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Federal Budget 2015-16 A Review

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Federal Budget 2015-16: A Review

IPS Report

Institute of Policy Studies, Islamabad

(www.ips.org.pk)

Considering that the budget is the most important indicator of a governments priorities economic, social and beyond that, political and the document usually gives a clear indication of the direction in which the government is steering the country, its economy and

society; the Institute of Policy Studies (IPS), Islamabad has regularly been coming up with

its pre-budget proposals and post-budget analysis and recommendations, in order to assist

the parliament, policy makers and all other stakeholders to review the budget. The following

analysis has been prepared by a special IPS Task Force.

A Brief Look at Economic Indicators

Before analyzing the budget, it is pertinent to have a look at the state of national economy.

According to the Pakistan Economic Survey 2014-15, provisional estimates put GDP growth

at 4.24 per cent which is slightly higher than the 4.03 per cent of 2013-14 but less than the

target set for the outgoing fiscal year, 5.1 per cent. Growth in agriculture sector remained

very low, posting 2.9 per cent but more disturbing is the fact that the major crops have

faltered. Whatever growth has been recorded is on the basis of growth in livestock sub-sector

and to some extent minor crops. Livestock, it may be pointed out, is a gray area as far as

calculation of growth figures is concerned and the rate of growth in this sub-sector is mostly

imputed. Large Scale Manufacturing was targeted to grow at six per cent but the growth

recorded is 2.4 per cent. Services sector grew at five per cent.

A major positive indicator on the economic horizon is reduction in inflation; for which the

provisional estimates come at 4.8 per cent as against the target of eight per cent for 2014-15.

Yet, this indicator is neither a result of any state policy or effort (being due mainly to drastic

decline in global oil and commodity prices) nor can the figures be regarded as accurate

altogether, as the public perception is contrary to it (owing to continuous rise witnessed in

the prices of food and daily use items, being experienced by the common man and reported

by media.)

While official economic data has always faced a question of credibility, the contradictory

positions of two major government departments on the whole issue of unemployment is

putting reliability of the claims of stabilization at stake. Planning Commissions data says that over eight per cent of the workforce is unemployed while the finance ministry and

budget documents say six per cent, claiming that unemployment has gone down from 6.3

per cent to six per cent. The decline in prevailing scenario becomes un-understandable for

the economists; looking at the GDP growth rate of 4.2 per cent and population growth rate

of 2.2 per cent. Textile industry a major employer claims that 30 per cent of its production units have closed down creating unemployment to the extent of some two million persons.

In this scenario, the Planning Commission and National Accounts Committee (NAC) seem

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to be painting closer-to-the-true picture, as unemployment cannot be expected to go down

in these circumstances.

The overall burden of debt continues to rise. It may be stressed here that the idea of reduction

in the public debt as a percentage of GDP is fallacious. Although there is an apparent decline

from 64.4 per cent to 62.9 per cent; but in real terms over Rs.1000 billion have been added

to the debt burden in this year alone. The burden of debt has increased by around three trillion

rupees since this government took over two years ago. Tax revenues have improved by 13

per cent, but have not recorded any improvement as a percentage of GDP. Thirteen percent

loses its glamour when it is adjusted in respect of 4.2 per cent growth rate and 4.6 per cent

inflation. More disturbing is the fact that the current expenditure has gone up as percentage

of GDP while development expenditure has gone down.

The current account is continuously being sustained by robust growth in remittances, which

have increased by 16 per cent during the first 10 months of 2014-15 and are expected to

reach to the tune of 18 billion dollars by the year end, which is a blessing for the external

account though have little to do with any effort on the economic management side. Fiscal

deficit and bank borrowing targets were also missed, with visibly large margins.

Budget 2015-16 at a Glance

The total outlay of the budget 2015-16 is Rs.4451.3 billion rupees, of which internal

resources are estimated at Rs.3366.8 billion, external resources at Rs.751.5 billion and

privatization proceeds at 50.0 billion rupees. As usual, 83 per cent of the expenditure

(Rs.3482.2 bn) is to be consumed by the current expenditure while only 17 per cent

(Rs.700.0) is estimated to be left for the developmental expenditure. (Please see the figure I

and II below.)

81%

18%1%

FIG IBUDGET 2015-16

RESOURCES (RS. BN.)

Internal Resources

External Resource

Privatization Proceeds

83%

17%

FIG IIBUDGET 2015-16

EXPENDITURE (RS. BN.)

Current Expenditure

Development Expenditure

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The Strategy: Finance minister has claimed in his budget speech that the budget 2015-16 is

a movement towards a growth oriented paradigm, from presently [what he describes as] a

stabilization paradigm. He has highlighted that the budget strategy of the government

revolves around the following elements:

Decreasing fiscal deficit

Increase tax revenues

Continued focus on energy

Enhancing exports

Increasing Tax to GDP Ratio

Public Debt Management

Benazir Income Support Program

Analyzing the Budgetary Proposal and Measures

There may be a number of yardsticks to analyze budgetary proposals and measures. This

review, however, analyses the budget 015-16 from two angles. One: is there any new

approach, departure from the past exercises and journey towards a new direction for

rejuvenation of economic activity, growth and development? Two: are the budgetary

measures and proposals in line with the announced strategy and priorities and whether the

targets set for the budget year are expected to be met?

At the outset, looking at the broader picture of resources and expenditures, it becomes clear

that there is no visible improvement in the structure and parameters of the budget, which

could suggest any extraordinary efforts or any drastic steps on part of the government

machinery to look towards any new beginning. Figures for both the resources and

expenditure have marginally been revised upward, and as usual, an attempt to merely balance

the two figures is visible from the documents.

While the overall approach looks business-as-usual, in the following paragraphs, a sector-wise review of some of the sectors vis--vis budget 2015-16 is being given.

Energy: Considering the multidimensional energy sector crisis that the country is faced

with, it is pertinent to look at budget documents attempts to tackle the sectors woes. In his budget speech, the Finance Minister suggested that the following strategy for energy sector

was adopted in the preparation of the budget:

Energy sector taken up as one of the key priorities of government To bring 7000 MW on stream besides setting up 3600 MW LNG-based projects

to fill current demand-supply gap

Bring 10600 MW in the system by Dec 2017 Dasu, Diamer-Basha, Karachi Civil Nuclear Energy etc. to be completed beyond

2017

The total budgetary outlay for the energy sector comes to the tune of Rs.248 billion, which

is sizable. The focus on hydro projects and improvement of the transmission lines are

welcome initiatives. However, a clear strategy to deal with the once again burgeoning

Circular Debt which is key challenge in overall energy crisis is totally missing from the

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budget. Reduction in the subsidy for the power tariff differentials from Rs.221 billion in 2014-15 to Rs.118 billion is sure to hurt the consumers. Even in the case of transmission

lines, the allocation of Rs.2.3 billion for CASA-1000 makes little sense. There are also

apprehensions as to how much this allocation is relevant; as the project is yet to get

underway.

Moreover, in case of energy, the budget deals, by and large, with the power sector only; and

there are neither any developmental allocations for oil and gas sector, nor any incentives to

attract local and foreign investors. Importantly, there is absolutely no indication and that the

government intends to move ahead with the projects such as Iran-Pakistan gas pipeline

during the coming fiscal year, as no funds have been provided for it at all.

Agriculture: While the sector remains the backbone of national economy, with around 21

per cent share in GDP and providing employment to around 44per cent of the workforce, it

has failed to draw the required government attention in the budget 2015-16. Setting the target

of agri-credit at Rs.600 billion is of symbolic value, as it is a well-established fact that much

of this credit goes to a limited number of large landowners. Incentives such as interest free

loans for solar powered tube-wells are welcome, but not enough. There are no measures

leading to any meaningful decrease in the cost of agri inputs (seeds, fertilizers1, pesticides).

The development budget for water, an important agri need, has been decreased from the

ongoing years Rs.46 billion to just over Rs.30 billion, for 2015-16.

Industry & Exports: As usual, a major set of incentives goes to the textile, industry with a package calculated at Rs.64.5 billion. True that textiles are single largest export industry

of the country, yet it is also a fact that our textile exports remain half of those of Bangladesh

despite all the incentives of yester years. The budget by and large has paid only lip-service

to the much-needed incentives for other export-oriented industries particularly the non-

traditional exports.

Development Budget (PSDP): The size of federal Public Sector Development Program

(PSDP) has been increased to Rs.700 billion. This increase is welcome. But a careful analysis

reveals that increase could be meaningless, as the allocations are neither true depictive of

the countrys development priorities nor are directed entirely on developmental projects. For instance, Rs.100 billion have been allocated for temporarily dislocated persons, which can

hardly be termed as a developmental expenditure, primarily being a rehabilitation exercise.

Around three fourth of the development budget is targeted towards infrastructure

(communications and energy included) the allocations going up from 323 bn. to 394 bn. while the share of and allocations for all-important social sectors have gone down. The

allocation for education has gone down from Rs.28 billion to Rs.22 billion while that for

health has witnessed a decline from Rs.28 billion to Rs.20 billion in the federal PSDP 2015-

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1 Subsidy for fertilizers has been provided but it is an established fact that this subsidy has hardly benefitted

small farmers.

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There are some other questionable allocations in the federal PSDP as well. Rs.28.5 billion

have been set aside in the name of Special Federal Development Program; with no details as

to where it will go. To recall, Rs.36 billion were provided for this in the budget 2014-15 but

revised estimates indicate that only up Rs.10 billion are expected to be spent under it by the

end of ongoing fiscal. The details of these special programs should be made known and it

has to be seen whether these sizable amounts are not meant for providing the economic

managers with a cushion to adjust the PSDP figures, and where expenditure is made, the

decision is not dictated by political considerations as against the real needs of the people

under these special programs. Another allocation of Rs.20 billion is being made for

Millennium Development Goals (MDGs) and Community Development Program (CDP).

An important question that arises in this regard is that with only six months left in the MDGs

deadline (December 31, 2015) what improvements is the country foreseeing with these

eleventh-hour increases as MDGs were the targets set over a whole decade.

Taxation: The same old policy of sticking with indirect taxes has been continued for the

year 2015-16. In fact, the taxes to be collected by FBR during 2015-16, as projected in the

budget documents indicate that increase foreseen in direct taxes is Rs.238.8 billion while

that in indirect taxes is Rs.259.8 billion, the latter being considerably more than the former.

It is indicative of the approach that the government is no mood to tax the wealthy and untaxed

segments proportionately and resultantly, the share of indirect taxes will continue to rise.

The statements of important government functionaries of the recent past and some of the

governments own surveys highlight that approximately three to four million people who must be paying taxes remain outside the ambit of direct taxes (such as income and wealth

tax). Finance minister has announced another cut in discriminatory, rather exploitative,

SROs to be issued by FBR, which is welcome. But the need to do away with SROs once and

for all is all too evident. Among the various anomalies in taxation, for example, is that while

duties on import of printed books from abroad are marginal; those on imported paper are

high. Such anomalies need to be dealt away with.

Wither Relief? Pakistan is a country where a large segment of population requires

specifically targeted relief, assistance, and social security provisions. While on one hand the

social sectors have been neglected and bare minimum allocations have been worked out for

education and health; the social safety priorities have been kept anchored in the much talked

about Benazir Income Support Program (BISP). Allocation for BISP has been increased to

Rs.102 billion (from Rs.97 billion in the ongoing fiscal) and it is estimated that the number

of beneficiaries of the program will be increased from 4.3 to 5.0 million. Sticking with this

program despite serious concerns repeatedly expressed about the usefulness of this program

and reports about rampant corruption and political use remains a big question. It has been

observed throughout the country that meagre monthly payments add to the dependence

syndrome and fail to make people economically active and self-reliant. The whole approach

needs to be rethought to bring the poor within the production stream.

The purpose of such schemes should be to make the beneficiaries self-reliant; BISP has not

served this purpose. There is an urgent need to analyze the impact of these huge amounts

being spent continuously, every year, and look for ways to make them more effective and

targeted. In terms of relief, the increase in the salaries (and pensions) of government

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employees by 7.5 per cent makes a mockery of itself in the wake of inflation, though

decreasing overall but being high in case of food and daily use items. Increase in minimum

income from Rs.12000 to Rs.13000 is not only too little, but as usual, an effective

mechanism to implement/ enforce whatever increase has been announced, is also missing.

It may also be highlighted here that the cut in power sector subsidies and increase in the rate

of duty on products such as packed dairy products and beverages will have an inflationary

impact that may actually render this meagre relief as meaningless.

Continuous Dependence on Debt: While the burden of debt servicing (Rs.1.2 trillion for

2015-16) has already become unsustainable for an economy such as Pakistan; budget 2015-

16 continues to tread the same brow-beaten path, targeting Rs.751 billion from external

sources and expecting domestic bank borrowings of Rs.282.9 billion (which is likely to end

much higher considering the continuing track record of yester years). It simply means we

may be heading towards another trillion rupees plus burden, added to the already mammoth

total of public debt, and resultantly, a much higher requirement for expenditure on servicing,

in years ahead.

Budget Formulation: Some Important Points

It has been highlighted time and again that the process of budget formulation in the country

is not a truly participatory exercise. There seems to be some movement towards making it

participatory from this year, but the effort remains, by and large, a case of too little and too

late. One positive point is that there was a dialogue with the business community in

formulation of the budget. There were also a couple of meetings with the finance committees

of the parliament. But nothing really substantive has come out. The reaction of the business

community indicates that a large chunk of their proposals (up to 80 per cent) has not been

considered. Another important aspect to keep in view in this regard is that it becomes a joke

that Pakistan Economic Survey is released just 24 hours before the budget. The Senate itself

has recommended several times that the document should be released one to two weeks

before the budget so that people study and digest it and in the light of that, evaluate the

budget.

Second important point with regard to budget is this whole concept of supplementary grants,

which is against the concept of no taxation without legislation. Even in this budget the supplementary grants come to over Rs.200 billion, of which about 140 billion are new

expenditures all incurred with impunity, without parliamentary sanction. Unfortunately, the

amount is double of what was overspent last year and thus represents a major lapse.

Third relates to SROs, which are an open anomaly and 90 percent of these are misused to

oblige and give concessions to specific persons and groups. SROs have been a source of

built-in corruption in the system. The Senate has been recommending that SROs must be

brought to a complete end. One can appreciate that there can be some developments such as

calamities, unforeseen events, which might call for fresh financial allocations. For that, the

government can have two mechanisms: 1) fresh budgetary requests (the country sees many

mini budgets in the form of price hikes every month), and 2) if fresh requests approval becomes difficult, constitution may be amended to authorize parliamentary committees on

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finance (both of the National Assembly and the Senate) to consider such requests and

sanction them; reporting to the parliament.

Conclusion

In the light of the above analysis, it becomes clear that budget 2015-16 remains a

continuation of the same tradition as the nation has been witnessing in the past. The

budgetary proposals and measures are not innovative enough. They remain devoid of any

vision for enhanced and inclusive growth. The also fall short of an appropriate response to

the challenges confronting the national economy. The document at best remains a

continuation of the accounting approach. More importantly, it is also not very much in

keeping with the manifesto of PML-N which was a very good effort. It had some key ideas

which if this government had cared to pursue during these two years, policies could have

made a real difference. Unfortunately, that has not taken place.

Any movement from debt dependence to a planned, gradual self-reliance, is not visible in

the budget. Even if 5per cent rate of growth is achieved; with 2.2per cent increase in

population, there is no possibility of the creation of 2.5 million new jobs, as the finance

minister has boastfully targeted in his budget speech. That we can move from a stabilization

paradigm to growth paradigm with this kind of a budgetary approach, is a wishful thinking,

particularly in the absence of any clear policy shift. A few incentives in agriculture and

energy, which are totally in-sufficient to lead towards a paradigm shift.