Cut in rate of GST by one per cent: 15 per cent increase in govt employees’ salary: budget fails to address structural weakness of economy.
Finance Minister, Dr Hafeez Sheikh presented the federal budget for fiscal year 2011-12 in the National Assembly amidst sloganeering from the opposition benches. A budget which envisages containing fiscal deficit at four per cent, numerous measures were announced to provide relief to the common man. Visible measures include the reduced burden of indirect taxes and commitment to enhance direct taxes through expanding the tax net. Gross revenue receipts are estimated at Rs 2,732 billion (13.3 per cent), which are inclusive of Rs1,952 billion estimated to be collected by the Federal Board of Revenue (FBR). The tax to GDP ratio is thereby estimated at 9.3 per cent, which is on the lower side when compared to last year’s estimate of 9.7 per cent. Total taxes are estimated to occupy 76 per cent of total revenue. However, given government effort to enhance role of provinces in the overall collection, stringent measures are needed at provincial levels, especially in the form of Gross Asset Tax. Just as ever, the biggest chunk of current account is still occupied by debt servicing of which 90 per cent belongs to debt servicing on domestic financing.
Meanwhile, repayment of long-term foreign loans is estimated to rise to $2.7 billion. Subsidies are also projected to shrink envisaging reduction of power tariff differential. Financing of the deficit will take place almost entirely through domestic sources, which shows no significant change in the domestic interest rate scenario. With key macroeconomic targets missed in fiscal year 2010-11, the coming year is anticipated to bring recovery, at least to the extent of sectors like agriculture and construction. Inflation is also targeted to come down to 12 per cent, further supported by relief measures taken in the budget.
The Minister highlighted factors which adversely affected the economy since 2008. Government inherited fragile economy in 2008 and initiated the process of stabilisation. A number of exogenous shocks such as international oil prices, devastating floods and prevailing security situation contributed in adding pressure on the fiscal side and led to a slowdown in economic growth. The government slashed the current development expenditure to meet the needs of millions of flood victims. The political disagreement on Reformed General Sales Tax (RGST) to broaden the tax base for mobilisation of resources also perturbed Minister. He stressed the need for national unity on sustained fiscal side challenges which are haunting the nation for the last 25 years. Along with these, the external sector is showing encouraging developments with exports and remittances showing highest growth in the history of the country by reaching at $24 billion and $12 billion, respectively for the current fiscal year. The details of the budgets are:
Government plans to invest heavily in the mega projects under the Public Sector Development Program (PSDP). In this regard, Rs.1100 million has been allocated for New Gwadar International Airport during the year 2011-12.
The independent review of the budget for the fiscal year 2011-12 indicates that it is an ambitious budget with many challenging targets. The revenue projections are too optimistic and government will have to not only put a lot of efforts to achieve them but also to restructure its tax departments.
Government plans to invest heavily in the mega projects under the Public Sector Development Programme (PSDP). In this regard, Rs. 1100 million has been allocated for New Gwadar International Airport during the year 2011-12. According to details, the total estimated cost of the project is Rs.7675 million which included Rs.1464 million of foreign loans. According to PSDP, a total of Rs.1470 million has been earmarked for difference ongoing schemes of Defence Division during the year 2011-12. The other major ongoing schemes included capacity building of Pakistan Meteorological Department of Islamabad, Establishment of Tropical Cyclone Warning Centre at Karachi, Construction of residential accommodation for operational staff at PMD Headquarters, Islamabad, Water Distribution Network Phase-III for RCB/CCB based on Khanpur Dam Water Source, Establishment of MSA Digitized Operation Room at New HQ MSA Building MSA, up-gradation of Pediatric, Cardiac, Surgical Facility in NIHD, AFIC and establishment of Pak-China Seismic Network in Pakistan.
The government allocated Rs 14 billion for Higher Education Commission (HEC) in PSDP for on-going and new projects. According to the budgetary document, an amount of Rs 679.895 million has been allocated for the six new schemes of HEC while an amount of Rs 13320.105 has been allocated for 166 ongoing schemes. Among the new schemes, Rs 300.000 million have been allocated for establishment of a university in Malakand/Swat, Rs. 200.000 million for indigenous PhD Fellowship for 5000 scholars (Phase-II), Rs. 60.000 million for establishment of a university at Turbat, Rs 50.000 million for National Defence University and Rs. 49.895 million for establishment of a university at Loralai. While among the ongoing schemes, Rs. 600.000 million have been allocated for strengthening of University of Engineering and Technology, Lahore, Rs. 600.000 million for PhD Fellowship for 5000 scholars, Rs. 450.000 million for infrastructure development of COMSATS Institute of Information Technology Islamabad Campus, Rs. 345.000 million for establishment of New Campus of Jalozai Khyber-Pukhtunkhwa University of Engineering and Technology, UET, Peshawar, and Rs. 350.000 million for strengthening of NED University of Engineering and Technology, Karachi.
An amount of Rs. 277.800 million has been allocated for strengthening and development of Mehran University of Engineering and Technology (MUET), Jamshoro, Rs. 270.000 million for establishment of Information Technology and Management Science and Telecommunication Institutes at NUST, Islamabad, Rs 250.000 million for Human Resource Development Initiative MS Leading to PhD Programme of Faculty Development for Engineering Universities (UESTPs), Rs.200.000 million for Foreign Faculty Hiring Programme and Rs 200.000 million for provision of higher education opportunities for students of Balochistan and FATA.
An amount of Rs. 160.000 million has been allocated for repair/rehabilitation/renovation of buildings of University of Balochistan, Quetta, Rs. 140.704 million for provision of essential facilities at COMSATS Institute of Information Technology (CIIT), Islamabad, Rs. 1800.000 million for Overseas Scholarships for Studies in General Comprehensive Medicine, Rs. 165.000 million for Overseas Scholarship Scheme for MS/M.Phil/Ph.D and Rs.150.000 million for the Post-Doctoral Fellowships Programme. The other ongoing projects include establishment of Karakuram International University, Gilgit, with an amount of Rs. 115.045 million, establishment of Medical College University of Sargodha with Rs. 125.000 million and Faculty Development and other basic requirements of Quaid-e-Awam University of Engineering and Technology (QUEST), Nawabshah, with Rs. 125.000 million.
The budget document reveals that the government will spend Rs1,034 billion or five per cent of GDP on retiring foreign loans and paying interest on domestic and foreign loans against last year’s payment of Rs 872 billion. Of this Rs 791 billion would go into interest payment while Rs 243 billion have been allocated for repayment of foreign loans whereas the government will also repay domestic loans of Rs 6,199 billion as against the last year’s repayment of Rs 4,157 billion. According to the document, public debt has increased by Rs1,162 billion in the first nine months of 2010-11 reaching a total outstanding amount of Rs10,020 billion while external debt has increased from $ 55.9 billion at the end of June 2010 to $59.5 billion by end March 2011 – an increase of $3.6 billion. Of $59.5 billion external debt, the debt owed to IMF stood at $8.9 billion (showing a growth of 10.7 per cent) at the end of March 2011, of which $1.97 billion accrued to the federal government while remaining is recorded on the State Bank of Pakistan books to strengthen the foreign exchange reserves of the country. The IMF also gave $452 million as Emergency and Natural Disaster Assistance (ENDA) for budgetary assistance.
The independent review of the budget for the fiscal year 2011-12 indicates that it is an ambitious budget with many challenging targets. The revenue projections are too optimistic and government will have to not only put a lot of efforts to achieve them but also to restructure its tax departments. The expenditures are also somewhat insufficient to meet the expenses. After transferring the provincial shares in the revenue, the federal government will be left with revenue not enough to cover for general public services, which include debt servicing, civil and military pensions and transfer payments and Defence expenditures. The fast expanding head of public order and safety and some others have not yet been counted. The point to note is that the federal revenue does not even pay for its current expenditure. As indicated earlier, the federal government plans to spend Rs 2,504 billion (including PSDP of 300 billion), i.e. Rs 975 billion more than its revenue. The federal government expects from provinces to generate a combined surplus of Rs125 billion. As a result, the overall fiscal deficit will come down to Rs 850, which is four per cent of GDP. Last year also, a fiscal deficit of four per cent was envisaged but government was unable to maintain that level and it had to drastically cut in development budget. With no significant new tax measures and concessions on a number of existing taxes, the realisation of the target is largely left to the administrative efficiency of the FBR.
The provinces are unlikely to deliver the projected surplus and there is no reason why expenditure on defence and public order and security will not overshoot the projections again.