Fis­cal deficit

The Pak Banker - - FRONT PAGE -

Due to mis­man­age­ment by the previous gov­ern­ment, the fis­cal deficit tar­get has been missed by whop­ping 2.5 per­cent of GDP (Rs860bn) in FY18 from tar­geted 4.1 per­cent of GDP to take it to 6.6 per­cent of GDP. In ab­so­lute terms, the deficit stood at Rs2.26 tril­lion ($18bn). In FY17, the deficit was tar­geted at 3.8 per­cent of GDP while the ac­tual num­ber came at 5.8 per­cent of GDP. The slip­page of 2-2.5 per­cent from tar­geted numbers in the last two years of PMLN regime largely ex­plains the widen­ing of cur­rent ac­count deficit and the ex­ter­nal cri­sis the econ­omy faces to­day. In Musharraf's era, fis­cal deficit slipped from 4.1 per­cent in FY07 to 7.31 per­cent in FY08 while the PPP gov­ern­ment which was not able to lower the deficit to a de­cent level in any year of its term, broke all the records in its all year to take the deficit to 8.2 per­cent in FY13.

It is a fa­mil­iar pat­tern. Ev­ery suc­ces­sive gov­ern­ment tries to win the hearts of the vot­ers by gen­er­ous spend­ing and tax breaks close to elec­tions. The real eco­nomic change 'Naya Pak­istan' can bring is to move away from the lav­ish spend­ing close to elec­tions which brings econ­omy at the verge of col­lapse and ev­ery new gov­ern­ment has to knock the door of IMF for a bailout. The story is no dif­fer­ent for PTI to start with. The fis­cal numbers of FY18 have a dis­mal tale to tell. There is not much wrong with fed­eral tax rev­enue col­lec­tion which grew by 11.5 per­cent in FY18 to reach Rs4,065 bil­lion and the tax col­lec­tion reached 13 per­cent of GDP in FY18 ver­sus 12.5 per­cent of GDP in FY17.The sin­gle big­gest con­trib­u­tor in tax rev­enues is sales tax which grew by 12.7 per­cent in FY18 to stand at Rs1,491 bil­lion. The num­ber is al­most same as to­tal di­rect tax col­lec­tion which stood at Rs1,536 bil­lion in FY18. The toll ex­hib­ited a growth of 14.7 per­cent in FY18.

How­ever, given the tax re­liefs by the out­go­ing gov­ern­ment in FY18 amid the plans of phas­ing out su­per tax and low­er­ing cor­po­rate in­come tax in stage man­ner, the growth of di­rect taxes will shave off in FY19 un­less more peo­ple come in the tax net. If there is no change in an­nounced re­lax­ation in bud­get, there is a fair chance that sales tax col­lec­tion will cross over­all di­rect tax numbers in FY19. The PTI man­i­festo con­tains pro-poor poli­cies aimed at bridg­ing the in­equal­i­ties be­tween the rich and the poor. If the gov­ern­ment works on th­ese prin­ci­ples, they will have to lower the GST and en­hance di­rect tax col­lec­tion. Fi­nance Min­is­ter Asad Umar has hinted that he is not happy with a few steps an­nounced in the last bud­get and a mini-bud­get may be in the off­ing.

The other chal­lenge is to curb the growth in ex­pen­di­ture. The to­tal fed­eral ex­pen­di­ture in­creased by 11 per­cent in FY18 which is not much and the sym­bolic aus­ter­ity would not con­sid­er­ably dent the high ex­pen­di­ture base. The in­ter­est and prin­ci­pal pay­ment of debt grew by 11 per­cent to Rs1499 bil­lion while the de­fence ex­pen­di­ture for the first time crossed tril­lion ru­pees mark in FY18.The real gain for sym­bolic ex­pen­di­ture can be de­rived from be­havioural eco­nom­ics. It can help in bridg­ing the trust deficit be­tween the tax payer and the state; and see­ing the ba­boos in pain due to aus­ter­ity may in­cen­tivize peo­ple to pay taxes.Only time will tell how ef­fec­tive mea­sures are in­tro­duced in curb­ing fis­cal deficit. What is needed is a cut in de­vel­op­ment spend­ing along with ra­tio­nal­iza­tion of gas and elec­tric­ity tar­iffs. This will help re­duce the bud­get deficit to a great ex­tent.

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