A day before announcing the budget for fiscal year 2016-2017, the government on Thursday revealed the Economic Survey 2015-16 to highlight its achievements in the past year.
While the government achieved several milestones, it also missed some important economic targets.Finance Minister Ishaq Dar said, “According to provisional estimates the GDP growth during 2015-16 remained at 4.71 per cent,” reading the survey, said at a televised press conference.”The government missed the most important economic target – GDP growth, which was set at 5.1 per cent. However, targets in industrial and service sectors remained stable.“There has been an ongoing war on terror that has taken priority,” said the finance minister. “We are definitely equipped to hold a census and we will have it done soon. It is a priority.”
War on terror expenses have risen to over $118 billion, adds Dar.
Industrial sector records growth at 6.8%
Industrial sector recorded growth at 6.8% as compared to 4.8% last year.
The target for the industrial sector was set at 6.4%.
Services witnesses growth rate of 5.7%
The Services sector has witnessed a growth rate of 5.7% as compared to 4.37% last year.Reflecting on why agriculture growth missed its target by a large margin, Dar pinned the hit on the decline in cotton production, adding that a subsidy package for the sector would be announced.
Dar wheat prod increased from 25.08 million tons to 25.48 ml tons
Fiscal deficit
Fiscal deficit during the nine-month period has remained 3.4 per cent as opposed to 3.8 per cent of the corresponding period last year.
Exports
Commenting on the fall of exports, which have gone down to $18.18 billion (10MFY16), Dar said the quantity had gone up overall. However, the decrease in commodity and oil prices have meant the return has been low.
Every year in June since 2013, Finance Minister Ishaq Dar presents the federal budget in Parliament, using the occasion for self-congratulation. After all, the government has spent just six months planning out expenditures that run into trillions of rupees.
What’s missing, however, is context.
The federal budget, once presented in Parliament, is essentially a law that lays out expenditure limits and where they are to be made. Over the years we have seen how easy it is to violate this law. But the question of why is linked to the making of that law itself.
In the words of former deputy chairman of the Planning Commission Dr Nadeemul Haque, policies are only as good as the process that backs them up.
His critique of the budget-making process reminds us of the importance and effects on every single member of the economy, days before the ruling Pakistan Muslim League-Nawaz (PML-N) announces its fourth budget – the second last of its term. Before discussing what’s in store, however, we look at how Nawaz Sharif’s government has fared so far since being elected in 2013.
In short, the PML-N’s ‘pro-business’ reputation has taken a hit. Here’s how:
While the budget is passed by the Lower House of Parliament in June, the budget making process begins as early as January. The finance ministry sends budget call notices to all respective ministries, departments and statutory institutions. The ministries and divisions raise their demands for current and development expenditures and a long process of negotiations and influences begin.The Ministry of Finance, Federal Board of Revenue, Planning Commission, Economic Affairs Division and Statistics Division spends six months preparing the budget. If time is an indication, budget laws should be sacrosanct, ensuring full implementation.
Unfortunately, there is no scientific planning involved in making the budget and tax policies are changed without thoroughly studying their implications on jobs, growth and the industry. The targets are set in the air, without any vision or consideration of their macroeconomic effects. If the past three years are any indication, the government’s focus has been on how to increase revenue, and not on growth.
Expenditures always turn out to be larger than envisaged. But when it comes to development, expenditures are often less than what were originally planned.
Revenues recorded are always less than stated in the law (budget) but what’s worse is that some of the decrease happens because the finance minister and the Economic Coordination Committee (ECC) of the Cabinet hand out tax exemptions as protests and lobbying influence gather pace.
Article 77 of the Constitution says Parliament has the power to tax. However, it is the finance ministry that always violates the Constitution and the law with ease. Add to that, Parliament is indifferent to or unaware of its responsibility, or worse, both.
The ECC meets every so often to spend money that is not in the budget, following which the finance ministry approves supplementary budgets. The International Monetary Fund (IMF) recently demanded the finance ministry surrender its powers to impose supplementary budgets. Of course, the finance ministry refused. Accepting the demand would be tantamount to cutting its own hands.
Parliament’s hands are tied. The finance ministry provides supplementary budgets amounting to hundreds of billions of rupees and informs Parliament at the end of the fiscal year. Expenditure overruns and re-allocations during the year are all done whimsically by the finance ministry.
The ECC grants tax exemptions to various sectors on demand even though these have revenue implications for the original budget in place. These are gross violations of the budget law and no one notices. Experts argue that the ECC should not consider proposals that are not backed by the budget law.
Article 77 of the Constitution says Parliament has the power to tax. However, it is the finance ministry that always violates the Constitution and the law with ease. Add to that, Parliament is indifferent to or unaware of its responsibility, or worse, both.
Great power, no responsibility
The budget making process has become machinelike. While ignoring sectoral priorities, the finance ministry allots money for current expenses by lining it with inflation. There are no checks and balances. Subsidies are always understated.
Dr Haque says to please donors the finance ministry chases fiscal numbers that are not in sync with ground realities.
With this power, the ministry has made the entire budget process a showcase event that is twisted and turned throughout the year. Just look at the fiasco that unfolded after it imposed withholding tax on all banking transactions valued at over Rs50,000 in a single day last time.
Unaware of its importance, parliamentarians happily agree to a summary debate on the budget of about two weeks. In this short duration, no aspect of the budget is seriously discussed, let alone those supplementary grants that are announced.
The same case applies to the FBR. The tax machinery asks business associations and chambers to submit their proposals. But it never holistically reviews them. Industry proposals are like a lengthy wishlist, which includes every demand – sometimes absurd ones – under the sun. The government consults them just to proudly state that stakeholders’ point of view was considered.
The result is that the FBR ends up overburdening those who are already taxed. Estimated revenues from these additional taxes are also not accurate, as these are not based on any scientific working.
The worst element of the taxation part of the budget is that the annual collection target is set on flowery assumptions. The FBR does not bother to ask its field formations to conduct a survey to figure out whether businesses are doing well in their jurisdictions. Due to this faulty exercise, authorities end up levying new taxes to meet targets besides blocking taxpayers’ refunds.
The last three budgets from June 2013 to June 2015 are classic examples of a robotic budget-making exercise. The finance ministry and the FBR have failed to meet their targets in any of the years.
In the last three years, the FBR has imposed Rs940 billion in additional taxes. The impact of nominal GDP growth on the measures taken in the past is in addition to Rs940 billion. However, the actual tax collection grew far less than this figure, exposing the hollowness of the procedure.
There have been no major developments in the past three exercises. The finance minister will, each year, deliver hours-long speeches highlighting the government’s ‘achievements’ and making tall claims about the upcoming year. No one bothers to track the progress of these claims, which cannot be independently verified either.
There have been no major developments in the past three exercises. The finance minister will, each year, deliver hours-long speech highlighting the government’s ‘achievements’ and making tall claims about the upcoming year. No one bothers to track the progress of these claims, which cannot be independently verified either.
Living up to budget claims
What has remained constant in the past three budgets is the International Monetary Fund. For the IMF, the message has been that the government would adhere to fiscal consolidation and, to fulfill this promise, the government will not shy away from fudging some figures.
Two years ago, Finance Minister Ishaq Dar had announced to set up an Export-Import Bank of Pakistan with a paid-up capital of Rs100 billion, meant to give loans to exporters at reduced interest rates. He has yet to fulfill his promise. The government also announced a special textile package, which was never implemented despite the passage of two years. The end-result – exports are falling.
One of the highlights of the past three budgets has been the China-Pakistan Economic Corridor. It was a welcoming step and the credit largely goes to China. However, this strategic initiative has started meeting setbacks due to the usual bureaucratic inefficiency and the political leadership’s habit of performing groundbreaking ceremonies without doing any homework.
In the past three budgets, the government increased tax liabilities for non-registered persons on electricity bills, gas bills, cash withdrawals, purchase of properties and vehicles. It hoped that this would encourage the documentation of the economy. However, this strategy has also failed and instead of showing any increase, the tax base in 2015 shrank by over 18% to just under one million.
In 2014, the total numbers of income tax filers was 1.199 million, which in 2015 slipped to just 980,155. As many as 219,840 slipped from the FBR net in just one year, suggesting that the policy of broadening the tax base by increasing the cost of non-compliance has backfired.
The PML-N government had come into power on the promise of reducing the standard General Sales Tax (GST) rate, which at that time was 16%. However, immediately after assuming office, the government announced to increase the rate to 17%, suggesting it could not come up with any out-of-the-box solution.
Unlike its predecessor, the Pakistan Peoples Party (PPP), the PML-N government has been a disappointment for civil servants and pensioners. They received a nominal increase in their salaries and pensions, which has been insufficient to meet growing fiscal needs.
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Economy