subsidies for tube wells, sugar exports and fertilizer; raise in the salary of government servants; the advance payment to oil companies are just the tips on the iceberg. It will take several months to dig out such expenditures and their budgetary impact. I have also not counted the fiscal profligacy of the provinces in the election year (2012-13). I have always stated that this year’s budget deficit may attain a new height in the range of 9.5-10.0 percent of GDP with all its macroeconomic consequences for the economy. Financing of deficit in the range of Rs.2.2-2.3 trillion would be challenging for the caretaker government. Serious damage to the economy has already been done. Deficit of this magnitude will further compound the difficulties for the caretaker as well as the newly elected government.
Interestingly, some of the remnants of the outgoing economic team have started positioning themselves to become acceptable to the new regime by criticising the outgoing government and its policies. Little do they know how much they are hated because of their incompetence by millions of poor of this country. The caretaker regime with 45 days in its account will face multiple challenges on the economic front. They need to take stock of the damage caused by financial hara-kiri and financial tsunami and make every effort to minimise the damage and prepare a structure of the next budget.
The budget strategy paper presented to the outgoing cabinet has been prepared by those who have lost their credibility. Therefore, the caretaker government needs to prepare the structure of the budget by taking on board the representatives of the key political parties. Whosoever forms the new government will take little time to finalise the budget 2013-14 which can be presented during the second or even third week of June.
Addressing the issue of debt repayment crisis would be the most critical challenge for the caretaker regime. With foreign exchange reserves dwindling and over a billion dollar payment due to the IMF alone, it will really be a challenging time for the caretaker government. May God give us the strength to absorb the impact of the last budget.