Federal budget 2011-12: a mix of hopes and challenges

Written By M. Sharif

The finance minister presented the new year’s fiscal budget in a rather challenging economic environment dominated by low ratios of growth, investment and tax-to-GDP, sky-rocketing inflation, surging fiscal deficit, widespread energy shortage, mounting debt burden, fragile domestic security conditions and excessive pressure from the IMF to implement its suggested reforms for seeking the next tranche of its loan programme.

It was expected that the budgetary proposals would aim at addressing a few of these crucial issues facing the economy, but just like the previous budgets, this one has also failed to provide anything substantial to the common man.

The federal budget for 2011-12 envisages federal expenditure of about Rs2.767 trillion, 12.3 per cent higher than the outlay for outgoing fiscal year. Total revenue is predicted at Rs2.732 trillion; Federal Board of Revenue’s (FBR) revenue collection is projected at Rs1.952 trillion. The provinces are expected to create a surplus of Rs125 billion which will reduce the overall fiscal deficit to Rs850 billion i.e. 4 per cent of the GDP to meet IMF’s requirement. FBR’s tax-to-GDP ratio is projected at 9.3 per cent. Keeping in view last year’s experience of the provinces being unable to present surplus budgets, generating a surplus of Rs125 billion seems unlikely to happen.

The federal government will have a net revenue of Rs1.529 trillion. It is 11.0 per cent higher than the revenue for the outgoing fiscal year. The capital receipts (net) are estimated at Rs396 billion against the budgetary estimates of Rs325 billion during 2010-11, indicating an increase of 11 per cent. The external receipts in 2011-12 are envisaged at Rs414 billion, revealing a hike of 7.1 per cent in comparison with the estimates of last fiscal year. The provinces are to avail Rs1.203 trillion as their respective share from the federal divisible pool (FDP), compared to Rs998 billion during the outgoing fiscal year. Punjab is to attain Rs576 billion, Sindh Rs324.4 billion, Khyber Pakhtunkhwa Rs191.84 billion and Baluchistan Rs110.2 billion.

Size of Public Sector Development Programme (PSDP) is estimated at Rs730 billion against last year’s figure of Rs663 billion, with the federal government’s share of Rs300 billion against the revised expenditure of Rs190 billion during outgoing financial year. The provincial governments will have a share of Rs430 billion against Rs373 billion. The federal government will also spend Rs35 billion on flood relief assistance. 57.0 per cent of the federal development budget will be spent on infrastructure development that includes development of national highways and water resources. 42 per cent of the budget funds will be spent on social sector development. A larger PSDP expenditure is aimed at giving impetus to economic growth.

In order to meet the tax revenue target of Rs1.952 trillion, the government has continued to depend upon indirect taxation by focusing on general sales tax (GST) and federal excise duty (FED), instead of taxing the rich and affluent landlords and businessmen. It has shied away from addressing the longstanding structural issues affecting the economy. The measures proposed include imposition of a 16 per cent GST on 15 new items that include computer software, surgical tapes, fertilisers, pesticides, machinery related to CNG sector, building blocks of cement including ready mix concrete blocks, ambulances, fire fighting vehicles, waste disposal trucks, breakdown lorries, special purpose vehicles for the maintenance of streetlights and overhead cables. These would generate revenue of more than Rs140 billion. Budgetary proposals envisage accumulating Rs81 billion through withdrawal of exemptions and zero-ratings. Subsidies have been reduced by 20 per cent to Rs166 billion.

On the contrary, the ruling elite has facilitated the wealthy class more by increasing the limit of filing wealth tax statement to Rs1 million from the existing Rs0.5 million. It has scrapped the proposal to re-introduce wealth tax. The rate of withholding tax on cash withdrawal from bank is to be declined to 0.2 per cent from the present rate of 0.3 per cent. Another Rs50 billion is expected to be raised through administrative measures that are likely to be illusive by the end of the fiscal year.

Nevertheless, not all is bleak as a few measures have been announced in the federal budget that are going to bring some relief to the common people in general and the manufacturing sector, in particular. These include reducing GST from 17.0 per cent to 16.0 per cent, abolishing all sorts of special excise duties and regulatory duties on 392 items to curb their smuggling, ending FED on cement within three years with a reduction of Rs500 per metric tonne in the first year, reducing withholding tax on cash receipts of Rs25,000 or more from banks from 0.3 to 0.2 per cent and FED on beverages from 12.0 to 6.0 per cent. In addition, special excise duty is also being done away with. Custom duty on 22 essential raw materials used by the pharmaceutical industry to produce anti-biotic, anti-allergic, anti-diabetic and TB medicines is being reduced substantially.

Salaries and pensions of the government employees have been enhanced by 15 to 20 per cent respectively. Conveyance allowance of employees up to grade 16 has been surged by 25.0 per cent. Subsequently, the private sector will be under a lot of pressure to increase the salaries of their staff members too.

An amount of Rs495 billion has been earmarked for defence, about 12 per cent more than current year’s allocation of Rs442 billion. Another Rs295 billion will be made available for security expenditure, up by Rs10 billion from the present year’s figure of Rs285 billion. Total security-related expenditure will heighten to Rs790 billion against Rs727 billion. An almost equally large amount of Rs786 billion will go to debt servicing, about Rs60 billion more than current year’s revised estimate of Rs726 billion.

A pertinent question arises related to the financing of the fiscal deficit that stands at Rs850 billion in the backdrop of constrained fund inflows from the IMF and US. The deficit will be financed largely through external funds amounting to Rs413.9 billion and borrowing from banks to the tune of Rs303.5 billion.

Past experience, especially of the last three years, clearly shows that increasing revenues through taxes and foreign inflows is an uphill task and has made the country’s financial management extremely difficult. Even in the forthcoming fiscal year, the government could face excruciating challenges to achieve the projected targets of economic growth, tax revenue collection and inflation on two accounts. Firstly, “the tax revenue collection of Rs1.952 billion by FBR is highly ambitious”, as stated by the Revenue Advisory Committee (RAC) led by Dr. Abdul Hafeez Pasha. According to RAC, “A target in the range of Rs1,885 billion to Rs1,900 billion would have been achievable.” Secondly, dependence on bank and non-bank borrowings to bridge the fiscal deficit will in fact be a continuation of expansionary fiscal policy that would make it impossible to curtail price-hike inflation on one hand and bring down the high discount rate on the other. Consequently, these developments would impede the economic growth and make it next to impossible to achieve the growth target of 4.2 per cent envisaged for next fiscal year.

BUDGET AT A GLANCE 2011-12

Rs in Billion
RECEIPTS
(a) Tax Revenue*

2074.0

(b) Non-Tax Revenue

658.0

          Gross Revenue Receipts

2732.0

          Less Provincial Share

1203.0

          (i) Net Revenue Receipts

1529.0

          (ii) Net Capital Receipts

396.0

          (iii) External Receipts

414.0

          (iv) Estimated Prov Surplus

125.0

          (v) Bank Borrowing

304.0

Total Resources (i to v)

2767.0

EXPENDITURES
 (a) Current

2315.0

          Interest Payments

791.0

          Repayment of Foreign Loans

243.0

          Pension

96.0

          Defence Affairs & Services

495.0

          Grants & Transfers

295.0

          Subsidies

166.0

          Running of Civil Government

203.0

          Provision for Pay & Pension

25.0

(b) Development

452.0

          Federal PSDP

300.0

          Development Loans & Grants to Provinces

55.0

          Other Dev. Expenditure

97.0

Total Expenditure (a + b)

2767.0

*Out of which FBR collection has been estimated at Rs 1952 billion.

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