Growth Budget: Gains and Loss

With a record amount deficit and spiraling inflation everyone had been apprehensively waiting for the budget, to see how the government would proceed in one of the worst time periods in Pakistan’s economic history. The government has put forth the budget policies ranging from controlling deficit to urgency of returning to IMF program and boosting production in agriculture and industry as well as banning luxury imports.

The governments focus is on stabilizing the external accounts and controlling the fiscal deficit but with this pushing for expenditure-led GDP growth is not wise and unsustainable. After record-breaking tax collection of Rs5 trillion, the government further wants to push it to Rs7 trillion for the upcoming year. For this target to achieve, the government must be relying on indirect taxes, particularly sales tax because otherwise only 2.8 million persons actually filing tax returns last year and a sizeable portion of which are either zero tax or small amounts (less than Rs100,000 million).

The estimated increase in sales tax over the upcoming year as compared to 2021-2022 is almost 23% (Rs2.5 trillion to Rs3 trillion) while the estimated increase in income tax is 17% (from Rs2.1 trillion to Rs2.5 trillion). Taxes on banking transactions, cigarettes, edible oil industry and the steel industry have been increased. The edible oil tax has hit hard the poor but the government justifies it by saying that this hard measure has been taken to discourage import and encourage local production. The import substitution strategy is less likely to work in short run as consumes can expect to pay more for another essential grocery item. The mobile handset demand more and is supposed to get Rs10 billion in the approaching year when contrasted with Rs8 billion last year.

Expect another hike in petroleum prices soon as petroleum levy is making a comeback when in actual subsidies on petroleum products were to be reduced and the government is expecting to earn rs750 billion from this head in the upcoming year. Debt payments are set to take off in the approaching year – the markup on homegrown and unfamiliar obligation is planned at around Rs4 trillion altogether, close to half of the all-out current use of Rs8.7 trillion. Debt servicing for domestic debt is supposed to be a significant 24% higher than the past financial year, having expanded from Rs2.7 trillion to Rs3.4 trillion. The foreign debt payments are expected to increase by 68% in rupee terms- from rs302 billion to Rs511 billion. The government Public Sector Development Program (PSDP) has been decreased from the Rs900 billion planned in 2021-22 to Rs727 billion in the approaching monetary year.

The average consumer will be badly affected by petroleum levy. Government should avoid using petroleum as revenue unless the prices in international market fall. Inflation will be hard to control and will badly hit consumer again. The projection at 11% is unrealistic and must be open to 20% again depending on hike in petroleum prices in international market.

Pakistan surely needs better infrastructure and services. At the same time, development expenditure cannot be a priority when debt servicing amounts to almost the entire value of taxes collected. This is clearly a crisis budget. Pakistan will have to be a higher price if this fire-fighting mode continues.