The PML-N was keen to end its tenure on a high note, and this year’s budget speech had more than the usual dose of triumphalism in it. Is this justified? A look at the numbers is informative.
The headline news is of course that the GDP growth rate this year is estimated at 5.3% – the highest in a decade. More interesting, this growth appears to have been built on growth in the commodity producing sectors. Agriculture has done better than it has in almost a decade, with a growth rate of 3.5%, while the growth rate in industry, compared to FY2016, hit 5%. Services, which constitute more than 60% of GDP, grew by 6%. The revival of the commodity producing sectors is good news, as it is this section of the economy which generates the most employment. Other macro targets have also, reportedly, done well, including inflation and the fiscal deficit, both of which fell below 5%. Credit to the private sector has increased five times compared to five years ago, fuelled by the historically low lending rates that the State Bank has managed to maintain. The most obvious negative note in all of this remains the external sector, with exports continuing to decline (albeit at a lower rate), and the growth in remittances slowing down. But overall, many targets have been met.
What does this mean for the coming year’s budget?
In the coming year, the government plans to push net revenue receipts to Rs 2,926 billion, compared to net receipts of Rs 2,616 billion last year. On the expenditure side, the most ambitious target relates to how development expenditure has been budgeted at Rs 1,001 billion in the coming year, although, like many previous years, the government could not meet its development expenditure targets last year also, and spent about Rs 715 billion compared to the Rs 800 billion budgeted. Defence has been budgeted at Rs 920 billion, but adding military pensions pushes this up to just over Rs 1,000 billion, the same as the development budget.
As has been for the last decade or so, the emphasis on the revenue side is on the collection of income tax in direct taxes, and sales tax in indirect taxes. For income tax, the collection was Rs 1,363 billion last year, but the target for the coming year is Rs 1,595 billion. But where will this additional Rs 232 billion come from? The active taxpayers list has consistently been at just over 1 million for the last five years or so. About 1.3 million people are expected to file taxes this year.
Going by the way the FBR has scrutinised tax returns in the last few years, it is very likely that it is this same 1.3 million (give or take a few thousand) who will cough up the additional collection targeted next year. Tax evasion remains a civil rather than a criminal offence in Pakistan, and given the extent of alleged corruption in the tax collection agencies, it should probably remain so. Without a major overhaul of the tax administration, it is going to be impossible to stretch the tax net to cover habitual offenders. The targets for next year are ambitious, including taking the tax-GDP ratio up to 13%, and investment to 17% of GDP, pushing the GDP growth rate up to 6%. In what is obviously an election promise, the government also declared that it will add 10,000 megawatts of electricity generation capacity to the grid over the next year, bringing about an end to load shedding.
The government deserves some credit for improving economic management, and for providing a stable policy regime, but also got lucky with the global crash in oil prices (which is actually what has caused inflation to fall). Nevertheless, it has succeeded in bringing about a significant improvement in key macro indicators. On social sectors, the situation remains uninspiring, but that’s a story that will emerge from the documents of provincial governments.